Itaú BBA - Strong activity recovery in Colombia

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Strong activity recovery in Colombia

January 21, 2019

We expect the activity recovery to continue, aided by low inflation and a mildly expansionary monetary policy.

Talk of the Day


The activity recovery continued in November. Retail sales came in strong, partly aided by a temporary boost in auto sales, increasing 10.8% yoy (6.4% previously), well above the market consensus (7.1%) and our call (6.8%). Sales remained robust once vehicle sales are excluded. Meanwhile, manufacturing grew at a brisk 4.7% pace (5.4% in October), led by oil refining, surpassing the consensus (4.3%) and just below our estimate (5.0%). Given the strong data, we expect the coincident activity indicator to expand 3.6% yoy in November (up from 2.3% in October), around potential and thereby halting the widening of the output gap. Besides the positive activity news, inflation remains under control, inflation expectations are anchored and the external environment still risky. Thus, we envision the central bank keeping rates stable in the near term.

We expect the activity recovery to continue, aided by low inflation and a mildly expansionary monetary policy. Our growth forecast is 3.3% for 2019, up from 2.6% expected for last year. However, low oil prices and slowing growth for major trade partners are headwinds to the recovery process.
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The government of Argentina met its primary fiscal deficit target for 2018. The treasury posted an estimated deficit of 2.7% of GDP (ARS 374.3 billion), matching the official target and slightly worse than our forecast of 2.6%. The deficit includes some investment expenditures contemplated in the agreement with the IMF equivalent to 0.3% of GDP. The 2018 nominal deficit was 5.2% of GDP, down from 5.6% in 2017.

We think that the approval of a zero primary deficit in the 2019 budget (with significant Senate support) is a clear signal of political commitment to fiscal consolidation. The adjustments focus on increasing revenues (through export taxes and sale of public pension fund assets) and reducing transfers to provinces, energy subsidies and capital spending. Pensions (which are indexed to past inflation) are expected to increase. In our view, the risk of a larger deficit is high, given the frail economy and the uncertain political scenario.
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The Week Ahead in LatAm


The trade balance for December will come out on Tuesday. A weak currency and contraction of internal demand have led to trade surpluses in recent months. We forecast a surplus of USD 200 million in December (up from a deficit of USD 800 million registered in the same month of 2017). 

On Wednesday, the central bank will publish its quarterly monetary policy report. The purpose of the report is to illustrate how the monetary authority anticipates the evolution of prices, and to explain the rationality of its monetary policy decisions. 

The INDEC will publish the EMAE (official monthly GDP proxy) for November on Thursday. According to leading and coincident indicators, the recession deepened that month. The IGA (GDP proxy published by OJF consulting firm) fell 6.5% yoy (-3.8% in October), industrial output dropped 13.3% yoy (-6.8% in the previous month) and construction activity plummeted 15.9% yoy, after falling 6.4% in October. We expect activity to post a 7.4% yoy contraction in November. 


This week’s highlight will be the World Economic Forum annual meeting, in Davos. President Bolsonaro will make his speech on Tuesday, which, according to local news, may focus on reinforcing the new government’s commitment to the reform agenda, especially the pension reform.

On economic activity, December’s CAGED formal job creation will probably come through (release date not yet specified), for which we forecast a net destruction of 314k jobs. It’s worth noticing this apparent weak headline is due to a strong seasonality in December. Adjusting for seasonality, our forecast implies a 71k formal jobs creation, leaving the 3-month s.a. moving average virtually stable at 73k. Also, FGV’s confidence surveys for January on industry (preview), consumer and commerce will be released during the week.

January’s IPCA-15 inflation will be released on Wednesday. We forecast a 0.35% monthly increase, leaving the 12-month reading virtually stable at 3.8%. Food and healthcare will likely post the major upward contributions to the monthly reading. On the opposite direction, transport group is expected to post the negative contribution, still reflecting the decline in fuel prices.


On Tuesday, the central bank will publish the trade balance for the month of November. In October, higher imports – partly due transitory factors – led to a wider trade balance deficit of USD 1.2 billion (USD 489 million deficit recorded one year ago and the largest deficit since April 2017). As a result, the rolling 12-month trade deficit widened to USD 5.8 billion, from USD 5.0 billion as of June (USD 6.1 billion in 2017), explained by the non-energy deficit increasing faster than the energy surplus improvement. We expect a trade deficit of USD 1.0 billion in November (USD -700 million last year), as export growth remains contained. 

Also on Tuesday, the coincident activity indicator (ISE) for the month of November will be released. In October, ISE came in below expectations and moderated at the margin. The original series grew 2.3% yoy, the same rate recorded in September. Growth in the quarter ending in October was 2.7% yoy (2.7% in 3Q18 and 2.8% in 2Q18). At the margin, activity fell 0.9% qoq/saar (+0.9% in 3Q18 and +0.8% in 2Q18) as the tax reform discussion likely affected private sentiment. For November, we expect the original series to pick up to 3.6% yoy, consistent with the better activity indicators for the month.


On Tuesday, INEGI will announce December’s unemployment rate. We expect the unemployment rate to be 3.2%. According to data reported by the Mexican Institute of Social Security (IMSS), formal employment increased 3.4% yoy in December.

On Thursday, INEGI will publish CPI inflation figures for the first half of January. We expect bi-weekly inflation to post 0.18% (from 0.24% a year ago). We expect non-core fruits and vegetables as well as energy prices exerted less inflationary pressure (offseting a mild increase in electricity tariffs in January). Moreover, some effect on prices from lower VAT in the northern frontier region (around 5.7% of total population in Mexico) could be already reflected in the first half of January figure. Assuming our forecast is correct, headline inflation would be 4.60% yoy (from 4.66% in the second half of December).

Also on Thursday, INEGI will publish November’s monthly GDP proxy IGAE, which we expect to slow to 1.1% yoy (from 2.9% in October). We already know industrial production decreased 1.3% yoy in November (from 1.0% in October), with mining (-8.0%) and construction contracting (-3.3%), while manufacturing sector decelerated to 1.4% yoy (from 2.5%). On the other hand, we expect employment dynamism continued to support services sectors.

On Friday, the statistics institute (INEGI) will announce November’s retail sales, which have grown at a decent pace lately. We estimate that retail sales grew 3.2% yoy, from 3.0% in October.

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