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PERU – GDP rebounds in 3Q20

November 23, 2020

We expect GDP to fall by 12.6% in 2020

Talk of the Day

Peru

COVID-19 update: the latest official information from the Ministry of Health is that Peru registered a daily increase of 46 deaths (65 on the previous day) and 1,589 confirmed cases (from 1,994). The 7-day moving average of deaths decreased to 52, from 53 on the previous day. The total number of deaths now stands at 35,595, with 949,670 confirmed cases, which implies a 3.7% mortality rate. The estimated reproduction rate (R) is currently at 0.94 (from 0.98).

According to the Central Bank’s (BCRP) data, GDP recovered to -9.4% yoy in 3Q20 (from -29.8% in the 2Q20).  At the margin, looking at the seasonally adjusted data reported by the BCRP, the economy rebounded 30.1% qoq (non-annualized) in 3Q20. Final domestic demand recovered to -8.6% yoy in 3Q20 (from -26.8% in 2Q20), supported by both private (-9.1%, from -30.4%) and public (-3.9%, from -26.9%) demand. Within private demand, consumption fell by 9.7% (from -22.1%), while investment stood at -7.1% (from -60.2%). In turn, government consumption registered a positive annual expansion in 3Q20 (4.3%, from -8.8% in 2Q20), while public investment stood at -24.5% (from -70.7%). Finally, exports recovered to -23.2% (from -41.6%), while imports fell by 21.0% (from -30.4%). We expect GDP to fall by 12.6% in 2020. The large fiscal and monetary stimulus will support the recovery during the rest of the year and 2021 (for which we expect a GDP expansion of 9.6%). However, political turmoil (including its effect on fiscal-policy execution) is a downside risk to economic recovery. **Full story here.

Peru’s current account deficit (CAD) narrowed in 3Q20, supported by an improvement in the trade surplus and lower net income payments. Using 4-quarter rolling figures, the current account deficit declined further to 0.1% of GDP in 3Q20 (from a deficit of 0.7% of GDP in 2Q20), supported by an improvement in the trade surplus (3.0% of GDP, from 2.4% of GDP) and lower net income payments (mainly profits from foreign mining firms) which stood at 3.1% of GDP (from 3.3% of GDP). In contrast, the services deficit deteriorated (1.9% of GDP, from 1.7% of GDP). On the financing side, using 4-quarter rolling figures, net foreign direct investment deteriorated further to 2.3% of GDP in 3Q20 (from 2.7% in 2Q20). 

Fiscal accounts deteriorated in October amid the sharp fall in activity and the large fiscal stimulus due to the COVID-19. Using 12-month rolling figures, the nominal fiscal and primary deficits increased to 7.3% of GDP in October (compared to 6.2% of GDP in September and 2.1% of GDP in February, before the outbreak) and 5.6% of GDP (from 4.6% of GDP in September and 0.6% of GDP in February), respectively. The deterioration in the fiscal balances is explained by lower tax revenues (-18.2% YTD yoy in October) due to weakness in economic activity and tax relief measures amid the pandemic. In turn, total expenditure increased 8.5% YTD in October (compared with the first 10 months of 2019), pressured mainly by expenditure transfers (59.3% in October) due to the fiscal stimulus. Turning to public debt ratios, gross debt and net debt increased to 32.1% of GDP in 3Q20 (from 30.3% of GDP in 2Q20) and 18.5% of GDP (from 15.2% of GDP), respectively. We expect the nominal fiscal deficit and gross public debt to reach 10.7% of GDP and 36.5% of GDP in 2020, respectively.
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Brazil
 
COVID-19 update: the latest official information from the Ministry of Health is that Brazil registered a daily increase of 194 deaths (376 on the previous day) and 18,615 confirmed cases (from 32,622). The 7-day moving average of deaths increased to 484, from 476 on the previous day. The total number of deaths now stands at 169,183, with 6,071,401 confirmed cases, which implies a 2.8% mortality rate. The estimated reproduction rate (R) is currently at 1.13 (from 1.12).

Itaú Daily Activity Tracker: The indicator decreased by 1.7 points, to 92.9 (latest available data from Monday, November 16th). The 7-day moving average increased slightly, by 0.2 points, to 94.5. The indicator is up 36.4 points from the bottom seen on April 11th, and is now 7.1% below the mid-March level, when the series started. See our report here.

Argentina

COVID-19 update: the latest official information from the Ministry of Health is that Argentina registered a daily increase of 100 deaths (112 on the previous day) and 4,184 confirmed cases (from 7,140). The 7-day moving average of deaths decreased to 224, from 228 on the previous day. The total number of deaths now stands at 37,002, with 1,370,353 confirmed cases, which implies a 2.7% mortality rate. The estimated reproduction rate (R) is currently at 0.75 (from 0.95).

Chile
 
COVID-19 update: the latest official information from the Ministry of Health is that Chile registered a daily increase of 39 deaths (27 on the previous day) and 1,497 confirmed cases (from 1,558). The 7-day moving average of deaths remained stable at 36. The total number of deaths now stands at 15,069, with 540,640 confirmed cases, which implies a 2.8% mortality rate. The estimated reproduction rate (R) is currently at 1.13 (from 1.11).

Colombia

COVID-19 update: the latest official information from the Ministry of Health is that Colombia registered a daily increase of 183 deaths (175 on the previous day) and 7,924 confirmed cases (from 7,049). The 7-day moving average of deaths decreased to 179, from 182 on the previous day. The total number of deaths now stands at 35,287, with 1,248,417 confirmed cases, which implies a 2.8% mortality rate. The estimated reproduction rate (R) is currently at 1.02 (from 0.99).

Mexico

COVID-19 update: according to the Johns Hopkins University, Mexico registered a daily increase of 303 deaths (550 on the previous day) and 9,187 confirmed cases (from 6,719). The 7-day moving average of deaths increased to 448, from 445 on the previous day. The total number of deaths now stands at 101,676, with 1,041,875 confirmed cases, which implies a 9.8% mortality rate. The estimated reproduction rate (R) is currently at 1.47 (from 1.16).

Paraguay

Day Ahead: The monetary policy meeting is scheduled for today. The central bank kept the reference rate unchanged at 0.75% in its previous meeting, citing low inflation and stronger activity. We do not expect changes in the monetary policy rate.

The Week Ahead in LatAm

Argentina

The EMAE (official monthly GDP proxy) for September will be published tomorrow. Leading and coincident indicators showed positive signals in September. The official manufacturing index rose 4.3% mom/sa and construction output increased 3.9% mom/sa. We forecast a 1.0% mom/sa increase, which still would represent a 9.9% year-over-year drop.

The trade balance for October will also come out tomorrow. We forecast a surplus of USD 1.0 billion (down from USD 1.8 billion surplus registered in October 2019) amid falling exports on a year-over-year basis. If our forecast is correct, the trade surplus accumulated over the last 12 months will be USD 17.4 billion, down from USD 18.1 billion in September.

Brazil

The COVID-19 outbreak will remain in the spotlight. While Ministry of Health figures still seem to be affected by some distortions, additional sources increasingly report rising pressure in hospital occupancy rates in some cities, such as São Paulo. That being the case, attention will focus not only on the evolution of the surge itself, but its potential implications for economic activity, with the possibility of renewed restrictions (albeit probably with lighter measures, at least initially), and especially from a fiscal standpoint, as pressures for greater social spending could increase further.

On the data front, November IPCA-15 will be released tomorrow. We forecast a 0.73% monthly increase, leading the 12-month reading to 4.13% (from 3.52% in October). Non-core inflation is likely to pressure upwards once again, particularly food-at-home prices, such as beef and rice, and with some acceleration on industrial prices, such as vehicles, clothing and housing items. Also for November, the IGP-M will be published on Friday. As in last months, wholesale prices will remain pressured by agricultural commodities. We expect a 3.02% monthly increase, with the 12-month reading reaching 24.21% (from 20.93% in the previous month).

Regarding economic activity, this week’s highlights will be focused on labor market data, with October formal job creation (CAGED, Thu.) and September unemployment rate (PNADC, Fri.). We forecast the net creation of 237 thousand formal jobs (+200k seasonally-adjusted, coming from +259k in September and +169k in August). Regarding the unemployment rate, we expect it to reach 14.7% (also 14.7% on a seasonally adjusted basis, coming from 14.5%). Other than that, November’s FGV business confidence final readings for the consumer (Wed.), construction (Wed.), retail (Thu.) and the industrial (Fri.) sectors confidence indexes will be published.

On external accounts, we expect the current account (Wednesday) to post a USD 1.1 billion surplus in October, well above the USD 7.3 billion deficit registered in the same month of 2019 and the seventh monthly positive result in a row. As in the previous month, we expect the service deficit (international travel, transport and equipment rental items) and the profit and dividend remittances deficit to drop sharply. Additionally, the trade balance will likely continue to improve, as exports remain at high levels, but imports have decreased considerably. The current account deficit over 12 months is likely to recede to USD 12 billion (0.8% of GDP), with the 3MMA SAAR reaching a USD 20 billion surplus. Direct investment in the country (DIC) will likely reach USD 1.0 billion in October, with the DIC over 12 months decreasing to USD 44 billion, below the observed levels in the last months. It is important to highlight that, as in every November, the BCB will disclose its annual external account data revision, which could impact the current and capital accounts for 2020.

Additionally, on Friday, the Central Bank will disclose its credit report for October.

Finally, on the fiscal front, October primary budget balance for the central government will be released on Friday.

Chile

On Friday, INE releases the national unemployment rate for the quarter ending in October. The labor market remained fragile during 3Q20, but there were signs of a recovery, in line with the reopening of the economy. The unemployment rate reached 12.3%, a 5.0 percentage point increase over twelve months. Employment contracted 18.2% YoY in the quarter, the smallest drop since the quarter ended in May (-20.0% in 2Q20). Meanwhile, the participation rate improved at the margin to 53.4% (from 51.9% in 2Q20). As some workers benefiting from the employment protection program return to their jobs, alongside greater mobility conditions and gains in informal employment, we expect the labor market recovery to continue. We project unemployment rate to reach 11.6% in the quarter, up a milder 4.5pp from last year.

Colombia

On Wednesday, think-tank Fedesarrollo will publish the business confidence indicators for the month of October. Colombian industrial and retail confidence continued to recover in September, edging closer to levels registered one year ago. Industrial confidence moved further into optimistic territory at 6.1% in September (+1.5% in August; 0 = neutral), recovering significantly from the -35.8% cycle trough registered in April. Industrial sentiment sits only 5.4pp below last year’s corresponding level, compared to the peak annual difference of 40.2pp in April. Meanwhile, retail confidence at +22.2% was only mildly below the 27.4% recorded in September 2019. As the reopening of economy consolidates, the sentiment recovery underway is likely to persist in October.

Closing the week will be the monetary policy rate decision. In October, the board of the central bank held the policy rate steady, at 1.75%, the first on-hold decision since a 250-bp easing cycle initiated in March. In the clearest sign that it could be the start of a prolonged pause, the decision had the unanimous support of the board (versus the 4-3 split in September). Meanwhile, governor Echavarria announced that he would not pursue a second term at the bank’s helm after his four-year stint concludes this year. We believe the board will keep rates steady for some time, as it evaluates how the economy responds to the reopening of the economy. Additionally, the announcement of Governor Echavarría’s departure likely supports stability, at least during the succession period.

Mexico

INEGI will publish inflation figures for the first half of November tomorrow. We expect bi-weekly CPI to gain 0.33% (from 0.68% a year ago), while core inflation likely stood at 0.15% (from 0.16% a year ago). We expect the figure to be marked by the removal of the seasonal subsidy to electricity tariffs, while non-core food and gasoline prices exerted downward pressure. Assuming our forecast is correct, headline and core CPI would reach 3.72% yoy (from 4.09% in the second half of September) and 3.95% (from 3.96%), respectively.

Also tomorrow, INEGI will announce October’s unemployment rate, which we expect at 5.2%. We already know formal job creation recovered to -3.98% yoy in October (from -4.21% from September).

In the middle of the week, the statistics institute (INEGI) will announce September’s retail sales, which we expect to recover further to -6.3% yoy (from -10.8% in August), reflecting the easing of distancing measures.

On the same day, the Central Bank will also publish Q3’s current account balance, which we estimate at USD 9 billion. We expect an improvement in the trade balance and resilient remittances to support the improvement of the current account.

Also, on Wednesday, the Central Bank of Mexico (Banxico) will publish the quarterly inflation report (3Q20). In this document, Banxico will provide an update of its macro outlook on the Mexican economy, including updated forecasts for the main variables.

On Thursday, the national statistics institute (INEGI) will publish Q3’s GDP, which we expect to fall by 8.5% YoY (from -18.7% in 2Q20), broadly in line with the GDP flash estimate. Looking at the breakdown, we expect industrial production recovered at a faster pace than services sector. Together with the quarterly data, INEGI will publish September’s monthly GDP proxy (IGAE), which we expect at -6.5% YoY (from -9.5% in August). This forecast is consistent with our estimate of 3Q20 GDP growth.

On the same day, Mexico’s Central Bank (Banxico) will publish the minutes of November’s monetary policy meeting (held two weeks before), in which the majority of Board members voted to keep the policy rate unchanged at 4.25%. The minutes will reveal the Board member that voted for a 25 bps cut and shed more light on the reasons most members supported a pause in the easing cycle.

Ending the week, INEGI will announce October’s trade balance, which we expect to post a surplus of USD 5.0 billion. Trade balance is improving in 2020 as external sales recover faster than imports due to a better performance of domestic demand in the U.S. relative to Mexico and the weaker Mexican peso.



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