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A 50-bp rate cut and strengthening liquidity measures in Colombia

Março 30, 2020

The next monetary policy decision will take place on April 30 and additional stimulus cannot be ruled out

Talk of the Day
 

Colombia

The central bank of Colombia followed in the footsteps of global central banks and eased monetary policy, by 50-bps to 3.75%, in anticipation of a significant shock to activity following the social distancing measures undertaken amid the coronavirus spread. We, and the market consensus according to Bloomberg, anticipated the first rate move since April 2018. The decision had the full support of the central bank board and the tone of the communiqué and press conference signal that the entity is not closing the door to additional action if the economic scenario deteriorates further. During the press conference, General Manager Echavarria stated that he is not uncomfortable with a negative real interest rate scenario (the one-year, ex-ante real interest rate remains slightly positive). Nevertheless, he emphasized that within the board, there is no consensus on the trajectory of monetary policy as uncertainty remains high, while it is also unclear whether the latest developments imply changes to the neutral rate. Overall, Echavarria stressed that the current focus is ensuring the normal functioning of the financial system. In this context, the board also enhanced today the volume of liquidity measures recently announced and expanded the pool of players that can participate in REPO auctions. While our call is for stable rates ahead, risks are tilted to more easing if the magnitude of the shock surprises or if the expected normalization of activity in 2H20 underwhelms. Wide twin deficits and the low oil price scenario amplify the vulnerability of the COP that may deter the board from lowering rates further. The next monetary policy decision will take place on April 30 and additional stimulus cannot be ruled out. ** Full story here.

Day Ahead: The central bank will release the minutes of Friday’s (March 27) monetary policy meeting. While global central banks move to lower rates, wide twin deficits and the low oil price scenario amplify the vulnerability of the COP and could raise inflationary concerns. Nevertheless, given the expected dire impact on activity, the option of lower rates is likely to dominate and the minutes could provide some additional insight into how willing the board is to add further stimulus.

Brazil

According to FGV’s monthly survey, services confidence declined sharply by 11.6 p.p. in March (to 82.8). The breakdown shows that the expectations component plummeted 18.1 p.p. (to 80.8), while the current conditions component fell 5.0 p.p. (to 85.2). The survey was conducted between March 3 and 25, so it considers the beginning of the coronavirus outbreak in Brazil. All other confidence surveys posted negative results in the month: Consumer (-7.6), retail (-11.7), construction (-2.0) and industrial (-3.9). In our view, these figures start to reflect the contraction that will soon materialize, and are set to deteriorate further.

The Central Bank announced on Friday a credit line for payroll payment by small and medium-sized companies. According to BCB’s calculations, this measure will benefit 1.4 million companies, and 12.2 million people. The program will last for two months (the estimated cost is BRL 20 billion per month, or BRL 40 billion in total), and the loans will be limited to two minimum wages per worker, at an annual interest rate of 3.75% (zero spread over the Selic rate), and with a grace period of six months, with another 36 months for repayment. As this proposal is a provisional measure, it has immediate effect. BCB’s governor, Roberto Campos Neto, also announced that the BCB will submit to congress a constitutional amendment to allow the central bank to purchase financial assets in open markets, similar to the procedure adopted by the Federal Reserve.

The Brazilian Central Bank released the credit figures for February on Friday. New non-earmarked loans increased 1.4% mom/sa in real terms, while new earmarked loans receded 2.6%. Overall delinquency remained stable at 3.0% in seasonally adjusted terms. ** Full story here.

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 4256 confirmed coronavirus cases, with 136 confirmed deaths.

Day Ahead: The central government’s balance for February will be released today, for which we expect a BRL 26.8 bn deficit

Mexico

The trade balance improved in February, supported by the non-energy balance. Monthly trade balance posted a surplus of USD 2.9 billion in February, above median market expectations (USD 2.4 billion deficit) – taking the 12-month rolling trade balance to a surplus of USD 9.6 billion in February (from a surplus of USD 8.1 billion in January). Looking at the breakdown, also using 12-month rolling figures, the energy trade deficit deteriorated slightly to USD 21.4 billion in February (compared to a deficit of USD 20.9 billion in January), while non-energy balance improved to a surplus of USD 31.1 billion (from a surplus of USD 29.0 billion). At the margin, using 3-month annualized seasonally adjusted figures, trade balance printed at a surplus of USD 19.2 billion in February (from a surplus of USD 16.7 billion in January), with the energy trade balance posting a deficit of USD 18.9 billion (practically unchanged from last month), while the non-energy trade surplus printed at USD 38.1 billion (from a surplus of USD 35.7 billion). We expect a deterioration of the trade balance in 2020 (relative to 2019). We expect a sharper deterioration in manufacturing exports (due to the deceleration in the U.S.) relative to non-oil imports (due to the worsening in internal demand), associated to the negative shock from the coronavirus outbreak, to decrease the non-energy trade balance.  ** Full story here.

Chile

The central bank’s trader survey, following the extraordinary meeting on March 16th that led to a 75-bp rate cut to 1.0%, shows traders expect additional easing of 50-bps to 0.5% at this week’s scheduled meeting (in line with our view). Prior to the intensification of concern surrounding the coronavirus, traders expected stable rates at 1.75% for at least a year. Now, the policy rate is seen staying at 0.5% for at least the next six months, with a gradual normalization process thereafter to 1.5% by early 2022. Meanwhile, the expected shock to activity is reflected in the one-year inflation expectation falling 0.2pp to 2.8%, while remaining anchored to the 3% target for the relevant two-year horizon. We expect inflation to remain high in coming months, closer to 4%, but weakening internal demand would aid a moderation to 3.3% by yearend. On Tuesday, we expect easing to continue with a 50-bp rate cut to the historically low rate of 0.5% (in line with the rate reached during the global financial crisis), justified by the expectation that activity is set to implode. Our call for lower rates now, just two weeks after the 75-bp rate cut, is also in part justified by the fact that the interest rate on the central bank’s conditional financing facility to banks is set at the current policy rate. Hence, lowering the rate now would help make the financing line more attractive and be more effective in limiting the impact on the Chilean economy.

Day Ahead: The minutes of the extraordinary monetary policy meeting from mid-March will be released today. At the meeting, the central bank followed in the footsteps of global counterparts in increasing monetary stimulus and liquidity measures in an effort to ensure the normal functioning of credit markets and limit the impact from the coronavirus shock. The policy rate was cut by 75 bps to 1.0%. The decision was not unanimous as two of the five board members backed a 50bp rate cut. We expect the minutes to show a board that is prepared to implement additional stimulus and liquidity measures if deemed necessary to confront the shock from the coronavirus.

Argentina

Day Ahead: The INDEC will publish the EMAE (official monthly GDP proxy) for January. Leading and coincident indicators showed positive signals on a sequential basis for that month. The manufacturing index rose 1.6% mom/sa, while construction output rose 0.5% mom/sa. We forecast a 0.2% mom/sa increase, leading to a 1.1% year-over-year drop in January.

The Week Ahead in LatAm

Argentina

On Friday, the central bank will release its monthly expectations survey. In the previous survey, analysts ticked down their inflation forecast for 2020 (to 40.0% from 41.7%) and for 2021 (to 30.5% from 32.1% before). Pundits will likely adjust their forecasts considering the effects of COVID-19. Others variables surveyed are activity, interest rate (Badlar from now on), exchange rate and primary fiscal balance.  

Brazil

COVID-19 cases in Brazil (currently at 4256, according to the Ministry of Health) are set to accelerate during the coming days. Other than the evolution of the surge itself, it will also be important to keep an eye open for additional economic measures that the Government, and the Congress may take to complement those already announced. Local news indicate that the Lower House may vote the so called “War Budget” bill, to speed up the implementation of actions to face the crisis caused by the pandemic, and also, ensure that the measures taken in this front will not be extended to the next years.

On economic activity, this week’s highlight will be February’s national unemployment rate (Tue) and industrial production (Wed). The CAGED formal job creation data (without a specific date) for January may also come out, as well as Fenabrave vehicle sales for March (without a specific date). We forecast 11.6% unemployment (0.1 pp drop to 11.4%, seasonally-adjusted). This forecast is more uncertain than usual, since job creation figures for January and February have not been released yet. For industrial production, we forecast a 0.4% decline mom/sa, with widespread negative figures within the manufacturing sector. This number may change according to some coincident data not yet available. Regarding CAGED, we forecast a net creation of 70k formal jobs (50k in seasonally adjusted terms, decreasing the 3-month s.a. moving average to 72k from 75k). 

On the external front, March’s trade balance will be released on Wednesday. We expect a USD 3.5 billion surplus, below the USD 4.6 billion registered in the same period last year. Over 12 months, we expect the trade surplus to recede to USD 42 billion (from USD 43 billion). Both exports and imports are expected to decline in the month, (-4.7% and -1.7%, respectively) already reflecting the fall in global trade due to the coronavirus outbreak.

On fiscal accounts, February’s tax collection may be published This week, without a specific date of release. We expect the indicator to reach BRL 119 billion in the month (-0.5% in year-over-year real terms). In addition to that, the central government’s balance for February will be released today, for which we expect a BRL 26.8 bn deficit. On Tuesday, the consolidated public accounts, also for February, will be published. We expect the consolidated primary balance to reach a BRL 22.2 bn deficit in the month.

Chile

The national institute of statistics (INE) releases activity indicators for February on Tuesday. Activity indicators surprised to the upside at the start of 2020 as the normalization process following the protests in 4Q19 advanced. Industrial production – aggregating mining, manufacturing and utilities – grew 1.8% yoy in January, following the 3.2% gain in December (contractions in the prior two months). Growth was lifted by upbeat manufacturing growth of 3.4% yoy (led by chemical production and machinery; 4.4% in December). Meanwhile, retail sales posted mild growth of 0.1% yoy, the first gain since September (2.6% decline in December, 7.4% fall in 4Q19). For February, accelerating electricity generation and a low base of comparison hints at sustained manufacturing dynamism with growth of 6.5%. Meanwhile, with car sales still shrinking at a double-digit rate and confidence at low levels, retail sales would post mild growth of 1.0%.

On the same day, INE releases the national unemployment rate for the quarter ending in February. The unemployment rate in the quarter ending in January increased 0.3pp over one year to reach 7.4%, as the labor market loosened following the 4Q19 social unrest that affected activity and business sentiment. We see the unemployment rate coming in at 7.3%, up 0.3pp from last year. The rise in unemployment remains mild considering the significant disruption to operations in 4Q19 and the subsequent effect on business confidence. Nevertheless, looking further ahead, we anticipate a sharper rise in unemployment rate, averaging 9.0% this year (7.4% last year), following the stringent measures undertaken during the coronavirus outbreak.

The central bank will announce its decision from the scheduled monetary policy meeting on Tuesday evening. We expect easing to continue with a 50-bp rate cut to the historically low rate of 0.5% (in line with the rate reached during the global financial crisis), justified by the expectation that activity is set to implode. Our call for lower rates now, just two weeks after the 75-bp rate cut, is also in part justified by the fact that the interest rate on the central bank’s conditional financing facility to banks is set at the current policy rate. Hence, lowering the rate now would help make the financing line more attractive and be more effective in limiting the impact on the Chilean economy.

On Wednesday morning, the central bank publishes its flagship monetary policy report (IPoM) in which it will likely signal significant monetary stimulus is required going forward as the Chilean economy navigates its way out of the coronavirus shock. In the last version of the report, following the outbreak of social protests, the central bank moved from an easing bias to a neutral stance as there remained high uncertainty over which inflationary force would dominate going forward (from the weaker CLP or increased economic slack). Nevertheless, the spread of the coronavirus and subsequent measures implemented will likely lead the central bank to revise growth down from its 0.5-1.5% range for this year to a contraction of 1.0-2.0%. Additionally, given the latest round of CLP depreciation was not idiosyncratic, the shock to domestic demand is likely to outweigh inflationary concerns, justifying a more expansionary policy stance. 

Also on Wednesday, the central bank will publish the GDP proxy (Imacec) for February. The Imacec surprised to the upside in January as the economy continued to recover from the significant shock at the start of 4Q19. The Imacec gain of 1.3% from December to January, led by non-mining activity (particularly services and construction), building on the 3.5% rise at the close of 2019. As a result, activity rose 1.5% yoy in January (1.1% in December). Given February was prior to the coronavirus shutdown measures in March, we expect the recovery to continue with growth of 3.5% YoY (0.1% MoM). With the global expansion of COVID-19 and the resulting measures undertaken the recovery will be short-lived. We see an activity contraction of 1.6% this year as the most likely outcome (+1.1% last year).

Colombia

On Tuesday, the institute of statistics will release the unemployment rate for February. Labor market dynamics on the urban front have been favorable in recent months. The urban unemployment rate moderated to 12.9% in January, below the 13.7% print last year, as employment growth accelerated to its fastest pace (2.8% yoy) since mid-2018. The urban labor market behavior is in line with a prolonged period of activity recovery. For February, we expect the dynamics to persist with the urban unemployment rate coming in at 11.7% (12.4% one year earlier). 

On Thursday, exports for February will be published. In January, export growth was driven by a coal sales recovery. Total exports grew 11.7% yoy, following seven consecutive months of declines, with coal posting a considerable recovery (+81.1% yoy from 41.5% drop in December), mostly boosted by higher volumes. Additionally, oil exports increased 5.4% yoy (+6.5% previously) aided by prices. For February, we expect exports of USD 3.1 billion, 4.2% yoy down from last year as energy exports retreat. 

On Saturday, the Colombian national institute of statistics (DANE) will release the inflation print for March. Annual inflation inched up 10bps to 3.72%, further away from the central bank’s 3% target. Nevertheless, inflation excluding food and energy prices edged down to 3.29% (3.37% in the previous month), while service inflation ticked down 9-bps to 3.52% reflecting underlying price dynamics are well-behaved. We expect CPI of 0.36% MoM (0.43% last year), lifted by food and housing prices, and leading to annual rate ticking down to 3.64%.

Mexico

On Wednesday, the Ministry of Finance (MoF) will publish the preliminary economic policy guidelines for 2021 (PEPG), which includes the MoF’s macroeconomic outlook and an update of fiscal estimates for 2020 and 2021. We expect the new macroeconomic estimates to reflect a deteriorated scenario (as a result of the coronavirus outbreak and oil price war), likely resulting in worse fiscal balances and higher debt estimates. A change to the nominal fiscal deficit for 2020 would need to be approved by Congress.

Paraguay

The central bank will publish the CPI inflation for March on Thursday. Inflation has been well behaved and has remained below the 4% target since November 2018. We forecast 0.3% mom inflation for March, bringing the annual figure to 2.6% from 2.4% in February.   

Peru

The statistics institute (INEI) will announce March’s CPI inflation on Wednesday, which we forecast at 0.79% month-over-month. The monthly inflation figure will reflect an increase in education prices (due to the start of the school year) and some upward pressure on food prices associated to the coronavirus outbreak. Assuming our forecast is correct, annual headline inflation would post a growth rate of 1.97% year-over-year in March (from 1.90% in February).

Uruguay

The consumer prices index for March will see the light on Friday. Inflation reached 0.6% mom in February, bringing the annual reading to 8.3%. We expect an acceleration of inflation in March, mostly due to the depreciation of the currency against the USD. Thus, we foresee 0.8% mom inflation (8.6% yoy).   



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