Itaú BBA - Brazil’s Senate approves War-budget

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Brazil’s Senate approves War-budget

Abril 20, 2020

As the Senate made some changes, the bill will return to the Lower House

Talk of the Day 


The “War-budget” constitutional amendment was approved in its second-round of voting in the Senate. The bill creates a separate budget, with the purpose of expediting fiscal relief measures to companies and workers during the pandemic, while also helping to prevent that emergency expenditure measures undertaken this year do not perpetuate over time. As the Senate made some changes in the text, such as requiring that private assets purchased by the Central Bank need to be rated at BB- or better by a large ratings agency, the proposal will return to the Lower House.

Last Friday, the Datafolha Institute released a survey on president Bolsonaro's administration regarding the reaction to the coronavirus pandemic. The poll shows that his approval rate increased slightly to 36% (from 33% in the previous poll, from April 4), while his rejection rate remained virtually stable 38% (from 39% in the previous poll). The survey was conducted on April 17, with 1606 people.

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 38,654 confirmed cases (up by 2,055, vs. 2,917 yesterday), with 2,462 confirmed deaths (up by 115, vs 211 yesterday).


Moody's has downgraded Mexico's rating to Baa1, and PEMEX to Ba2. The sovereign rating was downgraded by only one notch (still above other rating agencies), but with negative outlook, which means further downgrades are likely. Meanwhile, PEMEX was downgraded two notches (to junk) having the oil company rated by two out of three rating agencies as junk. PEMEX outlook is negative, which means further downgrades are also likely. The key drivers behind the sovereign rating downgrade are: i) Mexico's medium term economic growth prospects have materially weakened; ii) the continued deterioration in Pemex's financial and operational standing is eroding the sovereign's fiscal strength, which is already pressured by slower revenue growth due to a weaker economy; iii) weakened policymaking and institutional capacity. The negative outlook reflects the risk that economic and fiscal strength deteriorate beyond what is captured in a Baa1 rating due to ongoing uncertainties related to policy direction in the medium term and policy responses that have been insufficient to effectively address both the country's economic challenges and Pemex's continued financial and operating problems.


Prior to the lockdown measures in Colombia, the coincident activity indicator (ISE) for the month of February continued to show signs that the activity recovery was consolidating. The activity indicator increased 4.8% YoY, well above our 4.0% expectation and the 3.3% Bloomberg market consensus (3.5% in January). Strong retail activity remained the main driver of activity in the month along with upbeat manufacturing. Adjusting for the favorable calendar effect and seasonal factors, growth was a milder 3.2% YoY (3.5% in January). Overall, in the quarter ended in February, activity picked up to 3.9% YoY from 3.2% in 4Q19 (3.3% in 3Q19), the highest quarterly print since August 2015. At the margin, activity in the quarter accelerated to 5.4% qoq/saar from 2.9% in 4Q19 (0.6% in 3Q19), despite a mild monthly drop from January to February (the first such case since September). Since February, headwinds have significantly increased as oil prices plummeted, global demand slumped and the Colombian economy shut down in a bid to mitigate the spread of the coronavirus. We see an activity contraction of 1.4% this year (+3.3% last year), with risks tilted towards a sharper decline. In this context, the implementation of additional monetary stimulus is likely.

Colombia’s fiscal rule committee loosened the country’s deficit targets, as activity is set to fall well below potential, allowing for extraordinary crisis spending. Prior to the current crisis, the fiscal plan required the deficit to narrow from the 2.5% of GDP in 2019 (2.7% was permitted) to reach 2.3% this year. However, having considered the impact of the current shocks to the Colombian economy, the permitted deficit was adjusted to 4.9% of GDP. The allowed loosening is in part due to an extraordinary clause being triggered (namely, that of growth estimated to be more than 2pp below potential), which allows for increased public spending of up to 20% of the estimated output gap. The government forecasts a growth contraction of 1.6% this year (Itaú: 1.4% fall; IMF: 2.4% drop; versus estimated potential around 3%). The committee acknowledged the heightened levels of uncertainty and that the growth decline could be larger than the government’s preliminary scenario. If this were to be the case, the committee hints that the door would be open for an even greater permitted deficit in support of the countercyclical fiscal approach. Overall, we note that credit rating agencies are closely monitoring Colombia’s fiscal developments, with Fitch already downgrading its rating by one notch (to BBB-) and S&P altering its outlook to negative (BBB-). Without plans for a significant tax reform, in part to contain the speed of the debt rise, the likelihood that Colombia loses its investment grade rating going forward has considerably increased.


Day Ahead: The fiscal balance for March will be published today. We estimate that the 12-month rolling primary deficit as of February ticked up to 0.6% of GDP, from 0.5% in January and 0.4% in December 2019. We expect a significant deterioration of fiscal accounts ahead due to the measures announced to control the spread of the COVID-19 pandemic. We forecast a fiscal deficit of 2.4% of GDP in 2020, with risks tilted to a larger deficit.


Day Ahead: The central bank will release the results of its bi-weekly trader survey at 9:30 AM (SP time). At the close of March, traders already adjusted inflation expectation down by 20bps for the one year outlook to 2.8%, while envisioning the policy rate to be held stable at 0.5% for at least the next six months. One possible change this month could be the extension of the expected period of stable rates for at least one year following the central bank’s emphasis on its messaging of low-for-long.

The Week Ahead in LatAm


The trade balance for the third month of 2020 will come out on Wednesday. In March, we expect to see the first effects of Covid-19 in foreign trade, leading to a drop in both exports and imports. We forecast a surplus of USD 1.9 billion in March (up from USD 1.2 billion surplus registered in the same month of 2019). If our forecast is correct, the trade surplus accumulated over the last 12 months will rise to USD 18.0 billion from USD 17.3 billion in February 2020.


This week, other than the evolution of the COVID-19 surge itself, it will also be important to keep an eye open for signals about the duration of the lockdowns and additional economic measures that the authorities may take to complement those already announced. After being approved in the Senate, the so-called “War-time Budget” amendment heads back to the Lower House. Additionally, Congress may move forward with discussions regarding financial aid to states and municipalities, to compensate for lower tax revenues expected for this year, and other epidemic-related measures.

On external accounts, we expect the current account (Friday) to post a USD 0.2 billion deficit in March, below the USD 2.7 billion deficit observed in the same month of the previous year. Given the current scenario, international travel and remittances of profits and dividends deficits will probably post sharp declines. With this result, the current account deficit over 12 months would add up to USD 49.0 billion, or 2.7% of GDP. The 3MMA SAAR is set to slightly improve to a USD 54 bn deficit (from a USD 61 bn deficit previously). Direct investment in the country (DIC) will likely amount to USD 7.0 billion in the period, with the DIC over 12 months remaining broadly stable at USD 79.0 billion.

On economic activity, FGV’s industrial business confidence survey preview for April will be released on Friday. FGV has already anticipated preliminary results for its business and consumer confidence indexes for the month, with the survey being conducted between April 1st and 13th. Unsurprisingly, the report showed sharp drops in confidence. The strongest declines were in industrial and services business confidence (-39.0 and -34.9 p.p., respectively). In the construction sector, business confidence declined 29.1 p.p., whereas in the retail sector confidence fell 26.8 p.p. Consumer confidence dropped 22.1 p.p.


The trade balance for the second month of 2020 will be released on Tuesday. Double-digit export growth amid stable imports led to a trade deficit correction in January. As a result, the 12-month rolling trade deficit inched down to USD 10.4 billion from USD 10.8 billion in December. However, amid the recent terms-of-trade collapse and the global scenario deterioration, Colombia’s external imbalances will likely endure ahead. For February, we expect a trade deficit of USD 750 million (USD 582 million deficit last year).

On Wednesday, think-tank Fedesarrollo will publish the business confidence indicators for the month of March, which should reflect a turn for the worse for private sentiment. During the month of February, business confidence remained upbeat with industrial confidence at 9.8% (0 = neutral; 5.1% last year) and retail confidence at 28.3% (31.8% last year). However, earlier this month, consumer confidence dropped sharply to 2017 lows and with the economy in lockdown, we expect a similar slump for business confidence.


On Thursday, INEGI will publish the inflation figure for the first half of April. We expect bi-weekly CPI to fall 0.65% (from -0.03% a year ago), while core inflation likely stood at 0.24% (from 0.40% a year ago). We expect headline inflation to be pulled down by a sharp decline in electricity prices due to seasonal “summer” subsidies to electricity tariffs, lower gasoline prices and a fall in non-core food prices (despite the sharp increase in egg prices). Assuming our forecast is correct, headline and core CPI would increase 2.15% yoy (from 2.79% in the second half of March) and 3.44% (from 3.60%), respectively.

On the same day, the statistics institute (INEGI) will announce February’s retail sales, which we expect to slow down to 1.6% yoy (from 2.7% in January). We expect the decent growth pace in the real wage bill in February provided some support to retail sales. 

Ending the week, the national statistics institute (INEGI) will publish February’s monthly GDP proxy (IGAE), which we expect at -1.0% yoy (from -0.8% in January). We already know industrial production contracted 1.9% in February, dragged by construction and manufacturing output. In turn, services sector likely slowed down. 


The monetary policy meeting is scheduled for Wednesday. The central bank has cut the reference rate by a cumulative 175bps to 2.25% in March. In the latest decision, the BCP said the low inflation environment and the weak internal demand provides room for further monetary policy easing to help mitigate the coronavirus impact on the economy. We expect a 25-bp cut, taking the reference rate to 2.0%.

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