Itaú BBA - Construction confidence advances in Brazil

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Construction confidence advances in Brazil

Novembro 26, 2019

The breakdown shows that the increase was driven by the current conditions component (+2.4 p.p., to 81.3)

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According to FGV’s monthly survey, construction confidence advanced 1.5 p.p. to 89.0 in November. The breakdown shows that the increase was driven by the current conditions component (+2.4 p.p., to 81.3), while the expectations component increased 0.5 p.p., to 97.0.

Tax collection came in at BRL 135.2 billion in October, a bit worse than our forecast (BRL 137.0 bln) and market consensus (BRL 137.8 bn). Tax collection was stable in real terms in the month. Revenues related to the wage bill and corporate profits rose 2.9% yoy and 3.2% yoy, respectively, while those related to consumption were virtually stable and other revenues declined 9.5% yoy. Excluding revenues from the REFIS/PRT, tax collection increased 0.5% yoy in real terms, with the 3mma rate decelerating to 2.4% (from 3.5%), still better than economic activity. The central government primary result will be released on Thursday, for which we expect a BRL 10.7 bln primary surplus.

On the external sector, the current account posted a USD 7.9 billion deficit in October, which was wider than our forecast (USD -4.9 billion) and market estimates (USD -5.2 billion). The Central Bank published a new revision of external statistics, pushing the deficit in the 12 months through September to USD 48.9 billion from USD 37.4 billion. In October, the negative reading reached to USD 54.8 billion (3.0% of GDP). Compared to October 2018 (USD -2.0 billion after the revision), the larger deficit was mostly driven by a weakening trade surplus. In the financial account, direct investment in the country (DIC) added up to USD 6.8 billion, missing our estimate (USD 8.1 billion) and market consensus (USD 8 billion). DIC accumulated over 12 months totaled USD 79.5 billion or 4.35% of GDP. In all, the current account deficit widened in recent months due to a weakening trade surplus and growing income deficit. The revisions led us to reassess our estimates for the current account deficit in coming years, which should now hover around 2.5%-3.0% of GDP. In terms of financing, DIC is still easily covering the current account deficit, even after the revision carried out by the Brazilian Central Bank. Portfolio flows (to fixed income and stocks) remain volatile and have shown outflows in the past 12 months. ** Full story here.

The BCB released yesterday its weekly survey with market participants (Focus). The median of IPCA inflation expectations increased to 3.46% for 2019 (from 3.33%), while it has remained stable at 3.60% for 2020 and at 3.75% for 2021. On economic activity, the median of GDP growth expectations increased 7bps for 2019 (to 0.99%) and 3bps for 2020 (to 2.20). For 2021, the GDP growth expectations remained unchanged at 2.50%. On monetary policy, the median of year-end Selic rate forecasts for 2020 returned to 4.50 after declining to 4.25% last week. For 2019 and 2021, the Selic rate forecasts did not change, at 4.50% and 6.00%, respectively. On the exchange rate front, BRL expectations for 2019 depreciated to BRL 4.10/USD (from 4.00), for 2020 and 2021, expectations remained stable at BRL 4.00/USD.


Moody's kept Chile’s sovereign credit rating at “A1”, with a stable outlook. The rating agency supported its rating call noting that the country maintains notable strengths, such as its institutions and policy effectiveness, which remain comparable or better than those of its peers. The country’s low debt level also remains a strength. Meanwhile, Moody’s believes the widely discussed process to revamp the Constitution is an insufficient argument to modify the rating for now. Moody's argues that the high quorum (2/3) agreed to approve articles in a new Constitution reduces the likelihood that drastic changes are implemented. Nevertheless, the agency acknowledges that there will be uncertainty over the coming years that will likely have an impact on the investment and growth outlook. Arguments for downgrading Chile’s rating would come from a sharp rise in debt metrics and a failure to grow near potential. In addition to domestic uncertainty, developments on the international front (trade war) are key for Chile’s outlook. Overall, Moody’s lowered its growth expectation for Chile for 2020 from 3.2% to 2.3% (broadly in line with Itaú). The agency sees a 1.9% growth for 2019, due to lower activity in October and supply shocks in the mining sector during the first half of the year.


GDP in 3Q19 was revised upwards relative to the flash estimate announced by the Statistics Institute three weeks ago. Mexico’s monthly GDP proxy (IGAE) expanded 0.1% yoy in September (from -1.0% in August), above our forecast and median of market expectations (-0.5%). This result implied a GDP contraction of 0.3% yoy in 3Q19 (revised up from the Statistics Institute’s flash estimate of -0.4% and from -1.0% in 2Q19). Looking at the breakdown, the industrial sector contracted 1.4% yoy in 3Q19 (from -1.7% in 2Q19), mainly dragged by mining (-4.2%, from -7.8%) and construction output (-6.9%, from -5.4%), while manufacturing output decelerated to 1.3% (from 1.5%). In turn, the services sector, the largest sector of the economy, slowed down to 0.1% yoy in 3Q19 (from 0.8% in 2Q19), while the primary sector expanded 5.4% (from -0.2%). At the margin, 3Q19’s GDP stood flat in seasonally adjusted terms, posting an improvement from -0.1% qoq/sa in 2Q19 (revised downward from 0.0%). Looking ahead, this figures highlight downside risk to our GDP growth forecast of 0.1% for 2019. Uncertainties over the direction of domestic policy and trade relations with the U.S. are weighing on investment, while the slowdown of the U.S. economy will likely curb exports and limit manufacturing production. The government-transition effect on fiscal spending is expected to fade, which should support some recovery in 2020. Furthermore, if the recent stabilization of oil output lasts, the mining sector would also contribute to a GDP growth improvement in 2020. ** Full story here.

On a separate note, the annual current account deficit narrowed further in 3Q19, supported by an improvement in the non-oil trade balance. The current account balance posted a surplus of USD 2.0 billion or 0.7% of GDP in 3Q19 – above median market expectations (a surplus of USD 0.2 billion) - taking the 4-quarter rolling deficit to a low 0.4% of GDP (from a deficit of 1.0% of GDP in 2Q19). At the margin, our seasonally-adjusted measure of the current account balance in 3Q19 improved to a surplus of 0.7% of GDP in 3Q19, from a surplus of 0.5% of GDP in the previous quarter. On the funding side, net direct investment improved slightly in 3Q19, enough to cover the current account deficit. Looking ahead, we expect the current account deficit to remain narrow. The improvement in the external accounts was mainly the result of a deceleration in non-oil imports (associated to a weak internal demand) and somewhat resilient manufacturing sector. However, latest data show manufacturing exports are slowing down (0.8% yoy in September, from 3.7% in August) due to softness in US economic activity, which we expect to moderate the improvement in Mexico’s external accounts. ** Full story here.

Day Ahead: At 9:00 AM, the statistics institute (INEGI) will announce September’s retail sales, which we estimate slowed to 1.9% yoy, from 2.60% in August.


Day Ahead: The INDEC will publish the official monthly GDP proxy (EMAE) for September at 4:00 PM. We forecast a 1.0% mom drop in September activity, implying a 1.8% yoy decline.

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