Itaú BBA - Evening Edition – BCB and the Fed work together to provide liquidity to the FX market

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Evening Edition – BCB and the Fed work together to provide liquidity to the FX market

Março 19, 2020

The BCB and the Fed established a temporary dollar liquidity arrangement through swap lines

Talk of the Day


The BCB and the Fed established a temporary dollar liquidity arrangement through swap lines. This measure aims to deal with the high volatility caused by the coronavirus pandemic, the swap lines sum up to USD 60 billion. Additionally, the BCB auctioned USD 2 billion in FX credit lines and USD 635 million at the spot market during the day. 

In yesterday’s Copom meeting, the authorities ended up delivering the outcome that was (mostly) priced in, a 50-bp rate cut, in an unanimous decision. This takes the Selic to 3.75% pa (we had been expecting a more moderate move). As in its previous meeting, the committee goes out of its way to moderate market appetite for additional easing. It states that doubts about the continuity of fiscal reform may turn additional easing moves counter-productive, as they might result in tighter financial conditions. The statement also indicates, explicitly, that for now the authorities see base rate stability, at the new level, as adequate, whilst conceding that they are dealing in an especially uncertain scenario. We believe the Selic will end the year at 3.25%, with additional easing, once the worst of the Coronavirus-related financial market stress eases, but not necessarily in the next policy meeting. We will learn more about the committee's strategy with the release of the meeting minutes on Tuesday, March 24, at 08:00 AM Brasilia time. ** Full story here.

According to a survey published by CNN and conducted by Atlas Politico, 64% of the population disapprove the measures adopted by Bolsonaro’s administration to fight the coronavirus pandemic. Also, 80% believe the public health system is not prepared to face the outbreak, and 73% consider that the situation is going to deteriorate further. Regarding the length of the crisis, 38% believe that it will last for up to six months, while for 28%, it will last from two to three months. Finally, the questions related to the expected economic outcomes show that 57% believe Brazil is going to face a recession this year, 29% fear to lose their jobs, and 29% believe someone in the family will lose their job. The poll was conducted between March 16 and 18, with 1900 people.

Last night the Lower House approved the State of Public Calamity requested by the government on Tuesday. The measure will now head to the Senate, and will likely be voted next week. Meanwhile, the Ministry of Economy continues to announce measures to contain the coronavirus impact. The Ministry announced today that workers who earn up to two minimum wages and also happen to get reductions on wage and workload will receive, in advance, 25% of the unemployment insurance that they would be eligible for, should they have been fired. Local news also indicate the Administration will send a provisional measure to flexibilize working rules and protect employment during the pandemic. The measure aims at allowing companies to i) reduce the salaries and working hours by up to 50%; ii) Anticipate non-religious holidays; iii) Anticipate individual and collective vacations; iv) Use of the bank of overtime hours during the pandemic; the worker would be considered in a “time off”, and would compensate these working hours after the stabilization of the outbreak. As this proposal is a provisional measure, it has immediate effect, and has a deadline of 120 days to be analyzed by the Legislative Houses – if not approved by then, it will no longer be in force.

The government published determined the closure of borders with neighboring countries. The measure will last for 15 days and will prevent all foreigners from entering the country.

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 621 confirmed coronavirus cases (from 428 yesterday), with six confirmed deaths. Reports by sub-national health entities point to one more death.


President Sebastian Piñera announced a USD 11.7 billion stimulus package (around 4.7% of GDP) aimed at ensuring the short-term impacts of the coronavirus do not become permanent. The package consists of new fiscal expenditure (including extending unemployment insurance to those unable to work from home and beefing up funding to municipalities), bringing forward government expenditure to alleviate short-term liquidity needs as well as delaying tax requirements for small businesses. 

Fiscal expenditure measures include: Utilizing the special clause in the country´s constitution to immediately free up funds without congressional approval (roughly 0.5% of GDP in this case) to boost the public health budget; Injecting up to USD 2 billion into the Unemployment Fund in a bid to relieve labor costs for firms but compensate laborers for reduced income during this period; Capital injection of USD 0.5 billion to the state bank that would raise the bank’s credit capacity (to provide financing to individuals and SMEs) by USD 4.4 billion; A special bonus for non-formal laborers that would benefit 2 million people (total cost USD 0.1 billion); Solidarity fund (USD 0.1 billion) focused on alleviating reduced SME revenue during the period; Eliminating stamp tax for 6 months, applicable to all credit operations, implying a fiscal cost of USD 0.4 billion.

Favorable tax measures for SMEs include: Postponement of VAT payment by SMEs for 3 months and facilitate payment in 12 installments at 0% interest; Deferment of SME income tax to July 2020 and flexibility in real estate tax payment; Suspension of monthly income tax payments for 3 months; Accelerate payments to state providers to within 30 days to improve liquidity.

In all, Chile’s debt rise will accelerate further. Beyond the measures adopted to address the social demands (2% of GDP including increased pensions, minimum wages as well as infrastructure repair), the coronavirus stimulus package adds further pressure to the fiscal accounts that raise the likelihood of a credit rating downgrade. Earlier this month, Fitch changed its outlook to negative on its A rating. While Chile’s government retains a very strong balance sheet and holds significant financial buffers (SWFs), the planned expenditure path challenges the likelihood of debt stabilizing in the coming years. We estimate that the additional fiscal impulse announced today is equivalent to about USD 4 billion or about 1.5% of GDP, considering that tax deferrals generate cash flow, but they are not a new expense. This could lead the fiscal deficit to reach close to 6% of GDP in 2020. (2.8% last year; 4.5% expected previously).  


Double-digit export growth amid stable imports led to a trade deficit correction in the first month of 2020. The USD 690 million deficit, close to the market consensus of USD 650 million and our USD 624 million estimate, showed some narrowing from USD 1.0 billion deficit recorded in January last year. As a result, the 12-month rolling trade deficit inched down to USD 10.4 billion from USD 10.8 billion in December. Meanwhile, the annualized trade deficit (using our seasonal adjustment) narrowed from the USD 12.4 billion deficit in 4Q19 to USD 11.6 billion in the quarter ending in January. Import growth remained subdued at the start of the year. Total imports grew 0.6% yoy (2.5% drop in December), and gained 1.6% yoy in the quarter ending in January (4.7% fall in 4Q19). 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. Amid the recent terms-of-trade collapse and the global scenario deterioration, Colombia’s external imbalances will likely endure ahead. Lower oil prices and a weak external demand would be partially countered by a faltering internal demand. ** Full Story here.

The Central Bank announced additional liquidity measures to address the Colombian peso depreciation and tightening of financial conditions. Through FX swaps auctions, the Central Bank of Colombia will sell up to USD 400 million, with a 60-day horizon. The operation is aimed at providing liquidity in dollars, and will allow the participation of pension funds along traditional intermediaries in the FX market. Meanwhile, regarding liquidity aid, Central Bank announced that pension funds, brokerage firms, and trust companies may participate in REPO auctions, with public and private debt as collateral, to alleviate tightening financial conditions. Additionally, the total amount of REPO operations will be increased to COP 23.5tr from COP 20tr and the term of liquidity operations with private debt securities was extended to 90 days (from 30 days, previously). During the press conference, Technical Manager Hernando Vargas indicated the monetary policy rate has not been discussed in recent extraordinary meetings. However, amid the rapid deterioration of the global economy and the expected domestic slowdown, monetary easing cannot be ruled out. The next scheduled meeting will be held on March 27.

Tomorrow’s Agenda: The monthly coincident activity indicator (ISE) will be published for January at 4:00 PM (SP time). In December, ISE grew 3.7% yoy (2.9% in November), partly aided by a low base of comparison. Still solid retail sales in the month suggest another solid growth print (3.6% expectation). Looking further ahead, strong external headwinds and a weakening Colombian peso will likely lead to some growth moderation. 


Tomorrow’s Agenda: The statistics institute (INEGI) will publish Q4’s aggregate supply at 9:00 AM (SP time), which we expect to contract 0.6% yoy, as GDP fell by 0.5% yoy. Likewise, based on balance of payments data, we also expect that real imports of goods and services contracted 1.0% yoy in 4Q19.

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