Itaú BBA - Evening Edition – Brazil’s National Treasury announced a bond re-purchase program

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Evening Edition – Brazil’s National Treasury announced a bond re-purchase program

Março 12, 2020

The program started today and will continue until next Wednesday.

Talk of the Day


The National Treasury announced a bond re-purchase program to support the good functioning of markets, starting today, until next Wednesday. On the FX market, the BCB also intervened for the seventh consecutive day. The authorities auctioned about USD 1.8 billion (spot) during the day, after the BRL opened at a new historical peak, at BRL 5.00 per USD.

Coronavirus update: the latest official information is that Brazil has 76 confirmed cases of coronavirus.

Tomorrow’s Agenda: The Central Bank announced it will auction USD 2 billion in FX credit lines.


Tariff freeze decelerated headline inflation. The CPI increased by 2.0% mom in February, down from 2.3% in January.  At the margin, annualized inflation for the quarter ended in February decelerated to 37.1%, from 49.7% in the previous month. Annual inflation fell to 50.3%, from 52.9% in January 2019.

Inflation will likely pick up in March. The increase in medicines due to the end of the price agreement with labs and a weaker currency will likely pressure consumer prices this month. The proximity of the wage bargaining season will be a test for the administration and its efforts to eliminate indexation clauses and break inflationary inertia. We forecast inflation for this year at 43%. ** Full story here


While the Fitch Ratings agency retained at 'A' sovereign credit rating for Chile, it revised the Outlook to Negative from Stable. The Negative Outlook reflects significant deterioration in Fitch's baseline scenario for lower growth prospects and higher fiscal deficits and debt levels following the social unrest that began in mid-October 2019. The Outlook revision also reflects further downside risks posed by a more uncertain local political environment and global economic backdrop. However, these risks are mitigated to some extent by Chile's relatively strong balance sheet and much lower debt burden than the 'A' median.

Reflecting on the developments since the October events, Fitch comments that surveys show confidence in public institutions has deteriorated significantly since the start of the protests. Meanwhile, rewriting of the constitution (if the "yes" vote prevails in the April referendum) would be a lengthy two-year process that may dampen the economic recovery and prolong political uncertainties. Fitch forecasts flat growth at 1.2% in 2020 before recovering modestly to 2% in 2021, down sharply from Fitch's previous forecasts of 3% in 2020 and 3.2% in 2021, before the unrest hit. Increased uncertainty is the key factor behind the weaker economic outlook, as it will likely weigh on private investment and consumption, despite some policy stimulus. These revisions are in line with our own adjustments following the crisis. We note that the global shock underway amid the coronavirus spread are in line with Fitch’s take that risks to growth are skewed to the downside. Medium-term growth prospects are likely to be weaker, in Fitch's view, given that major policy changes to expand the social safety net could weigh on private investment prospects without clear near-term benefits for productivity.

Planned fiscal consolidation path will be challenging. In 2019, the central government fiscal deficit rose to an estimated 2.8% of GDP from 1.7% in 2018, reflecting declines in tax revenues and lower copper proceeds, and significant growth in current spending. As a result, of the increased spending as well as weaker growth and copper prices, Fitch expects a central government fiscal deficit of 5% of GDP in 2020 and 4.5% of GDP in 2021. Overall, Fitch considers the following risk factors could trigger a rating downgrade: a significant deterioration in of governance risks and political stability; sustained growth under-performance leading to a wider divergence in per capita income with the 'A' category median; and the lack of fiscal deficit consolidation that leads to an ongoing increase in government debt and/or reduction in fiscal buffers (i.e. sovereign wealth funds). As Chile grapples with increased social demands amid a lack of business confidence, achieving a meaningful growth recovery to aid the fiscal consolidation process ahead is a key risk.


Following the Colombian peso depreciating to historic nominal lows (touching 4,131 pesos per dollar during Thursday, March 12), the central bank announced it would intervene in the FX market, with the use of NDFs valued at USD 1.0 billion, and provide other measures to aid liquidity. The NDFs would have a 30-day horizon and are renewable, as needed. No details were provided regarding the calendar or size of the auctions. However, given that the FX market on average trades around USD 0.8-1.2 billion a day, the amount is likely to be broken down into tranches. Additionally, the central bank will implement liquidity lines with qualified securities as collateral to alleviate tightening financial conditions. These lines will be overnight and at fixed term with a total amount of COP 17tr (approx. USD 3.8 billion), split into public debt (COP 12tr) and private debt (COP 5tr), with no expiration date. At the press conference announcing the measures, General Manager Echavarria commented that the measures seek to address liquidity concerns (in pesos and dollars), and not halt depreciation (as the latter is due to the fall in oil prices; a fundamental driver for the Colombian currency). Echavarria also said that sales in the spot market were not being considered at this time, so there was no discussion about using the Flexible Credit Line Colombia holds with the IMF. Meanwhile, Finance Minister Carrasquilla commented other options to support the peso have not been ruled out, hinting at some support from the fiscal side (likely in the form of sale of dollar denominated assets). Colombian international reserves sit close to USD 54 billion. Developments in the FX market along with large twin deficits (fiscal and current account), limit the room for the central bank to potentially follow the global trend and increase monetary stimulus amid the shock from the coronavirus (next meeting: March 27).

Tomorrow’s Agenda: Activity indicators for the month of January will be released at 12:00 PM (SP time). Activity growth in the final month of 2019 improved from the protest-hit month of November. Retail sales increased 7.1% yoy (4.4% previously). Meanwhile, manufacturing rebounded to 3.2% yoy (-1.5% previously), partly aided by a low base of comparison and a favorable calendar effect. Overall, consumption-related activity, supported by credit growth, drove activity last year, while manufacturing failed to capitalize on a weaker COP (partly due to a softer global demand). We expect still upbeat retail sales growth of 7.8% over twelve months, aided by a car sales rebound and a low base of comparison, while our call for manufacturing is mild growth of 1.2%.


Tomorrow’s Agenda: The Statistics Institute (INEGI) will publish January’s industrial production at 9:00 AM (SP time). We estimate industrial production fell by 1.8% yoy (from -1.0% in December). We expect the mining sector to recover, associated to some stabilization in the oil output.  Likewise, we also expect manufacturing sector to improve somewhat, in line with the expansion of January’s manufacturing exports. In contrast, we expect construction output remained weak (public capital expenditure execution contracted 15.2% year over year in real terms).


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