Itaú BBA - Evening Edition – Chilean government builds on fiscal response

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Evening Edition – Chilean government builds on fiscal response

Abril 8, 2020

The measures amount to USD 5 billion (close to 2% of GDP) and is complementary to the USD 11.7 billion package (close to 5% of GDP) released on March 17

Talk of the Day 


President Sebastian Piñera announced a second package of fiscal measures with the focus on informal workers and SMEs. The measures amount to USD 5 billion (close to 2% of GDP) and is complementary to the USD 11.7 billion package (close to 5% of GDP) released on March 17. To recap, the first fiscal package included: An employment protection initiative that allows workers to retain the contractual link with their employer and all corresponding labor rights, while receiving a partial wage financed through the unemployment insurance fund; A 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 close to USD 4.4 billion; A special bonus for non-formal workers that would benefit nearly 3 million people; A municipal solidarity fund focused on alleviating reduced SME revenue during the emergency; Eliminating stamp tax for 6 months, applicable to all new credit operations. Fast-tracking payments to government suppliers to within 30 days. Adding to the economic measures was the central bank’s 125bps of easing, taking the policy rate to its most expansionary stance technically permitted (0.5%). The central bank also launched a first-round financing facility (FCIC) to banks for just under 2.0% of GDP and a bank bond purchasing program of USD 8 billion (just over 3% of GDP). Finally, the financial market oversight body delayed the implementation of Basel III capital requirements until the end of 2021 and offered regulatory exception to delay by up to 6 months payments of mortgage and consumer loans.

The second fiscal package announced today considers two key areas: protecting economic activity and protecting income, especially for informal workers. Government guaranteed 48-month credit lines to SMEs are behind the first initiative. Guarantees would be up to USD 3 billion (just over 1% of GDP) and aim for preferential interest rates to be granted on new loans by addressing credit risk concerns. Collateral offered by the state would decrease relative to firms’ annual sales. Credit would be via the banking sector and available until September. Banks will need to re-schedule other credit lines the recipients hold with the bank for the duration of the “Covid-19” credit line period. Firms receiving this working capital injection cannot be use it to pay other credit lines, but rather to pay for ongoing operations (salaries, providers, rent, etc.). Preliminary estimates are for close to USD 24 billion in new credit, which would imply up to a 20% increase in outstanding commercial loans (or 10% of GDP). The initiative to protect income is based on a USD 2 billion fund (just under 1% of GDP) to finance transfers to 2.6 million informal workers (who do not have unemployment insurance). This would not be new money but rather through budget reallocation. Meanwhile, the central bank announced the activation of its second phase of its bank financing facility (FCIC), given 2/3 of the first offering has already been utilized. The first phase amount totaled close to 2% of GDP. The second round looks set to increase the financing capacity to around 8% of GDP. The rate paid by banks on this credit facility would be the policy rate at the time (0.5%).

The new fiscal package announced totaled USD 5 billion, but new additional resources committed would be closer to USD 3 billion. As a result, Chile’s debt is set accelerate even further. Beyond the measures adopted to address the social demands (2% of GDP including increased pensions, minimum wages as well as infrastructure repair), the combined coronavirus stimulus packages adds further pressure to the fiscal accounts that raise the likelihood of a credit rating downgrade. Last 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 means debt stabilizing in coming years is unlikely. We estimate that the fiscal impulse from the coronavirus measures (phase I and II) is equivalent to about USD 5.5-USD 7 billion or about 2.0%-3.0% of GDP, taking the fiscal deficit to around 7% of GDP in 2020 (2.8% last year; and above our previous estimate of 5.7%). Risks tilt towards a higher deficit as revenue would likely underwhelm expectations.

After five consecutive months of acceleration, headline inflation ticked down 0.2pp to 3.7% YoY in March, as weaker demand counters pass-through pressures. Consumer prices increased 0.3% from February to March, 0.1pp below our expectations and 0.2pp lower than last year. Inflationary pressures in the month were led by the seasonal rise in education prices (although below our expectation and historical patterns), along with health prices. While tradable inflation remained stable and high, non-tradable inflation fell. The latter development is expected to continue as the negative output gap widens. As such, the central bank would remain comfortable keeping its policy rate at its technical minimum of 0.5% for a significant period.  Looking ahead, we see inflation falling closer to the 3% target in 2Q20. ** Full story here.


Service sector real revenue dropped 1.0% mom/sa in February. In year-over-year terms, the indicator advanced 0.7%. Three out of five sectors printed negative figures in the month. The sharpest decline was in the “professional services, administrative and complementary” division (-0.9% mom/sa). This is the third drop in a row for this segment. On the other hand, “Transportation, auxiliary transportation and courier services” sector increased for the second consecutive month (+0.4% mom/sa). It’s worth mentioning that these figures are related to February, before the strong negative impacts from the Coronavirus on economic activity.

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 15,927 confirmed cases (up by 2210, from 13,727 yesterday), with 667 confirmed deaths (up by 133, from 667 yesterday). Find our weekly monitor for Covid-19 here.

Tomorrow’s Agenda: March’s IPCA inflation will be released at 9:00 AM (SP time). We forecast a 0.10% monthly increase, leading the 12-month reading to 3.33% (from 4.00% in February). Other than that, IBC-Br activity index may also be released. We forecast a 0.3% mom/sa increase, with the yoy reading printing at 1.0%.


Industrial production (IP) was below market expectations in February. IP fell by 1.9% year-over-year in the month, better than our forecast of -2.3% and worse than market expectations (-1.2%). According to figures adjusted by working days, IP contracted at a faster pace (3.4% year-over-year in February, from -1.7% in January), taking the quarterly annual growth rate to -2.1% in February (from -1.6% in January). Looking at the breakdown, mining sector expanded 2.8% year-over-year in the quarter ended in February (from 2.4% in January), while construction output deteriorated further (-7.4%, from -5.7%). Meanwhile, the quarterly annual growth rate of the manufacturing sector contracted 1.5% (practically unchanged from last month). Looking ahead we estimate a contraction of 3.7% in 2020 GDP.  We expect economic activity to deteriorate sharply in 1H2020, associated to the coronavirus outbreak, recovering during the second half of the year. Uncertainty from domestic policy direction is also a drag to Mexico’s economic outlook. ** Full story here.


Think-tank Fedesarrollo’s consumer confidence gauge came in at -23.8 in March, well into pessimistic territory (0 = neutral) as it reflects the drastically deteriorated context encountering the Colombian economy. The confidence gauge dropped 25pp from last year (12.6pp down from February) as Colombians entered into an extensive lockdown period in response to the coronavirus risk. Meanwhile, the oil price shock added to consumer woes by leading the COP to an historical weakness. The deterioration from last year was led by a considerable fall of the economic conditions sub-index to -39.8 (from -1.4 one year earlier), reflecting an ambience of uncertainty along with the practical issue of immobility. Meanwhile, there was a milder retreat of consumer expectation (to -13.1 from +2.9 in March 2019, -12,0 previously), but as the economy slows and the labor market loosens, consumer expectations would likely worsen significantly further. The increasing headwinds from the global scenario and the lockdown measures to mitigate the pandemic effects will likely lead to an activity contraction of 1.4% this year (+3.3% last year), as domestic demand implodes, supporting our call for additional monetary easing (to 2.75%) by the central bank.

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