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Industrial production declines sharply in Brazil

Maio 6, 2020

Data for March and April will be relevant to measure the magnitude of economic activity drop during social distancing

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Industrial production declined 9.1% mom/sa in March, weaker than market expectations (-3.7%) and close to our call (-8.0%). The negative result was driven by the effects of social distancing measures that started in mid-March. The decline was widespread as 23 out of 26 industrial activities went down on a month-on-month basis. Within the main categories, the steepest drop was in production of consumer durable goods (-23.5% mom/sa). Indicators related to investment also declined strongly (capital goods -15.2%, construction inputs -12.5% mom/sa). Data for March and April will be relevant to measure the magnitude of economic activity drop during social distancing, but data for May, June and Q3 will also be key to analyze the speed of recovery, in case the economy is able to reopen gradually during May and June. ** Full story here.

Fitch Ratings has revised Brazil’s outlook to negative, while the Long-Term Foreign Currency Issuer Default Rating (IDR) was maintained at 'BB-'. According to the agency, the outlook revision to negative reflects the deterioration of Brazil's economic and fiscal outlook, and downside risks associated to both, due to political tensions and uncertainty over the duration and intensity of the pandemic. The agency also affirms that Brazil entered the current period of stress with a relatively weak fiscal position and low economic growth. The pandemic and the consequent recession are expected to further increase public indebtedness, impacting fiscal flexibility and increasing vulnerability to shocks.

Last night the Lower House approved a package of about BRL 125 billion of financial aid to states and municipalities. This package includes direct transfers of some BRL 60bn, as well as up to BRL 65bn in debt relief. The Lower House also made some changes in the bill that was approved by the Senate on Saturday, such as a modification in the criteria of distribution of resources from the union to the states. With this changes, the bill will need to return to the Senate for a final vote.

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 114,715 confirmed cases (up by 6,935 vs 6,633 yesterday), with 7,921 confirmed deaths (up by 600, vs 296 yesterday).

Day Ahead: The Copom will publish its monetary policy decision. We expect them to reduce the Selic rate by 50 bps, to 3.25% pa, and to signal caution regarding additional movements. We understand that a cut of this magnitude is consistent with the need for further stimulus to the economy, at a time when economic activity is being strongly impacted by the Covid-19 pandemic, but in light of the deterioration in public accounts resulting from the crisis, interest rate cuts of greater magnitude could be counterproductive for financial conditions. ** Full story here

Other than that, the Lower House may vote the second round of the “War-Budget” today.


The central bank’s quarterly Business Perception Report points to heightened uncertainty that, if unresolved swiftly, would likely lead to further labor market loosening in coming quarters. Service industries, already affected by the social unrest late last year, are once more at the forefront of the shock. While mining operations have been less disrupted, investment plans are partially or fully frozen, generating concern for suppliers. Investment that is underway in mining and other sectors is linked to cost cutting measures. Salmon farming reported a significant reduction, while business operations in areas affected by quarantines or restrictions conveyed negativity across all sectors. Overall, a large amount of businesses confirmed that they are operating below potential given the abrupt fall in demand and income. A significant majority of business believe the health crisis will extend for at least another two quarters. Nearly all respondents acknowledged some adjustment to their labor force, whether it be the utilization of the government’s employment protection program, reduced wages and/or workweeks, as well as layoffs. Although the latter has been more prevalent in the most- affected sectors, other operations do not rule out the possibility of reducing their workforce in coming months depending on the evolution of the crisis. Postponing loan payments or re-financing existing credits did not encounter significant hurdles. However, accessing new credit (given the liquidity constraints amid dropped sales), was more challenging due to stricter risk criteria used by banks (as reported in the central bank’s credit conditions survey for 1Q20). The respondents remain expectant of improved conditions following the implementation of the government’s credit support measures (extended guarantees). Historically low business sentiment amid significant levels of uncertainty and public fear would result in the Chilean economy contracting by event more than -2,5% to -1,5% forecasted in the central bank’s latest inflation report for this year (+1.1% last year).

In April, consumer confidence fell to the lowest level on record (since 2002), and well below the slump recorded during the social unrest last year. The GFK consumer confidence index dropped 21.6pp over twelve months to 21.6 points (27.8 in March and 28.3 in November last year). All five sub-indexes deteriorated, completing eight consecutive months of widespread pessimism. The headline measure has been in pessimistic ground since July 2018. The main drag coming from the expectation of household goods consumption, which deteriorated 39.5 points over one year, to reach 15.0 points. The current economic situation dropped 22.9 points to 23.4, while the 1-year economic outlook retreated 20.6 points from 49.2 in April 2019. The 5-year economic outlook sits at 19.1 points (23.8 last April; 23.1 in March). Lockdown measures and a loosening labor market are likely key factors behind the overall consumer confidence deterioration. The historically-low private sentiment amid shrinking global demand and suppressed investment and private consumption point to a significant activity contraction this year.

New car sales dropped to their lowest levels in a decade as coronavirus mitigating measures, that included rolling lockdowns, and a loosening labor market hindered private consumption. According to National Automobile Association (ANAC), new car sales fell 72.8% yoy in April (-36.5 in March; 10.6% fall in 2019) to reach 8,906 (near historical minimums recorded in 2009). After adjusting for seasonal factors, car sales in the quarter slumped 72.6% qoq/saar (-1.6% in 1Q20; -50.6% in 4Q19). The monthly decline from March to April was 54.5% (SA), far exceeding the 18.5% drop from October to November last year during the peak of social unrest. Downbeat private sentiment, amid a loosening labor market and heightened uncertainty do not point to a rapid recovery of private consumption going forward.

Day Ahead: The central bank will announce its decision from the scheduled monetary policy meeting. Having taken the policy rate swiftly to its technical floor of 0.5%, stable rates will be the name of the game. Nevertheless, the communication would likely emphasize the message of low-for-long and reiterate the preparedness to respond through boosting QE tools if risks for the economy increase even further.


In April, consumer prices increased 0.16% from March, below our 0.22% forecast, the 0.25% market consensus, and the 0.50% recorded last year. The main contributor to the monthly price gain was the 2.04% increase of food and non-alcoholic beverages prices (contributing 0.32pp) and the 0.15% rise in the housing division. Meanwhile, the lockdown measures to contain the virus outbreak were likely behind decreasing prices in communications and transportation expenses (-2.97% and 0.89% mom, respectively), which together subtracted 0.24pp from the headline figure. Annual inflation moderated to 3.51% from 3.85% in March, dragged by still low durable goods (1.58% yoy vs. 1.83% last month), while energy prices moderated to the slowest pace since June 2015 (1.15% yoy vs. 2.62% in March). Additionally, inflation excluding food and energy prices fell to 2.79% from 3.32% previously, while non-durable goods drove inflation, with a broadly stable 5.02% gain (5.04% in March). A downbeat outlook for activity and moderating inflationary pressures support our call for additional monetary stimulus.

In the central bank’s updated baseline scenario, activity could contract by up to 7% this year (+3.3% last year) and inflation could fall to 1% (3.8% in 2019), justifying the stance that significant monetary stimulus is necessary. To date, the board has lowered the policy rate by 100bps to 3.25%. Going forward, the technical team notes that the timing, magnitude, and the rate at which rate changes occur will be mainly determined by: the magnitude and persistence of the supply and demand shocks; the evolution of inflation expectations; local financial conditions and the transmission of the policy rate; and COP developments. We expect additional monetary stimulus ahead. Meanwhile, the board will continue to utilize its other monetary policy tools to ensure no significant tightening of financial conditions that could exacerbate the effect of the current shocks on the Colombian economy. The next monetary policy decision will take place on June 29, but we note General Manager Echavarría did not rule a rate decision taking place at May’s board meeting, so another 50-bp rate cut this month is likely. ** Full story here.

Fiscal Rule Committee raises permitted deficit to 6.1% due to the expected activity collapse. The announcement follows last month’s decision, when Colombia’s fiscal rule committee loosened the deficit target for this year to 4.9% of GDP, on the expectation that growth is set to fall 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 (below the 2.7% permitted deficit) to reach 2.3% this year. In the most recent decision, the committee adjusted the permitted deficit once again, this time to 6.1% of GDP on the back of the Government’s revised activity forecast, which has a 5.5% activity contraction this year as the most likely scenario (below the 1.6% contraction used in the previous committee meeting; +3.3% in 2019). The larger deficit partly responds to the triggering of an extraordinary clause that allows public spending to increase by up to 20% of the estimated output gap when growth is expected to be at least 2pp below potential. Hence, according to the communique, the cyclical component (economic and oil prices below structural levels) allow for a deficit of 1.9% of GDP, while the extraordinary spending clause permits an additional deficit of 2.4% of GDP. The committee also allowed an additional deficit of 0.4% to address the Venezuelan migration burden. Since the committee still envisions a structural deficit target of 1.5% this year, the mentioned components take the allowed nominal balance to a 6.1% deficit this year. The committee highlighted the importance of fiscal adjustment in coming years in order to guarantee the sustainability of fiscal accounts, but fell short of presenting a revised path for deficits at this time. Overall, we note that credit rating agencies are closely monitoring Colombia’s fiscal developments, with Fitch recently downgrading its rating by one notch (to BBB- with a negative outlook) and S&P (BBB-) altering its outlook to negative. Without plans for significant tax reform to contain the speed of the debt rise, the likelihood that Colombia loses its investment-grade rating going forward has considerably increased.


The central bank of Mexico (Banxico) published the minutes of April 21st extraordinary meeting, in which the Board unanimously decided to cut the policy rate by 50-bp, to 6.00%). All members acknowledged the necessity to make a monetary policy decision out of the program to respond promptly to the fast change in the domestic and global environment in the week before the policy decision. Given well-behaved inflation and the sharp deterioration of activity, we see downside risks to our forecast of a policy rate of 4.50% by the end of year 2020, while another 50-bp rate cut will likely come in May.  Board members seem to agree on the need for lower rates, but most of them still have a cautious tone over the easing pace (hinting that cuts larger than 50-bps are unlikely, even though more easing in out-of-schedule meetings can’t be ruled out). ** Full story here.


Day Ahead: The central bank will release its monthly expectation survey. In the previous survey, analysts maintained their inflation forecast for 2020 at 40.0%, while increased it to 33% for 2021, from 30.5%. Pundits reduced their GDP growth forecast for 2020 to -4.3%, from -1.2%, considering the effects of COVID-19. Other variables surveyed are Badlar interest rate, exchange rate and primary fiscal balance.

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