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Markets plummet across the region

Março 10, 2020

Almost every asset class in the region printed strong losses

Talk of the Day

All LatAm: how do lower oil prices affect the region?

Negotiations between OPEC and Russia reached an unexpected turn, as Saudi Arabia reduced oil prices by 20% and stated that it will increase daily production to more than 10 million barrels (currently at 9.7 million), in a decision that added volatility to markets across the board, piling on the already-stressed conditions set in place by the worsening coronavirus epidemic. Almost every asset class in the region printed strong losses. With this in mind, we present below short summaries, with the main oil price impacts in each country.

In Argentina, lower oil prices mean a lower energy deficit in the short run. Argentina is a net importer of energy products, so the recent price reduction will likely make a positive contribution to reducing the energy trade deficit (currently at USD 300 million for the last 12 months). In the medium term, persistently lower oil prices would make the exploitation of the country’s massive shale-gas reservoirs unattractive, including those in the Vaca Muerta area. Lower gasoline prices will also help moderate inflation and reduce energy subsidies. The domestic oil price was below the previous international prices due to the official decision to freeze the domestic fuel price. At the new levels, the energy subsidy bill (around 1.0% of GDP) will decrease, while an eventual cut in gasoline prices will contribute to disinflation.

In Brazil, lower oil prices are not as damaging for external accounts as they are for some peers, as oil and derivatives make up for 13% of total exports and 10% of total imports. Since the difference is not that high, most of yesterday’s BRL depreciation seems to result from further deterioration of global financial conditions, coupled with negative spillover to other commodity prices than just those strictly related to oil. From an economic activity standpoint, our first estimates show that Brent prices around $35/bbl may trim 0.2 p.p. from GDP growth this year, coming from the direct impact of lower export prices. However, this effect may be somewhat muted by lower energy prices in industry and, potentially, some extra room for monetary easing, because of lower inflation – the price slump contributes to cheaper fuel and energy prices in the domestic market. All else constant, the direct impact on consumer prices may trim about 40 bps from our year-end IPCA forecast (currently at 3.3%). Finally, Brazil stands to lose on the fiscal side, as the government is long O&G. Sectorial royalties accounted for 4% of total government revenues in 2019, and tax collection coming from the sector is also set to fall.

Chile is a winner, as it is a net energy importer. Energy imports were around 3.8% of GDP last year, moderating somewhat from the 6.6% peak during the last decade (2011). Overall, the net energy and mining trade balance is close to a 9.2% of GDP surplus (15% peak in last decade, 2010), as mining exports more than triple the value of energy imports. We note that despite the impact of the coronavirus on global growth (particularly China) and lower commodity prices, we anticipate the current account deficit would narrow this year to 0.9% of GDP (3.2% estimated for last year), amid a weaker CLP and poor internal demand growth. However, if the recent price developments in the oil market endure, the correction of external imbalances could be even swifter than expected and alleviate part of the pressure on the CLP. Additionally, the impact would be towards lower inflation (from our current expectation of 3.3% by yearend, with an upside bias given recent surprises) by around 0.2-0.3pp if the full effect of the price decline is passed through to prices at the pump and oil prices don’t significantly rebound as the year unfolds.

Colombia will be one of the countries negatively affected by lower oil prices. While dependence on oil has diminished, it remains a key component of the economy. The net energy trade surplus (excluding coal) is around 3.5% of GDP (7.3% peak in the last decade, 2011). As a result, lower oil prices would risk a CAD correction (4.3% of GDP last year). On the other hand, the impact on the currency (6.3% depreciation yesterday, to take COP to an historic level of 3812 pesos per dollar) could hamper domestic demand and limit the widening of the CAD. With a weaker currency, inflation could reaccelerate and put the central bank at a crossroad: cut to support the economy, or hike to support the currency and potential pass-through. Meanwhile the Colombian budget dependence on oil averaged 10% of Central Government Revenue during the past decade (close to 20% in 2013, but around 5% last year). A short-term risk comes from the fact that the 2020 budget was estimated on Brent at $60 average. Yet, while oil prices (in USD) fall, a weaker COP would partially compensate for lost revenue. The government estimates an additional COP 1trn in revenue for every 100 pesos above $3250 per dollar. Nevertheless, the net effect is negative and places additional pressure on the compliance of fiscal targets. Recently, the government has been able to broadly meet its short-term targets because Colombia’s public finances have benefited from higher-than-expected central bank dividends and elevated revenues from state-owned Ecopetrol (which are not sustainable going forward), as well as a dynamic domestic demand. However, a still-fragile structural revenue stream points to a likely need for additional tax reforms and additional privatization – both of which will be difficult to execute in the current domestic social environment – in order to keep the rating agencies at bay.

Finally, while lower oil prices don’t disrupt fiscal accounts, they will pose additional challenges to Mexico’s fiscal outlook: around 17.5% of total budget revenues or 3.9% of GDP are oil revenues (of which 1.8% of GDP are received by the federal government, while 2.2% of GDP are kept by PEMEX). For the 2020 Budget, the federal government hedged its oil revenues with a price of 49 dollars per barrel (which is the same level as the oil price in the 2020 Budget). PEMEX oil revenues have a somewhat similar hedge (although they didn’t disclose at what price their oil revenues were hedged). Lower gasoline prices (driven by a fall in oil revenues) help mitigating the pressure to federal government fiscal accounts. Domestic gasoline prices are broadly composed of the retail price plus VAT and an excise tax, which is used by the government as buffer to smoothen increases in gasoline prices. In scenario with cheaper oil, the government can increase the excise tax (up to 4.95 pesos per liter limit), increasing their gasoline tax revenues, which amounted 1.2% of GDP in 2019.


Following the collapse of oil prices and the sharp weakening of the Mexican peso, Mexico’s  exchange rate commission (formed by the central bank and the Ministry of Finance) announced an increase in its dollar sales program through NDF. A USD 20 billion program has been in place since February 2017, of which authorities have been rolling over USD 5.5 billion. While the statement announcing the decision mentioned that auctions could be called and implemented at any time, no sales were announced yet. The announcement is not aggressive in our view, but the firepower of the exchange rate commission is substantial, considering the flexible credit line facility with the IMF (worth USD 61 billion) and USD 184 billion in international reserves.    

CPI for February surprised to the upside, while core inflation was broadly in line with market expectations. Consumer prices increased 0.42% month-over-month in February (from -0.03% a year ago), above our forecast of 0.30% and market expectations. In turn, core CPI stood at 0.36% month-over month (from 0.43% a year ago), close to our forecast of 0.38% and market expectations of 0.37%. Headline inflation upside surprise was driven mainly by non-core fruits and vegetables inflation. 

Annual headline inflation accelerated, while core inflation slowed down. Headline inflation stood at 3.70% year-over-year in February (from 3.24% in January), pressured by an unfavorable base effect (lower monthly inflation in first two months of 2019 due to lower VAT in northern frontier) and non-core fruits and vegetables prices (11.2% yoy in February, from -1.76% in January). In contrast, core inflation decelerated slightly to 3.66% yoy in February (from 3.73% in January), with tradables and services inflation slowing down to 3.82% (from 3.92%) and 3.48% (from 3.51%), respectively. Other core services CPI, an indicator closely related to domestic demand, decelerated to 3.72% (from 3.78%).  

We expect inflation for 2020 at 3.2%. We note the rebound in annual inflation will fade away in March as the unfavorable base effect disappears. Looking further ahead, a widening output gap will likely contribute to curb inflationary pressures.


Yesterday the BCB intervened at the FX market for the fourth consecutive day. In the morning, the authorities auctioned USD 3 billion (spot), followed by another intervention in the afternoon, when the BCB offered another USD 1 billion in the spot market (but only USD 465 million were sold). 

Coronavirus update: there are now 30 confirmed cases of coronavirus, in 7 states. 

Day Ahead: The Central Bank announced it will auction another USD 2 billion in the spot market during the morning. Also, January’s Industrial production will be released at 9:00 AM (SP time). We forecast a 0.8% mom/sa increase.


A trade surplus of USD 821 million was registered in February, well above the USD 226 million last year, while milder than our USD 1.0 billion forecast. Trade data in the month showed the first effects of trade disruption amid the coronavirus spread. While both exports and imports dropped sharply, the impact from lower fuel prices and weakened consumer goods imports (on the back of a CLP depreciation) outweighed the hampered mining and manufacturing sales. As a result, the rolling 12-month trade balance rose to a USD 4.9 billion surplus, up from the USD 4.2 billion last year. 

After the pickup in January (+8.9%), mining fell 1.8% yoy, while manufacturing exports declined 12.2% (7.9% drop in January). In the quarter ending in February, total exports fell a mild 1.7% yoy following the 10.4% drop in 4Q19. Mining exports and strong agriculture-related sales drove growth, while manufacturing exports remained weak (down 7.9%; 13.4% fall in 4Q19). Even before the current oil price plummet, energy imports fell 21.5% in February after rising 57.0% in January, leading to total imports dropping 18.2% yoy (2.9% fall previously). Energy imports account for around 3.8% of GDP, down from a 7% at the start of the last decade. Meanwhile, continued falls in consumer and capital goods imports underscore the weak domestic demand. In the quarter ending in January, consumer imports fell 17.5% (in line with 4Q19), capital imports shrunk 14.4% (16.2% drop in 4Q19). Energy imports still retained a positive contribution in the quarter (+5.3% yoy; 16% decline in 4Q19), but a slowdown going forward is expected. At the margin, imports fell 15.1% qoq/SAAR and they are likely to weaken further ahead. New car sales dropped 10.3% YoY in February as consumers remain cautious amid heightened uncertainty and a weaker CLP. A positive development is the moderation in the fall of car sales, which posted the mildest decline since just before the start of the October protest action. In the quarter ended in February, car sales fell 11.3% YoY (-21.0% in 4Q19). After adjusting for seasonal factors, car sales accelerated to 16.5% qoq/saar. However, a meaningful recovery ahead is unlikely as private sentiment remains low, the labor market is loosening and the effect of CLP depreciation on domestic-currency prices for imported goods would persist.

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