Macro Latam< Voltar
For the full report, see enclosed file
• Annual inflation plummeted in January due to one-off factors last year that affected the comparison base. We still expect inflation to converge toward the center of the central bank's target range (4.5%) by the end of the year.
• The central bank kept its policy rate unchanged at 5.5% for the seventh consecutive month. The monetary authority expressed its confidence in the performance of both prices and activity. We do not foresee any changes in the policy rate in 2017 and 2018.
• We expect GDP to grow by 3.7% this year, following a 4% expansion in 2016 (according to our estimates). In fact, leading indicators suggest that growth could have been somewhat higher. Activity will likely continue to expand in 2018, by that time supported by the expected recovery in Brazil.
Annual inflation recedes due to base effects
Consumer prices rose by 0.6% mom in January, slightly above market expectations (0.5%), according to the central bank’s latest survey. Annual inflation fell to 1.9%, from 3.9% in December 2016, and it is now below the lower bound of the target range set by the central bank (4.5% ± 2%). The fall in inflation was due to comparison-base effects. In January 2016, heavy storms and floods affected the transportation and distribution of meat and its derivatives, affecting the prices of these products and leading to a monthly inflation of 2.6% mom. Core inflation, the main measure used by the central bank (BCP) in setting its monetary-policy rate, rose by 0.2% mom in January (3.1% yoy). Our 2017 and 2018 inflation forecast remains at 4.5%, in line with the BCP’s target.
The central bank left its monetary-policy rate unchanged at 5.5% in January. The decision was in line with our expectation and market consensus. The BCP’s statement highlighted that both inflation and inflation expectations remain in line with the monetary-policy target, while economic activity indicators continue to show a favorable dynamic. We expect the policy rate to remain stable at 5.5% for the rest of this year and next year.
Nominal exchange rate against the dollar has remained relatively stable so far this year. However, against the Brazilian real, the guaraní depreciated by 4% due to the appreciation of the Brazilian currency. The BCP announced that it will offer up to USD 5 million daily in the FX market in February to offset purchases from the finance ministry and to avoid fluctuations that are not related to the fundamentals. We expect stronger currencies in the region, particularly in Argentina and Brazil. Therefore, we revised down our YE17 exchange rate forecast to 5,950 guaraníes per dollar(from 6,100 previously). In 2018, we expect the guaraní to remain stable in real terms, reaching 6,100 guaraníes per dollar.
Solid growth in 2016
According to the BCP’s IMAEP monthly indicator, economic activity expanded by 6.3% yoy in December 2016. Trade, the construction sector, binational companies, the industrial sector and some services had solid performance. Therefore, the economy would have likely expanded by 4.2% in 2016, introducing upside risks to our expansion forecast (4%) and the market’s (3.9%, BCP’s survey). Be that as it may, the IMAEP is a preliminary estimate and the national accounts data will be published on March 7.
The central bank's business sales indicator grew by 8.4% yoy in December 2016, and totaled a 3.7% expansion in 2016. Fuel sales, supermarkets and vehicles led the increase. Another BCP survey showed that commercial banks expect a pick-up in lending in the coming months. The most dynamic sectors are trade, construction (strongly linked to the expected performance of the economy) and agriculture, subject to climatic factors.
We expect activity to remain robust this year. Our 2017 GDP growth forecast stands at 3.7%. For 2018 we expect growth to strengthen to 4%, fueled by the expected expansion in Brazil and Argentina.
In January, the trade deficit reached USD 43 million, deteriorating from the same month last year (USD 61 million surplus). Total exports rose by 5.1% yoy, to USD 828 million due to higher re-exports (up 60% yoy and mainly to Brazil). Total imports grew by 20.0% yoy in January boosted by higher purchases of capital goods (+39%), chiefly agricultural machinery because of better harvest prospects. Consumer goods purchases expanded by 23% yoy and intermediate goods increased by 8.4% yoy. We expect a reduction in the trade surplus in 2017, to USD 1.0 billion, down from USD 1.4 billion posted in 2016, in line with the expected rebound in oil prices. For 2018 we expect a further reduction of the trade surplus.
Juan Carlos Barboza
For the full report, see enclosed file