Itaú BBA - More measures to help contain coronavirus impacts announced in Brazil

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More measures to help contain coronavirus impacts announced in Brazil

Abril 2, 2020

Last night the government announced a provisional measure that authorizes companies to reduce their employees working hours with a proportional salary reduction

Talk of the Day 
 

Brazil

Last night the government announced a provisional measure that authorizes companies to reduce their employees working hours with a proportional salary reduction. The measure proposes four modalities of agreement between companies and workers: reduction of 25%, 50% or 70% of working hours, or total suspension of the job contract. During the period of the agreement (maximum extent of 90 days), the employee will receive a proportional payment of his unemployment insurance (to be paid by the government), partially compensating his income loss. The Labor Secretariat estimates that this measure will preserve about 8.5 million jobs, with a fiscal cost of BRL 51.2 billion. Other than that, yesterday the Secretariat of Federal Revenue announced that it will postpone the payments of PIS/Pasep, Cofins and the employer’s contribution to Social Security, relative to April and May, to August and October, respectively. Also, the deadline for the Individual Income Tax (IRPF) payment, was extended to June 30 (from April 31). The measure will also eliminate the Tax on Financial Operations (IOF) for 90 days. The Federal Revenue estimates that these measures add up to BRL 87 billion (BRL 7 billion from IOF reduction, and the remainder from the taxes payment postponement).

Yesterday, a new version of the so called “War-budget” constitutional amendment was presented  in the Lower House. The bill creates a separate budget, intended to provide fiscal relief measures to companies and workers during the covid-19 pandemic, and also gives more instruments to the Central Bank to act in the crisis. In the new version, presented by the rapporteur, the Congress limited the period for deposits to be held by the Central Bank to 12 months. Also, the authorization to buy and sell government securities was removed from the bill (the authorization to buy and sell corporate debts securities was maintained). According to local news, speaker Rodrigo Maia has indicated that he intends to put the bill for a vote tomorrow morning.

Industrial production increased 0.5% mom/sa in February, above our call and market expectations (both at -0.4% mom/sa). In year-over-year terms, industrial production receded 0.4% (our call and market: -2.2%). The diffusion index (percentage of industrial items rising in the month) hit 58%, showing that the increase was widespread (15 out of the 26 activities). Production of vehicles and chemical products were the main positive surprises (+2.7% mom/sa and +2.6% mom/sa, respectively). In the main categories breakdown, capital and intermediate goods were the drivers of industrial production (1.2% mom/sa and 0.5% mom/sa respectively), while the remaining categories showed negative results. After cooling down in the last two months of 2019, capital goods production showed two positive results in a row, almost reaching the same level as in October 2019. Construction inputs, another component related to investment, remained stable seasonally-adjusted. It’s worth mentioning that these figures are related to February, before the strong negative impacts from the Coronavirus on economic activity.

The trade surplus in March reached $4.7 billion, above our expectations ($3.5 billion surplus) and the market consensus ($ 4.0 billion surplus). Exports totaled $19.2 billion, decreasing 4.7% yoy, controlling for the number of working days. There was a slight decrease in shipments of basic goods (-0.6%) and a more significant drop in sales of manufactured items (-14.9%), the latter affected by the transactions involving an oil-drilling rig carried out in March 2019. Sales of semi-manufactured items increased 6.1% yoy. Imports totaled $14.5 billion, receding 4.5% yoy, adjusting for the number of working days. There was a sharp increase in purchases of capital goods (23.3%), but this result possibly reflects imports related to an oil-drilling rig. Imports of intermediate goods rose 1.2%. Consumer goods purchases decreased by 4.0% yoy, with purchases of consumer durable goods posting a 20.7% contraction and purchases of consumer non-durable goods growing 0.6%. Fuel and lubricant imports decreased 10.0% yoy. 

The trade balance in March still does not reflect the slowdown in global trade or the decline in domestic activity caused by the Coronavirus pandemic. However, the results for the coming months will likely show a weakening of both exports and imports. For the coming years, we forecast smaller trade surpluses than those observed in recent years ($40 billion in 2020, vs. $43.1 billion accumulated in 12 months until February and $46.7 billion in 2019). ** Full story here.

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 6836 (up by 1119, from 5717 yesterday) confirmed coronavirus cases, with 240 (up by 39, from 201 yesterday) confirmed deaths.

Colombia

Fitch downgraded Colombia’s long-term foreign currency debt rating one notch to "BBB-" (the lowest investment grade rating) and retained a negative outlook. The decision follows S&P’s change of outlook from 'Stable' to 'Negative' while keeping the rating unchanged one notch above junk status last week. The downgrade by Fitch reflects the likely weakening of key fiscal metrics amid the expected economic downturn caused by the combination of shocks from the fall in oil prices and measures to combat the coronavirus pandemic. Fitch sees a growth contraction this year of 0.5% (Itaú -0.4%; +3.3% last year), dragged down by a significant slowdown in domestic demand and oil exports. The fiscal deficit is seen widening to 4.5% of GDP (Itaú 3.3%; 2.5% of GDP last year) amid rigid expenditure demand. Meanwhile, the debt level is expected to rise above 50%, up from 44% in 2019, a development explained by disaster response spending and the sharp depreciation of the currency. Interest payments to revenue have also risen significantly. An increase in the debt burden in recent years and an expected fall in tax revenues have left the government with less fiscal space to counteract economic shocks, in Fitch's view. Meanwhile, the ‘Negative’ outlook reflects downside risks to the outlook for economic growth and public finances, and to the capacity and quality of the government's policy response to decisively cut deficits and stabilize debt over the coming years, given the scale of the shock. Overall, Fitch states that Colombia's investment grade rating reflects the government's conservative macroeconomic policies that have underpinned macroeconomic and financial stability. However, a rating downgrade could unfold if: there is a failure to achieve a fiscal consolidation consistent with stabilization and eventual reduction in government debt burden; damage to medium term growth prospects; and a sustained large external imbalances that lead to a continuous rise in the external debt burden. Moody’s still holds Colombia's rating two notches into investment grade ("Baa2", Stable Outlook), but given the dual shocks facing the country and the expected deterioration of growth and fiscal metrics, a downgrade to the same level as Fitch and S&P is likely to unfold this year.

Day Ahead: February’s exports will be published at 12:00 PM (SP time). In January, export growth was driven by a coal sales recovery. Total exports grew 11.7% yoy, following seven consecutive months of declines, with coal posting a considerable recovery (+81.1% yoy from 41.5% drop in December), mostly boosted by higher volumes. Additionally, oil exports increased 5.4% yoy (+6.5% previously) aided by prices. For February, we expect exports of USD 3.1 billion, 4.2% yoy down from last year as energy exports retreat.

Chile

Fuels will drop sharply today. In its weekly price report, the National Petroleum Company (Enap) announced a larger than usual change in domestic gasoline prices reflecting the recent collapse in global fuel prices arising from the effects of the global pandemic and the oil price war between Saudi Arabia and Russia. The Price Stabilization Mechanism (Mepco) can, under extraordinary circumstances, allow for price variations larger than usual 6 CLP per liter per week. In this case, prices will fall between CLP 18 and 25 pesos given a change in the ad valorem fuel tax associated with the price stabilization mechanism. We estimate this change would lead to fuels falling around 4.7% in April, contributing -0.13bp to total inflation in the month, and additional 0.05 drag relative to our previous estimate, leading CPI in the month closer to 0.1%. Additionally, we estimate the price stabilization mechanism will continue to lead to weakly drops until at least July, with a downside bias for the rest of the year.

In the flagship quarterly Monetary Policy Report (IPoM), significant downward revisions to activity and core inflation justified the swift move to take the policy rate to its “technical” floor of 0.5% (through 125bp cut over the last two weeks). The board highlights the extreme complexity of the current scenario engulfing the globe that raises forecast uncertainty, particularly due to the difficulty in estimating how the pandemic will evolve and how to ease social distancing measures. In its base case, the central bank expects an economic recovery from the 3Q20 onwards. However, key to the expected bounce back would be the capability of businesses and households to stay afloat aided by the set of announced monetary and fiscal measures. We expect rates to stay at this historically low level for the remainder of the year, with quantitative easing measures expected if risks for the economy increase even further. **Full story here.

Prior to the coronavirus pandemic outbreak, activity remained upbeat, led by mining. The monthly GDP proxy expanded 2.7% YoY, below our 3.3% call and close to the Bloomberg market consensus. Mining posted the strongest growth since early 2018, expanding 10.4% YoY (+1.9% previously) given a low base of comparison last year. Meanwhile, non-mining activity (led by manufacturing and construction) also improved to post the highest growth rate since before the protest action in October 2019, with a 2% YoY expansion. The seasonally and calendar adjusted series expanded 0.6% MoM from January, leading to a 2.5% YoY growth, as February 2020 was a leap month. Overall, the upbeat data print will not continue past March, as the direct impact of the coronavirus advancement and the social distancing measures adopted sharply depress activity. We expect a 1.6% contraction for GDP this year. Our base-case scenario is for a sharp drop in growth in 2Q20, followed by a robust recovery thereafter, aided by the significant fiscal and monetary stimulus put forward at a global level. Yet, risks are tilted to the downside in activity, justifying rates a “technical minimum” for a prolonged period of time. ** Full story here.

Peru

CPI was slightly above market expectations in March. CPI posted a month-over-month rate of 0.65% (from 0.72% a year ago), below our forecast of 0.79% and above market expectations of 0.60% (as per Bloomberg). The monthly figure reflected a seasonal increase in education prices associated to the start of the school year and an increase in some fruits and vegetables. The sharp deceleration in core inflation puts downside risk to our inflation forecast of 2.1% end of 2020. The widening of slack conditions will curb inflation, offsetting pressures to inflation from the currency depreciation. ** Full story here.



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