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Macroeconomic Research Department
LATAM MACRO REPORTAugust 01st, 2016
LATAM MACRO REPORT
Economic downturn, added to a more favorable external scenario, will allow
monetary policy to be more flexible than we expected
Economic activity in the region has been disappointing at the beginning of this year. This scenario,
in conjunction with: (i) the expected normalization of interest rates in the USA; (ii) the recent
weakness of the dollar due to frustration with growth in the USA and the difficulty Trump has faced
in implementing his political agenda, have contributed to a slowing in inflation in Latin American
countries. With the exceptions of Peru and Mexico, which still suffer from the effects of supply
shocks (in the case of Peru) and exchange rate pass-through and increase in fuel prices (in
Mexico’s case). We believe that this combination of weak activity and slowing in the inflation rate
will allow loosen monetary conditions in the countries of the region.
• Argentina: The economy continues on an upward trend after the sharp contraction of last year.
Persistently high levels of inflation have led the Central Bank to raise interest rates. However,
we expect inflation to slow in the coming months, thereby allowing for an easing of monetary
policy in the second half. (p. 2)
• Chile: We revised our GDP growth forecast for 2017 to 1.8%. However, we forecast the growth
rate to accelerate to 2.5% in 2018. After cutting interest rates in recent months in response to
weak activity, we expect the Central Bank to keep interest rates at 2.5% until the end of 2017.
The names of presidential candidates will start to become clear with the upcoming primaries
scheduled for 2 July. (p. 4)
• Colombia: More acute slowing of inflation and economic activity caused BanRep (Colombian
Central Bank) to accelerate the pace of interest rate cuts at its April meeting. Activity indicators
have confirmed the scenario of slowing growth in the first yearly quarter. Nevertheless, the
decompression of consumer inflation still falls short of the pace expected by BanRep. (p. 6)
• Mexico: The more conciliatory position of the United States government in relation to NAFTA
and some improvement in the foreign scenario have led us to raise our growth projections from
1.5% to 1.8% in 2017. The consequent improvement in the perception of risk should reduce
pressure on inflation, allowing Banxico (Mexican Central Bank) to interrupt the cycle of high
interest rates sooner than we predicted. Current indicators continue to show solid growth, with
emphasis on the recovery of the country’s foreign sales. (p. 8)
• Peru: We have reduced our GDP growth estimate from 3.7% to 3.4% in 2017. Inflation has
been unexpectedly increasing, driven by temporary factors, particularly food prices, which are a
result of the heavy rains that hit the country in May. We expect that, after the cut in April,
interest rates will remain at 4.0% until the end of 2017. (p. 10)
May, 2017
2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018
Argentina 2.5 -2.3 2.8 3.0 26.9 41.0 20.0 14.0 33.00 24.75 19.00 11.00 12.9 15.9 17.8 19.8
Brazil -3.8 -3.6 0.3 2.5 10.7 6.3 4.2 4.5 14.25 13.75 9.00 9.25 3.90 3.26 3.30 3.55
Chile 2.3 1.5 2.1 2.5 4.4 2.7 3.0 3.0 3.50 3.50 3.00 3.00 709 671 670 675
Colombia 3.1 2.0 2.8 3.5 6.8 5.8 3.9 3.5 5.75 7.50 5.75 5.50 3174 3001 3060 3000
Mexico 2.5 2.3 1.5 2.0 2.3 3.2 4.4 3.5 3.25 5.75 7.00 6.00 17.2 20.7 21.5 21.0
Peru 3.3 3.9 3.7 4.3 4.4 3.2 2.8 2.5 3.75 4.25 4.25 4.25 3.41 3.36 3.40 3.50
GDP Growth (%) CPI Inflation (%) Policy Rate (%)FX - year end
(LC / USD)
Forecast: Bradesco
LATAM MACRO REPORT
8.98.0
9.0
4.1
-5.9
10.1
6.0
-1.0
2.4
-2.5
2.6
-2.3
2.5 3.0
-8
-4
0
4
8
12
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Real GDP Growth: Actual data and Bradesco forecasts (%)
Sources: CEIC, Bradesco
26.25
22
24
26
28
30
32
34
36
38
40
dez
-15
jan
-16
fev
-16
ma
r-16
abr-
16
ma
i-16
jun
-16
jul-
16
ago
-16
set-
16
ou
t-16
no
v-1
6
dez
-16
jan
-17
fev
-17
ma
r-17
abr-
17
ma
i-17
Monetary Policy Rate (%)
Source: Central Bank of Argentina
12
8
3.5
17
12
6.5
0
10
20
30
40
50
jun
-13
de
z-13
jun
-14
de
z-14
jun
-15
de
z-15
jun
-16
de
z-16
jun
-17
de
z-17
jun
-18
de
z-18
jun
-19
de
z-19
Inflation (%)
Buenos Aires Inflation
Inflation targets
Source: Bloomberg, Central Bank of Argentina, Bradesco
The country's economy remains in recovery. While
the February data came under expectations, the March
figures show some improvement in the performance of
economic activity. The monthly indicator of economic
activity grew by 1.9% m/m in March, suggesting a
GDP growth of 0.6% q/q in the first quarter of this year.
Growth should accelerate, showing some recovery in
consumption, which last year was affected by the
increases in the prices of public services reflecting the
withdrawal of subsidies for rates. We have slightly
reduced our estimated GDP growth this year from
2.8% to 2.5%.
The foreign scenario remains favorable. The global
economy seems to be gaining traction at the beginning
of the year. The expectation is still a gradual rise in
American interest rates. In addition, the trade balance
has accumulated a surplus of USD 877 million in the
last 12 months, reflecting the exports growth.
Inflation has been persistent, but we still expect a
slowdown in the coming months. Inflation has fallen
less than expected, with monthly variations above
2.0% m/m in the last two months. The inflation
accumulated over the past 12 months is falling and
mainly reflects the withdrawal of the effect of energy
price adjustments. What is more, the appreciation of
the real exchange rate should help contain the
inflationary pressures ahead. The plentiful grain
harvest should also help contain food prices. We
expect a slowdown in inflation in the coming months,
reaching 21% at the end of 2017.
The Central Bank surprised the market by
increasing interest rates in mid-April. This has been
the first change in interest rates since November. At
the following meetings, the Central Bank opted to keep
interest rates on hold, but reiterated that it is ready to
act if necessary. As we believe that inflation should
decline, albeit at a slower pace than previously
anticipated, we expect the Central Bank to keep
interest rates unchanged in the months ahead. That
would happen before starting a cycle of reduced
interest rates in the second half of the year. With this in
mind, we reviewed our estimate for the monetary policy
rate from 19.0% to 22.0% by the end of 2017.
• The economy continues on an upward trend after the sharp contraction of last year.
• Persistently high levels of inflation have led the Central Bank to raise interest rates.
• We expect inflation to slow in the coming months, enabling an easing of monetary policy
throughout the second half.
The economy is still in recovery; we
forecast GDP growth of
2.5% in 2017.
Argentina
The Central Bank raised interest
rates.
Inflation should decelerate in the
coming months.
LATAM MACRO REPORT
3.3
1.7 1.8
-1.1-0.4
-1.4 -1.5-2.4
-3.2
-4.4-5.0
-4.2
-3.2
-2.2
-8
-6
-4
-2
0
2
4
6
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Primary Balance (% of GDP)
Source: IMF, Treasury, Bradesco
government targets
3
The adjustment of fiscal accounts remains a
challenge. The Government’s goal is gradually
reducing the primary deficit over the next four years,
reaching 2.2% of GDP in 2019. The fulfillment of this
year's fiscal target (a deficit of 4.2% in GDP) should be
helped by extraordinary collection with the
regularization of assets held outside the country.
Moreover, the resumption of economic growth should
lead to an increase in tax collection. On the
expenditure side, the withdrawal of energy subsidies
should also help in the adjustment.
The elections for Congress in October will be
important for the perspectives of the country. Half
of the House and a third of the Senate will be in
dispute. The main issue will be the support for the
Macri administration, which is currently in a minority in
both chambers. Currently, our base scenario is that the
elections will not have a clear winner, with only minor
changes taking place in the composition of Congress.
A victory for Macri’s Cambiaremos coalition should
lead to a more ambitious agenda of economic reforms,
enabling faster national growth in the coming years,
increasing the chances of political continuity in the
presidential election of 2019. On the other hand, a
victory for the opposition would make reforms difficult
and increase the uncertainty regarding the continuity of
economic policy.
New fiscal targets point to a gradual
adjustment of public finances.
LATAM MACRO REPORT
The activity data at the beginning of the year was
disappointing. The mining sector was strongly
affected by a strike at the country's largest copper
mine. Production in the sector shrank 13.6% y/y in the
first quarter. GDP growth slowed down to 0.2% q/q in
the first quarter from 0.5% in the previous quarter.
Though consumption rose from 0.2% to 1.2%.
The poor performance at the beginning of the year
led us to reduce our estimate for GDP growth in
2017 from 2.1% to 1.8%. We believe, however, that
the economy should accelerate in the coming quarters,
reflecting the decline in interest rates and the increase
in investments in response to higher copper prices.
Thus, we have kept our 2018 GDP growth estimate at
2.5%.
The external scenario also seems more favorable.
Despite the recent setback, international copper prices,
which represent about half of the country’s total
exports, remain about 12% above the average price in
2016. Furthermore, the expectation of a gradual
normalization of the United States’ monetary policy has
favored emerging countries’ currencies. In this respect,
we expect the Chilean currency to remain without
significant changes until the end of the year, after
having depreciated since the start of the year.
Inflation remains favorable. The favorable
exchange rate also contributes to lower inflationary
pressures. In April, the consumer inflation rose 2.7%
y/y, the same variation observed in the two previous
surveys. The core indicators were even more favorable
increasing 2.2% . Inflation should remain near the
target. Inflation expectations remain anchored, with the
median forecasts at 2.9% in 2017 and 3.0% in 2018.
This low-inflation environment, with very slow
economic activity, supports the monetary easing
carried out by the Central Bank.
• We reduced our GDP growth forecast for 2017 to 1.8%. However, we still expect the growth to
accelerate to 2.5% in 2018.
• After the recent interest rates cuts i in response to a weaker economic activity, we expect
Central Bank to keep rates at 2.5%.
• The names of presidential candidates is starting to become clear ahead of the upcoming
primaries on July 2.
Economic activity continues to
disappoint.
Chile
Inflation remains
around the target.
9.9
-2.3
4.4
1.0
6.1
4.8
2.7
-4
-2
0
2
4
6
8
10
ma
r-0
7
set-
07
ma
r-0
8
set-
08
ma
r-0
9
set-
09
ma
r-1
0
set-
10
ma
r-1
1
set-
11
ma
r-1
2
set-
12
ma
r-1
3
set-
13
ma
r-1
4
set-
14
ma
r-1
5
set-
15
ma
r-1
6
set-
16
ma
r-1
7
Consumer Inflation (% YoY)
Source: Bloomberg
target band
1.01.6
-5.9-6
-4
-2
0
2
4
6
8
10
ma
r-1
0
set-
10
ma
r-1
1
set-
11
ma
r-1
2
set-
12
ma
r-1
3
set-
13
ma
r-1
4
set-
14
ma
r-1
5
set-
15
ma
r-1
6
set-
16
ma
r-1
7
Economic Activity Index - IMACEC (12 months, % change)
Total Non-mining Mining
Source: Banco Central de Chile
LATAM MACRO REPORT
5
After announcing her candidacy,
Beatriz Sánchez won votes from
both opponents.
The Central Bank has decreased the interest rates
to 2.5%. With the current inflation near the target and
the modest pace of economic activity, the Central Bank
opted to cut the interest rates by 0.25 p.p. at meetings
held in April and May. The press release of the last
meeting states that future changes in monetary policy
will depend on the consequences of internal and
external macroeconomic conditions for inflationary
perspectives. In our view, this signals that the Central
Bank does not intend to promote further interest rate
adjustments in the short term. Based on that, we
expect interest rates to end the year at the current level
of 2.5%
The outlook for November’s elections starts to
become clearer with the approach of the primaries
that will be held on July 2. Ex-President Lagos has
abandoned the race for a position in the Government
coalition, Nova Maioria, which will probably have
Senator Alejandro Guiller as a candidate. Journalist
Beatriz Sánchez has agreed to contest the primaries
for the newly established Frente Amplio coalition. A
recent poll has shown the two best-positioned
candidates, former President Sebastian Piñera (from
the Chile Vamos coalition) and Alejandro Guillier, the
governing candidate, to have lost votes compared to
the previous poll, registering 24% and 19%
respectively. Beatriz Sánchez, on the other hand, has
advanced to 11% of voting intentions.
0
2
4
6
8
10
dez
-06
dez
-07
dez
-08
dez
-09
dez
-10
dez
-11
dez
-12
dez
-13
dez
-14
dez
-15
dez
-16
dez
-17
Monetary Policy Rate (%)
Sources: Bloomberg, Bradesco
P
After the recent cuts, we expect the
Central Bank to keep the interest
rates at 2.5%.
1820
24
29
27
2927
24
5
15
21
26
28
2523
19
57
5 54 32 4 4 4 22
4
22
11
0
10
20
30
40
Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17
Presidential Election Survey (%)
Sebastian Piñera Alejandro GuillierRicardo Lagos Escobar Manuel José OssandónBeatriz Sánchez
Source: GFK Adimark
LATAM MACRO REPORT
At the last monetary policy meeting, the Central
Bank of Colombia (BanRep) decided to step up the
pace of interest rate cuts (from 0.25 to 0.50
percentage points). This confirmed our expectation
that, after the signals given at the meeting in March,
when the BanRep highlighted the deceleration of
economic activity and inflation, BanRep would
accelerate the pace of cuts.
On that occasion, one of the committee members
voted for a 0.50 percentage point reduction. However,
in March most members of the committee opted for a
cut of 0.25 percentage points. As the inflation and the
economic activity data showed a higher than expected
slowdown, the committee decided to increase the pace
of cuts to 50 bps, in April’s meeting.
The results from the first-quarter GDP have
confirmed the decrease in economic activity since
the end of last year. GDP grew by 1.1% y/y, which is
the equivalent to a 0.9% q/q contraction. This weak
GDP growth reflects the shrinking of domestic
consumption, as well as low industrial output.
While showing slight improvement in March, retail
sales (excluding fuel) suffered a 3% q/q contraction
in the first quarter of 2017. This reduction in
consumption could be explained by falling purchasing
power due to higher inflation. Furthermore, the recent
rise in Value Added Tax (VAT) on some consumer
goods may also have contributed. Similarly, industrial
production has also been slowing in the first quarter of
this year, with an accumulated fall of 2% q/q. This
deceleration remains mainly influenced by poor output
in the oil industry.
The effect of this scenario of slowing economic
activity starts to affect the behavior of consumer
inflation. When coupled with strong decompression in
food prices, this has made the inflation rate decrease
from 9.0% y/y , in July 2016, to 4.6% in April. During
this period, food prices went down from 15.7% to 2.5%,
contributing with 3,7p.p. to the reduction in headline
inflation. Other prices have shown greater resilience,
given the slowdown in core inflation was lower in the
period, from 7% y/y to 5.4%, which suggests greater
inertia among these items.
• A more intense decrease in inflation and economic activity made BanRep intensify the pace of
interest rate cuts to 0.5 percentage points at the last meeting in April.
• Economic activity indicators have confirmed a scenario of slowing GDP growth in the first
quarter.
• After a few months of sharp rise, consumer inflation starts to slow down, but at a slower pace
than expected by BanRep.
Acute slowing of economic activity
in the first quarter of 2017.
Owing to the sharp fall in inflation and
economic activity, BanRep
accelerated interest rate cuts in April.
Colombia
11.50%
5.25%
7.25%
6.00%
10.00%
3.00%
5.25%
3.25%
4.50%
7.75%7.00%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Ma
r-0
1N
ov
-01
Ju
l-0
2M
ar-
03
No
v-0
3J
ul-
04
Ma
r-0
5N
ov
-05
Ju
l-0
6M
ar-
07
No
v-0
7J
ul-
08
Ma
r-0
9N
ov
-09
Ju
l-1
0M
ar-
11
No
v-1
1J
ul-
12
Ma
r-1
3N
ov
-13
Ju
l-1
4M
ar-
15
No
v-1
5J
ul-
16
Mar-
17
Interest rate
Source: Bloomberg
3.0%
8.0%7.3%
-0.9%
8.3%
1.4%
7.0%
1.8%
3.6%2.5%
0.7%
-2%
0%
2%
4%
6%
8%
10%
Feb
-05
No
v-0
5
Au
g-0
6
May
-07
Feb
-08
No
v-0
8
Au
g-0
9
May
-10
Feb
-11
No
v-1
1
Au
g-1
2
May
-13
Feb
-14
No
v-1
4
Au
g-1
5
May
-16
Feb
-17
Colombia Economic Activity Index
Source: Bloomberg
LATAM MACRO REPORT
8.1%
5.6%
7.8% 7.9%
1.8%
4.0%
1.8%
4.4%
9.0%
4.7%5.0%
3.5%
5.8%
3.3%
2.3%
7.0%
5.4%
0%
2%
4%
6%
8%
10%
Jul-
01
Ap
r-02
Jan
-03
Oct
-03
Jul-
04
Ap
r-05
Jan
-06
Oct
-06
Jul-
07
Ap
r-08
Jan
-09
Oct
-09
Jul-
10
Ap
r-11
Jan
-12
Oct
-12
Jul-
13
Ap
r-14
Jan
-15
Oct
-15
Jul-
16
Ap
r-17
Consumer price index (YoY % change)
Cheio
Núcleo
Source: Bloomberg
Decompression of food prices mostly
explains the reduction in inflation.
However, it is worth highlighting that part of this
resilience reflects the pass through effect of the rise in
the Valued Added Tax (VAT) in February 2017 and an
increase in gasoline prices, which have restricted the
decompression in core inflation.
Another factor that has contributed to the
deceleration of prices is lower volatility in the
exchange rate. This is because the devaluation of the
Colombian peso from the end of 2014 - reflecting the
fall in oil prices - affected the prices of imported
products and consequently domestic prices in 2015
and 2016. However, as the exchange rate has
stabilized since mid-2016, it has ceased to contribute
to the increase inflation.
We expect some moderation in the pace of
slowdown in food prices with the end of the favorable
base effect. Notwithstanding, the outlook for 2018
should still be favorable due to the good agricultural
harvest this year, and given the low probability of a
climatic events detrimental to national agricultural
production.
This set of favorable factors has caused inflation
expectations to migrate closer to BanRep’s average
inflation target. Inflation expectations for the next 12
months are already at 3.65%, within BanRep’s
tolerance range (between 4% and 2%). Likewise, the
expectation for 2018 went from 4.24% in July 2016 to
3.50% in April. Such convergence of expectations
concerning the target leaves BanRep more at ease to
continue loosening monetary policy, which reinforces
our expectation of continuing cuts in the base interest
rate. Thus, we expect four more cuts of 25 basis
points, taking the rate to 5.50%.
Core Inflation is still showing some
resilience.
Inflation expectations are already within the
range of its target.
5.7%
4.1%
5.8%
3.2%
3.6%
2.8% 3.1%
4.6%
5.6%
3.7%
2.5%
3.5%
4.5%
5.5%
6.5%
7.5%
Ju
n-0
4
Ma
y-0
5
Ap
r-0
6
Ma
r-0
7
Fe
b-0
8
Ja
n-0
9
De
c-0
9
No
v-1
0
Oc
t-1
1
Se
p-1
2
Au
g-1
3
Ju
l-1
4
Ju
n-1
5
Ma
y-1
6
Ap
r-1
7
Ce
nte
nas
Market expectation to next 12 months
Source: Banrep
6.6%
11.5%
4.2%
7.2%
4.7%7.0%
14.2%
-0.5%
6.6%
0.7%
7.7%
5.7%
15.7%
8.5%
5.2%
-2.0%
2.0%
6.0%
10.0%
14.0%
18.0%
Dec-0
1
Jan
-03
Feb
-04
Mar-
05
Ap
r-06
May-0
7
Ju
n-0
8
Ju
l-09
Au
g-1
0
Sep
-11
Oct-
12
No
v-1
3
Dec-1
4
Jan
-16
Feb
-17
CPI Food index (YoY % Change)
Source: Bloomberg
LATAM MACRO REPORT
18.28
19.88
18.32
20.81
21.95
19.67
18.70
18.0
18.5
19.0
19.5
20.0
20.5
21.0
21.5
22.0
22.5
Sep
-16
Oct-
16
No
v-1
6
Dec-1
6
Jan
-17
Ma
r-1
7
Ap
r-17
May-1
7
MXN/US$
Source: Bloomberg
3.93
3.30
2.36
1.49
1.66
1.18
1.68
2.18
2.68
3.18
3.68
4.18
Feb
-15
Ap
r-15
Ju
n-1
5
Au
g-1
5
Oct-
15
Dec-1
5
Feb
-16
Ap
r-16
Ju
n-1
6
Au
g-1
6
Oct-
16
Dec-1
6
Feb
-17
Ap
r-17
Market Forecast for 2017 GDP Growth
Source: Banxico
Since Donald Trump’s victory, the perspectives for
Mexico's GDP growth have weakened significantly.
Partly because of the anti-immigration rhetoric and
partly due to Trump’s protectionist position during his
presidential campaign.
It is worth remarking that the effects of possible
changes in the US trade policy are important for
Mexico. The United States is Mexico’s main trading
partner, receiving more than 80% of Mexican exports.
In addition, they provide a significant part of the foreign
investment received by Mexico, which is largely
directed to sectors that benefit from free trade with the
United States.
With regard to immigration policy, a tougher position
concerning the flow of people between the two
countries would directly affect remittances from
Mexicans living in the United States. Because of this,
the market expectations for GDP growth decreased
from 2.36% in September 2016 to 1.49% in January.
However, the expected slowdown in the Mexican
economy has not materialized: so far no effective
measure that affects remittances of Mexican workers in
the United States has been approved. This is despite
some of Trump’s recent statements against NAFTA,
suggesting he could cancel the trade agreement.
Our basic assumption is that there will be a
renegotiation of NAFTA’s terms only from August,
and at a slow pace. Hence, not much has actually
changed in the relationship between the U.S. and
Mexico. Moreover, major future changes have become
less likely, given (i) the more conciliatory position of the
U.S. Secretary of Commerce Wilbur Ross, who
suggests a renegotiation beneficial to all NAFTA
members and (ii) that any changes in NAFTA should
be approved by the U.S. Congress. Trump has been
facing difficulties in mobilizing his party to approve his
campaign proposals. These combined factors have
resulted in a significant improvement in the perception
of risk for the country, contributing to the appreciation
of the Mexican peso and, consequently, relieving the
pressure on the current inflation and on the
expectations. As a result, the Central Bank of Mexico
has the opportunity to stop the interest rate cycle
sooner than we expected.
• A more conciliatory position of the U.S. Government regarding NAFTA and improvements in the
external scenario have made us raise our growth projections.
• Improvements in the perception of risk should reduce pressure on inflation, allowing Banxico to
interrupt the tightening cycle sooner than we thought.
• Current indicators continue to show solid growth, with emphasis on the recovery of the
country’s exports.
Facing a more favorable foreign
scenario, an improvement in GDP
growth is expected in 2017.
Mexico
Similarly, improvement in the
country’s risk perception should lead
Banxico to interrupt the tightening
cycle sooner than we thought.
LATAM MACRO REPORT
100
112.4119.7
159.7
80
100
120
140
160
180
200
Mar-
16
Ap
r-16
May-1
6
Ju
n-1
6
Ju
l-16
Au
g-1
6
Sep
-16
Oct-
16
No
v-1
6
Dec-1
6
Jan
-17
Fe
b-1
7
Mar-
17
Exports to destination(March/16=100)
America
US
Europa
Asia
Source: INEGI
9
The current economic data on the country still
shows a solid pace of growth at around 2% and has
recently drawn attention to the recovery of the
country's foreign sales.
Exports have been registering strong improvement
since March last year. In addition, net exports
contributed positively to the country’s GDP growth in
the last quarter of 2016. The rise in exports is largely
due to: (i) the improvement in external demand, with
the global economy growing at a strong pace since the
end of last year, (ii) the depreciation of the Mexican
peso in relation to its major trading partners, and (iii)
the growth of demand in the U.S.
Nevertheless, it is worth mentioning that the
improvement in exports did not focus solely on
sales to the USA, highlighting the sales growth to Asia
and Europe. Despite only representing 11% of
Mexico’s foreign sales, these two regions together
grew by 60% y/y and 20% respectively. In contrast,
sales to the U.S. have grown 12% on the same basis
of comparison. Among the products, the strong sales
performance of manufactured goods to Europe, Asia
and South America is particularly noteworthy. Vehicles,
spare parts and pieces increased 23%; machinery and
equipment rose 20%.
This better performance of exports has ended up
influencing the growth of Mexican industrial
activity, which should offset part of the slowdown in
domestic activity in the country. There is a current
slump in household consumption and in the services
sector due to: (i) the reduction in disposable income
(caused by high inflation) and (ii) the lagging effects of
tightening monetary conditions.
We do not expect this positive outlook for external
demand to remain for the remainder of 2017. The
positive effect of the depreciation of the currency due
to the country’s exports is likely to diminish, since (as
mentioned previously) the Mexican peso has
strengthened and also regained much of the
depreciation incurred since Trump’s victory. The
prospective outlook for U.S. industrial activity also
tends to lose some momentum along the year. This is
consistent with our growth expectation of 1.9% for U.S.
GDP in 2017. To sum up, due to this set of factors,
we have reviewed our growth expectation for the
country from 1.5% to 1.8% in 2017.
Improvements in Mexican exports was
boosted by sales to Asia and Europe.
Incorporating the more favorable
external scenario, we have revised our
2017 GDP growth expectation from
1.5% to 1.8%.
5.3
-0.6
0.1
1.4
4.3
3.0
5.0
3.1
1.4
-4.7
5.1
4.0 4.0
1.4
2.32.6
2.31.8 2.0
-7.0
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
*
2018
*
GDP growth
Source: FMI, Bradesco
LATAM MACRO REPORT
Over the past few months the country has been
affected by heavy rains due to El Niño Costeiro (the
coastal variety), which reflects the temperature
increase in Pacific coastal waters¹. The hardest-hit
region was the North coast of Peru and that caused a
significant impact on the region's infrastructure,
causing the collapse of bridges and blocking of roads
by landslides. However, the last ENFEN² Commission
report, released last May 11, foresees that the effects
will continue to fade away. Therefore, further severe
rains are not expected going forward.
We have reduced our GDP growth estimate in 2017
from 3.7% to 3.4%. This revision reflects the effects of
this phenomenon and the weaker activity data at the
beginning of the year. In fact, GDP growth slowed to
2.1% in the first quarter, compared with growth of 3.0%
in the previous quarter. Consumption, in turn, has
shown a more intense dip, by moving from 3.1% y/y in
the last quarter of 2016 to 2.2% in the first quarter of
this year. As regards supply side, mining sector growth
also slowed to 4.1% after the strong expansion of
10.7% recorded in the previous quarter. Furthermore,
substantial investments in infrastructure were
paralyzed after allegations of corruption emerged. In
particular, the awarding of the Gasoduto do Sul
[Southern Pipeline] concession was revoked. A new
tender process is only expected in 2018. For the
second half, we expect some acceleration in
consumption, reflecting the reduction in the rate of
value-added tax that will take effect in July.
Heavy rains and the difficulty of transportation led
to a sharp rise in inflation. Consumer inflation rose
by 1.3% between February and March, pushed up by
food prices (whose weighting in the total index reaches
38%), which advanced 2.1%. Among foodstuffs, we
highlight the price rises on vegetables (+ 17.4% m/m)
and fruit (+ 7.6%), which together contributed 0.45
percentage points to the rise in inflation during that
period.
• We reduced our estimated 2017 GDP growth from 3.7% to 3.4%.
• Inflation surprises to the upside, driven by higher food prices reflecting the strong rains that
affected the country in the last few months.
• We expect that, after April’s cut, interest rate cuts will remain at 4.0% until the end of the year.
Peru
Despite the weaker data at the
beginning of the year, we expect
activity to recover in the coming
quarters.
6.3
7.5
8.59.1
1.0
8.5
6.56.0 5.8
2.4
3.33.9
3.44.0
0
2
4
6
8
10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* 2017* 2018*
GDP Growth (%)
Source: CEIC (*) Bradesco forecasts
3.3
1.9
0
2
4
6
8
10
12
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
GDP and GDP ex-mining (12 month, % change)
GDP
GDP ex-mining
Source: CEIC, Bradesco
Even excluding the mining sector, we
see a slowdown in the economy.
_______________________
¹ Unlike the El Niño phenomenon, which has global effects, El Niño
Costeiro only has an impact on the regional climate.
² The Multisectoral Committee for the National Study of the El Niño
Phenomenon (ENFEN) is an arm of the Peruvian Government
responsible for studies of the ocean and the atmosphere, with the aim of
proposing measures to reduce the impact of El Niño.
LATAM MACRO REPORT
11
Inflation begins to retreat after the
food price shock.
However, the April data showed the beginning of the
reversal of those pressures, with a 0.7% m/m fall in
food prices, leading the full rate to register a 0.3%
deflation during the period.
In the face of slowing activity in the short term, and
the worsening expectations for GDP performance,
the Central Bank decided at its last meeting to
reduce the interest rate from 4.25% to 4.00%.
Interest rates had been stable at 4.25% since February
2016. The recent acceleration of current inflation and
market expectations did not suggest a loosening of
monetary policy at this point. Nevertheless, the Central
Bank had already, at their previous meeting,
manifested concern about the performance of
economic activity and judged the current inflationary
pressures to be temporary. In the face of such a
position, the vast majority of the market expected
interest rates to be reduced at the June meeting, when
the reversal of a substantial part of food price rises
would already have been noticed. Nonetheless, that
decision was anticipated. The meeting press release
said that the Central Bank would monitor the evolution
of inflation and its causes, in order to carry out further
adjustments in monetary policy, leaving a bias towards
lower interest.
We expect interest rates to remain stable. Although
our scenario considers a deceleration of inflation in the
coming months, we do not foresee further reductions of
interest rates in the short term. That is because we
believe inflation will remain close to the limit of the
target and that inflation expectations are slightly above
the target for this year (3.2%, according to the latest
survey), which should lead to a more cautious stance
by the monetary authority. However, we emphasize
that, should there be further frustration with
economic activity, the Central Bank may adopt new
monetary easing.
0
1
2
3
4
5
6
7
8
9
jan
-11
abr-
11
jul-
11
ou
t-11
jan
-12
abr-
12
jul-
12
ou
t-12
jan
-13
abr-
13
jul-
13
ou
t-13
jan
-14
abr-
14
jul-
14
ou
t-14
jan
-15
abr-
15
jul-
15
ou
t-15
jan
-16
abr-
16
jul-
16
ou
t-16
jan
-17
abr-
17
Consumer Inflation (% YoY)
Headline Food
Source: CEIC
target band
LATAM MACRO REPORT
12
Staff
Fernando Honorato Barbosa – Chief Economist
Economists: Ana Maria Bonomi Barufi / Andréa Bastos Damico / Ariana Stephanie Zerbinatti / Constantin Jancso / Daniela Cunha de
Lima / Ellen Regina Steter / Estevão Augusto Oller Scripilliti / Fabiana D’Atri / Igor Velecico / Leandro Câmara Negrão /
Marcio Aldred Gregory / Myriã Tatiany Neves Bast / Priscila Pacheco Trigo / Regina Helena Couto Silva /
Thomas Henrique Schreurs Pires
Internships: Alexandre Stiubiener Himmestein / Bruno Sanchez Honório / Christian Frederico M. Moraes / Fabio Rafael Otheguy
Fernandes / Felipe Alves Fêo Emery de Carvalho / Mariana Silva de Freitas / Rafael Martins Murrer
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