Latin America – The Week Ahead June 1st – June 5th

Previous Week:

In Mexico, the current account in Q1 2009 posted a smaller-than-expected deficit of USD 1.1bn or 0.5% of GDP (–USD 2.6bn in Q1 2008) vs. an expected deficit of USD 2.3bn.  The collapse in domestic demand hurt imports and outbound tourism significantly, and the gloomy economic outlook discouraged foreign companies to reinvest. This was enough to counteract the sharp decline in exports and lower worker remittances inflows. Meanwhile, the capital account posted a sharp reversal to a deficit of USD 4bn from a surplus of USD 8.8bn in Q 1 2008 and USD 11.6bn in Q 4 2008.   In Q1 2009, lower foreign investment (USD 1.7bn vs. USD 10bn in Q1 2008), both foreign direct (USD 2.7bn vs. USD 6bn in Q1 2008) and portfolio investment (USD 1 vs. USD 4bn in Q1 2008), weighted on capital inflows, while a sharp increase in assets held abroad (-USD 5.7bn vs. -USD 3bn in Q1 2008), in particular Mexicans investments abroad (-USD 3bn vs. +USD 0.5bn in Q1 2008), increased capital outflows.  Given that we anticipate domestic demand to remain weak in the upcoming quarters due to poor labor dynamics and sluggish recovery in domestic confidence, while the export sector will likely lead the recovery in the H2 2009, we are lowering our current account deficit to USD 10bn from USD 20bn previously, with the risk tilted to a lower deficit.

Moreover, Mexico’s unemployment rate increased rapidly to 5.25% in April as economic conditions remain under stress and the A H1N1 flu outbreak impacted services and the tourism industry.

In Chile, industrial production in April declined sharply by 11.1% y/y, which was worse than expected (RGE -9.7% y/y; Bloomberg -9% y/y).  Most of the components accelerated the contraction: consumer (-10.4% y/y vs. -4% y/y 3MMA), durables (-35.3% y/y vs. -33.3% y/y 3MMA), and capital goods (-17.1% y/y vs. -7% y/y 3MA).  Intermediate goods also decelerated sharply (-10.9% y/y vs. -12.6% y/y 3MMA).   On top of weak domestic confidence and poor external demand, a negative calendar effect (April 2009 had one less business day than April 2008) pressured industrial production down.  Moreover, other leading economic indicators were also released signaling that GDP continued contraction at a rapid pace in April (please see note below).  We anticipate industrial production to contract by around 7% y/y in 2009.

In Colombia, the central bank lowered the monetary policy rate by 100bps to 5% on the back of slow domestic and external demand, improving inflation dynamics and expectations, and lower commodity prices (compared to record highs in 2008).  The central bank recognized, however, that the global economy is presenting signs of stabilization (US) and recovery (China) and expects the Colombian economy to improve in H2 2009.  According to the central bank, the monetary policy rate is clearly expansionary at the current level and that eventual further cuts will be less deep than in the recent past, and they will depend on upcoming economic data.  In our view, the central bank will likely cut the monetary policy rate by another 50bps to 4.5% in June and stay put thereafter. The likelihood of bringing the policy rate to 4% in the Q3 2009 is conditioned to a sudden improvement in inflation expectations and deterioration of the growth outlook.

Week Ahead:

Brazil – Encouraging External Sector Figures for 2009 Have Its Main Rootstocks on Improving Trade Data

The balance of payments data for April released last week brought better than expected figures with the current account shifting from the deficit zone where it was parked for more than 18 months to a surplus of US$150 millions. For the 12-month period ended in April 2009, the current account deficit narrowed markedly from US$23.0 billion or 1.59% of GDP in March to US$19.8 billion or 1.41% of GDP. The improvements vis-à-vis an year earlier (Apr-08 deficit of US$ 3.1 billions) were mostly driven by a robust rebound in trade surplus (from US$1.7 billion in Apr-08 to US$3.7 billion)  as well as lower remittances of profits and dividends (from US$3.7 billion a year earlier to US$1.7 billion).

Looking into the open data for the Brazilian trade balance, we find interesting the composition of prices and volume of imports and exports provided by Funcex. Exports volumes (rate of growth measured by the 3MMA y/y % change) started to cross the zero line back in Aug-2007 when the global economy started to bring signs of weakness to dive deep into the -10% to -15% zone after Nov-2008. In March and April though, the contraction in the volume of exports started to moderate bringing some encouragement. Even though the movement in volume represents 57% of the movement in total exports growth, the rate of growth of export prices is also quite important (the other 43% of the variability of total exports growth). The latter collapsed from a peak of more than 38% in Sep-08 to a monotonic movement towards -9.4% in April. As a result, total exports started to contract very sharply on the last quarter of 2008 to really collapse in January and remain in the negative zone since then. Nonetheless, in April the rate of contraction also moderated from -19.4% to -14.6% and could be the beginning of a reversal towards positive rates of growth again.


On the imports side, the rate of growth of imports volumes started to fall back in Ju-08, reaching a trough in Mar-09 of -20.1%, when in April the contraction moderated marginally to -19.5%. Imports prices went from a peak in Aug-08, growing more than 28.5% to a continuous fall towards -8.1% seen in April. Total imports growth as result has been falling from a peak in Jul-8 of more than 61% to a current contraction of -26.1% in April-09.


The trade balance thus is already reflecting some of the impacts of a marginal improvement in exports while imports remain on the downside. The 12-months trade surplus for April 2009 was US$26.9 billions, a slight recovery from the trough seen in January (US$23.4 billions) and if our forecast is right for the month of May we should see a surplus of US$2.6 billions, pushing the 12-months sum back to US$25.5 billions. We maintain our year-end forecast for the current account and trade balance at US$-19.2 billions and US$21.3 billions respectively, even though we should remain vigilant of the trends on both exports and imports, where the path of the currency is likely to have a key role.

Also on the calendar for the coming week is April’s industrial production data. Looking into the most relevant leading indicators for the month of April, further deterioration can be seen. The production of corrugated cardboards contracted by 8.7% y/y, down from -2.2% in March at the same time that total production of auto-vehicles (Anfavea data) showed an even sharper contraction going from -3.9% in March to -16.1% in April. The pattern of the automotive industry has proven to be quite important to determine the performance of the industrial sector as a whole. The government’s delay on announcing whether to postpone or not the cut in the IPI tax over vehicles sales caused another surge in the production in March but in April the production bounced back and this effect might be reflected on IBGE’s IP data for April. In May, the effect could be positive as production would probably have adjusted to higher expected demand although inventory adjustments could mitigate this effect.


In addition to it, the volume imports of intermediate goods, another important industrial indicator also accelerated the rate of contraction from -18% in March, to -31% y/y in April. Given those figures, we are looking for a contraction of 12.5% y/y for the aggregate industrial sector, worse than the rate of contraction seen in
March (-9.9%), which implies an advance of 1.9% m/m seasonally adjusted.

MEXICO—Consumer Confidence in May

Data this week will bring some light on domestic consumption and investment dynamics in May 2009.  Consumer confidence (May 2009) likely remained limited by the deteriorating economic growth outlook, despite some improvements in inflation and inflation expectations.  Furthermore, it will be key to follow IMEF (Mexican Institute of Finance Executives) manufacturing and non-manufacturing indexes (May 2009), which are a gauge for business confidence, to get a sense of whether or not the rate of contraction has lessened.  IMEF data will be released on Wednesday June 3rd.  Finally, other relevant releases on Monday June 1st will be Banxico’s monthly survey on economic expectations (May 2009), which will likely show a further deterioration in growth prospects, but also reflect an improvement of the inflation outlook.  Banxico’s monthly survey will also reflect analysts’ view that the central bank is closer to the end of the easing cycle.  We expect Banxico to bring the ON TIIE rate to 4% in Q3 2009.  Moreover, on Monday, Banxico will release data related to remittances (May 2009), which should continue falling mainly given poor labor conditions in the US.

On Thursday June 4th, INEGI will report on May Consumer Confidence (CCI) and we expect a year-over- year decline of 17% to 78.5.  Although this is still a sharp decline, the pace of the contraction might be easing (20.8% y/y 3MMA).  In our view, the poor economic growth outlook, rising unemployment and the A H1N1 flu outbreak should have hurt consumer confidence in May, despite improving inflation dynamics. If we are correct, it will suggest that consumer spending remained under stress in the Q2 2009, when we expect GDP to decline by 8.1% y/y.  The Bloomberg consensus expects the (CCI) to print 79.8.

ARGENTINA—Government Tax Revenues Likely Continued its Downward Trend in May

The most important piece of information will be government tax revenues for May, which will likely suggest that the economic slowdown is pressuring tax revenues, despite a rebound in grain prices and high transfers from the nationalized pension system.  Other relevant news to follow during the week will be political events as the race for mid-term congressional elections (June 28th) is entering its final stage.

During the week, the Finance Ministry will release government tax revenues for May, which will likely print ARS 27.1bn or a deceleration to 12% y/y (17.7% y/y 3MMA).  Slowing economic activity likely hurt VAT and income taxes, while relatively low commodity prices (on a year-over-year basis) and sluggish external demand probably kept trade taxes subdued.  However, social security transfers, which are captured via the nationalization of the pension system, likely remained growing at a rapid pace.  If we are correct, total revenues should have increased by 14.7% YTD, which is a sharp decline compared to an increase of 40% YTD in the first five months of 2008.  The central bank consensus expects May’s government tax revenues to post ARS 26.3bn.

CHILE–Low Inflation in May and Poor Economic Activity in April.

This week’s data will likely continue pointing to a rapid disinflation process and weak economic activity in the Q2 2009.  In our view, the improving inflation outlook and poor economic growth dynamics might induce the central bank to cut the monetary policy rate by 25bps to 1% during the June 16th meeting.

On Friday, June 5th, INE will disclose inflation data for May.  We expect prices to continue showing a descending trend, driven by slower economic activity.  Although transportation (upward adjustment to fuel costs) and food prices might have increased in May (on a month to month basis), downward pressure on other inflation components should have brought the headline number lower.  That is, we anticipate headline inflation to print 0.06% m/m (vs. -0.16% m/m in April 2009 and 1.2% m/m in May 2008) and core CPI to register 0.05% m/m (vs. -0.21% m/m in April 2009 and 0.7% m/m in May 2008).  This would bring headline and core inflation to readings of 3.34% y/y (4.48% y/y in April 2009) and 4.84% y/y (5.51% y/y in April 2009), respectively.  Although both prints would be above the central bank target of 3%, they are signaling a rapid falling pattern, which, together with a swift widening of the output gap, should provide comfort to the CB board to lower rates in the June 16th meeting.  The Bloomberg consensus expects headline and core CPI to register 0% m/m and 0.1% m/m, respectively, in May 2009.

Moreover, on Friday, the central bank will report on economic activity (IMACEC) for April 2009, which will likely print a contraction of 3.6% y/y.  Overall, weak external and domestic demand, along with a negative calendar effect (April 2009 had one business day less than April 2008) exacerbated downside pressures on economic activity.  Indeed, total trade (exports plus imports) stayed under pressure (-38.7% y/y vs. 37.5% y/y 3MMA) and the industrial output contracted sharply (-11.1% y/y vs. -9.1% y/y 3MMA).  Furthermore, unemployment for the Feb to April 2009 period worsened rapidly to 9.8% from 9.2% in March; mining output stayed in negative territory (-1.1% y/y); and real retail sales worsened (-5% y/y).   However, positive readings in electricity generation (1% y/y) and real supermarket sales (4.5% y/y) likely avoided a further decline.  Our view is that strong downward pressures on economic activity will stay in place during the first part of the year, and then improve by year-end thanks to an aggressive countercyclical macroeconomic policy and some improvement on the external front.  We expect Chile to contract by about 0.4% y/y in 2009 (0% to -1% range), with the risks tilted on the downside.  The Bloomberg consensus expects economic activity to contract by 3.6% y/y in April 2009.

COLOMBIA—Disinflation Likely Persisted in May  

On Friday June 5th, DANE will release inflation data for May, which will probably show that headline inflation increased by 0.35% m/m (0.32% m/m in April 2009 and 0.93% m/m in May 2008) and core (ex-food) CPI went up by 0.25% m/m (0.25% m/m in April 2009 and 0.29% m/m in May 2008).  This means that headline and core (ex-food) inflation should stand at 5.12% y/y (5.73% y/y in April 2009) and 4.64% y/y (4.68% y/y in April 2009), respectively; both within the central bank target range of 5% (+- 0.5%) for 2009.  Overall, rapidly slowing domestic demand, lower fuel prices (as determined by the government), and stronger local currency should have pressured inflation down.  We expect headline inflation to be about 4.4% by the end of 2009; however, the risk is on the downside.  The Bloomberg consensus expects headline inflation to be about 0.28% m/m in May 2009.

PERU—Inflation Probably Continued Adjusting Down and The Central Bank Will Likely Cut The Monetary Policy Rate by at Least 50bps to 3.5%

This week’s inflation data, together with indications that the economy continues facing downward pressures, should provide the central bank with the necessary room to lower the reference rate by at least 50bps to 3.5% during the June 4th meeting.

On Monday, June 1st, INE will disclose inflation data for May.  We anticipate headline CPI to print 0.1% m/m (0.02% m/m in April 2009 and 0.37% m/m in May 2008) and core (ex-food) to post a decline of 0.04% m/m (0.07% m/m in April 2009 and -0.02% in May 2008).  This means that headline inflation likely dropped to 4.32% y/y from 4.59% y/y in April and core (ex-food) CPI probably went down to 2.79% y/y from 2.81% y/y in April.  Overall, rapidly decelerating domestic demand should have continued pressing inflation down in May; however, seasonal factors (Mother’s day) and the impact of the A H1N1 flu scare on some food prices post the main risks
to our forecast.  We expect inflation to continue declining to about 2% y/y by the end of 2009.  The Bloomberg consensus expects headline CPI to post 0.3% m/m in May 2009.

On Thursday, June 4th, the central bank monetary policy board will decide on the reference rate, and we anticipate the committee to lower rates by at least 50bps to 3.5%; however, we do not discard a deeper cut of about 100bps to 3%.  Domestic demand is decelerating and the inflation outlook is improving.  We see Peru’s central bank lowering rates to 2.5% or 2% by Q3 2009.  The Bloomberg consensus expects the CB to lower rates by 50bps to 3.5%.