Can Portfolio Flows Play a Dual Role in Brazil in 2013?

Brazil’s current account remained relatively stable in 2012, with a deficit of around 2.4% of GDP, slightly higher than the 2011 deficit of 2.1% of GDP. The CAD was fully funded by FDI, which summed US$68 billion (3% of GDP), while portfolio flows remained anemic at 0.4% of GDP. These dynamics prevailed throughout 2012, so […]

Why Did Brazil Underperform its Peers in 2012? Policy.

The end of Q4 brought forward interesting dynamics in the LatAm region: Namely, a sharp deceleration in inflation in every inflation-targeting economy, with the exception of Brazil (although we expected inflation to soothe by year-end in Mexico, Chile and Peru, the deceleration was much stronger than anticipated, and downward revisions to our inflation forecasts could […]

For LatAm, QE3 Impact on Financial Risk Is Key

The Fed’s QE3 will have varying effects by country in LatAm; however, there are a few broad strokes that color the region. QE3 comes at a moment when growth is weak across the board and policy action is widely needed. What QE3 signifies for LatAm, in this context, is not only related to the added […]

Mexican Central Bank Stays On Hold

Mexico’s Monetary Policy Inflation Dynamics (% y/y)


Source: Banxico and RGE

The cental bank of Mexico (Banxico) stayed on hold at its April meeting—leaving the monetary policy rate at 4.5%, as expected. Banxico’s communiqué highlights the multispeed recovery throughout the globe (with emerging markets growing stronger than developed markets).

Retail Sector Drives Robust Chilean Growth

Chilean economic activity continued to charge to the upside in March, surprising with a 7.2% y/y (6.76% three-month moving average, 3MMA) gain—markets and RGE were expecting a 6.3% y/y increase. According to the central bank’s (BCCh) communiqué, the retail sector led growth dynamics and the fruit, forestry, fishing and transport services subsectors helped on the upside. In seasonally adjusted (SA) terms, economic activity grew 0.4% m/m, slowing from 1% m/m in January and taking the 3MMA to 0.5% m/m from 0.8% m/m.

Chile: Industrial Output Disappointing; Activity Indicators Robust

Industrial output stayed in negative territory in February; contracting 1.1% m/m (-0.5% m/m in January). On a yearly basis, industrial production decelerated sharply to 1.9% y/y (3.4% y/y 3MMA), surprising the consensus (4.5% y/y) and RGE (3.8% y/y) on the downside. Disappointing results in consumer (-1.9% y/y) and intermediate (3.4% y/y)—accounting for 97% of the index—pressed down.

Economic Expectations in Peru

Expectations for Peru’s 2010 GDP remain in line with RGE’s own expectations. For 2011, higher inflation is consistent with stronger growth, which continues to be revised upward, but still falls slightly short of our expectations for 2011. These revisions, however, do not affect the exchange rate, signalling that analysts expect the central bank to continue with strong intervention to prevent sharp appreciation of the currency. Analysts also show heightened optimism for 2012, while we still have a more conservative view as the global economic recovery remains fragile and monetary and fiscal authorities continue to remove excessive stimulus from the economy.

Venezuelan Inflation Unlikely to Fall

We expect Venezuela’s inflation to start showing some upward pressure on food prices due mainly to production and distribution disruptions to agricultural products as a result of heavy rainfall at the end of 2010 and the devaluation in early 2011. However, government price controls will likely prevent inflation from spiking and lead to a gradual correction in prices. We expect the Caracas CPI headline to hover around 2.2% m/m (27.1% y/y) in January. Additional pressures from sectors such as education, restaurants and health will also be present in January and should keep core inflation around similar levels (2.2% m/m, 29% y/y), according to our core estimate.

Caracas Headline, Core and Food Inflation (% y/y)


Source: Central Bank of Venezuela & RGE

Robust Growth in Peru

Peru’s economic activity accelerated in November as GDP advanced by 1.5% m/m in seasonally adjusted (SA) terms, after declining by 0.2% m/m in October and growing by 0.9% m/m in September, pushing the three-month moving average (3MMA) reading to 0.73% from 0.51% through October. Seven out of nine categories gained momentum, with construction (11.2% m/m), agriculture (2.5% m/m) and services (2% m/m) leading the economic activity, followed by retail sales (0.6% m/m), utilities (0.5% m/m) and import duties (0.4% m/m). Fishing (-22.4% m/m), mining (-3.3% m/m) and manufacturing (-0.8% m/m) registered an overall weaker result. Construction benefited from strong cement sales and advances in infrastructure projects, while services profited from solid growth in the financial sector.

Venezuela’s Export Volume Continues to Slip

Venezuela’s oil exports shrunk by an additional 1.8% y/y in December 2010, according to audited data published by Reuters, accumulating to a 6.5% y/y fall in the average volume of oil exports in 2010. Venezuela’s declining oil production is one of our main concerns regarding the economic stability of the country, as oil revenues constitute the pillars of the economy, representing the primary source of hard currency into the economy, 95% of the country’s exports and more than a third of the government’s revenues. Venezuela should close 2010 with exports bordering US$65 billion and a trade surplus of US$27 billion. For 2011, the external outlook should remain positive as long as oil prices remain elevated, which is the most likely scenario. However, they should remain stable relative to current prices. Imports will increase in 2011 led by government purchases, while oil production will likely remain compressed and oil prices, although high, should remain stable, limiting a major surge in exports and leading to a contraction of the trade surplus in 2011.

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