Overall, there is a great consensus among the candidates’ proposals (see Figure 1). Most aim to preserve the current macroeconomic policy framework, including: A responsible fiscal policy; an independent monetary policy enforced by the central bank; and the promotion of private investment. All candidates will pursue a tax reform, as they seek to increase revenues and the formalization of the economy. And only Toledo and Humala want to increase the royalty taxes that mining companies pay to the government, in order to support social spending.
The current account deficit likely narrowed to US$3.9 billion in February, from a deficit of US$5.4 billion in January, but widened compared to a deficit of US$3.3 billion in February 2010. A widening of the merchandize trade surplus to US$1.2 billion—driven by higher commodity prices—despite an expected narrowing in the net services deficit to US$5.3 billion, should explain the deterioration from January. This would mean that, on 12-months rolling basis, the current account shortfall shrank to US$49.3 billion in February from US$48.6 billion in the previous month. We highlight that FDI and portfolio inflows have been more than enough to cover the gap; however, the quality of the funding has deteriorated as portfolio, rather than FDI, becomes more prominent. We expect the current account to continue to deteriorate in 2011 to US$70 billion, or 3% of GDP, as domestic demand should continue to grow at a faster pace than external demand as the currency remains overvalued—though elevated commodity prices should help in avoiding a sharper deterioration.
Mexico’s central bank (Banxico) kept its benchmark rate unchanged at 4.5% at its March 4 meeting, in line with market consensus, including RGE’s expectations. In its communiqué, Banxico said that economic activity in advanced economies is now being driven by external demand and domestic consumption. With regards to global prices, the bank mentioned that numerous factors including high levels of liquidity, adverse weather conditions and the geopolitical conflicts in parts of the MENA region were driving costs upward and represent risks to the global economic recovery. In many emerging economies in particular, the rise in raw materials prices has increased the risk of inflation.
Mexican Inflation (y/y) and Monetary Policy Rate Source: Banxico and RGE
Colombia’s central bank (Banrep) increased the benchmark rate by 25 basis points to 3.25% at its February 25 meeting, the first hike after maintaining the rate at 3% for nine consecutive months. The decision surprised the markets and RGE as expectations were tilted toward an unaltered monetary policy rate. In its communiqué, Banrep said that the conditions keeping the rate at a low level had changed as domestic demand and credit dynamics had improved, economic growth is approaching its long-term trend, inflation projections are close to the middle of the target range and inflation expectations have deteriorated. Still, Banrep maintains that the new rate level is supportive of economic and employment growth and helps to keep inflation within the target range.
Banrep, the Colombian central bank, said that for Q4 2010 it expects similar growth to the 3.6% registered during Q3, driven mainly by external demand. Adverse weather conditions during late 2010 affected the agriculture sector, as well as construction, gross fixed capital formation and mining exports, which were reduced due to problems with extraction and transport. Borrowing, corporate debt and investment in machinery and equipment expanded at high rates as nominal and real interest rates are at historical lows. Household consumption continued to develop positively, reflected by improved consumer confidence and benefiting from a rise in formal employment for skilled workers. Foreign trade dynamics showed exports growing 19.5% annually by November, driven by mining, energy and coffee exports, while imports rose 34.5% during the same period.
Brazil’s mid-January IPCA headline inflation came in above expectations (consensus, 0.69% m/m; RGE, 0.7% m/m) at 0.76% m/m (0.63% m/m in December), pushing yearly inflation up to 6.05% from 5.9% by the end of 2010 and away from the central bank target of 4.5% (+/- 2%). Food prices dropped to 1.2% m/m from 1.32% m/m in December and the last year’s peak of 2.22% in November; however, higher transportation prices—particularly bus tariffs (1.77% m/m) and ethanol prices (4.31% m/m)—together with stronger prints in housing, personal expenses and education, kept inflation elevated. Food inflation was responsible for 37% of the increase.