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 […]
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 […]
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 […]
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).
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.
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.
On March 29, the government announced a new decree in the Official Gazette, increasing the financial-operation tax (IOF) on overseas loans—corporate loans and debt sold abroad by banks and companies. The tax was raised to 6% from 5.38% on international bond sales and extended to transactions with a maturity of up to 360 days from the previous 90-day limit. Brazil’s central bank said the increase was aimed at curbing foreign currency loans with a maturity longer than three months; which have grown around 39% since the end of 2008. In addition, the local newspaper Folha de S.Paulo, asserted that since January 2011, the inflows of U.S. dollars into the country had reached almost US$35 billion, reflecting an increase of 42% with respect to 2010’s total inflows.
Mexico’s Core CPI Dynamics (y/y, 2w/2w index)
Source: Banxico and RGE
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.