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.
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.
RGE expects Peru’s inflation to increase by 0.28% m/m to 2.36% y/y in January (2.08% y/y in 2010) and core ex-food inflation to increase 0.03% m/m to 1.82% y/y (1.38% y/y in 2010). Higher food, energy and fuel prices, as well as strong domestic demand, likely exerted upward pressures on prices, despite stronger currency. The central bank’s target is 2% (+ / -1%).
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.
According to the new CPI index, Mexico’s inflation numbers surprised on the downside as headline inflation increased by 0.17% m/m (consensus, 0.27% 2w/2w; RGE, 0.28% 2w/2w) and core inflation grew by 0.21% 2w/2w (consensus, 0.29% 2w/2w; RGE, 0.27% 2w/2w). On a y/y basis, headline inflation dropped to 3.96% y/y from 4.4% y/y by the end of 2010 and core prices eased to 3.32% y/y from 3.58% y/y. Three factors were responsible for the result: 1) the inflationary impact in early 2010 associated with the fiscal adjustment has started to fade; 2) increases in local government tax have been much lower than in the past; 3) favorable weather conditions improved the supply of agriculture products. In RGE’s view, the latest data suggest a broad base deceleration in inflation which might continue throughout Q1 2011—getting closer to the target (3%) by March—but move higher in Q2 2011.
RGE expects Argentina’s trade balance to register a US$589 million surplus in December, compared with surpluses of US$0.4 billion in November and US$1.2 billion in December 2009. This would shrink the trade surplus to US$12.4 billion from US$16.9 billion in 2009 as a result of strong domestic demand. An over-stimulated and unsustainable domestic demand growth likely kept imports increasing at a strong pace (50% y/y), while exports (24% y/y) likely benefited from higher commodity prices and demand from Brazil—particularly industrial products.
According to Citigroup’s Banamex survey, released on January 20, headline and core inflation expectations for Mexico have deteriorated for 2011 compared with the January 5 release. Higher inflation expectations come in a scenario where analysts continue to revise GDP growth expectations upward for this year, assuming the central bank (Banxico) will not hike rates during 2011. This stronger growth cycle and relative lack of intervention risks are translating into a stronger currency, as analysts see some appreciation pressures for this year. Growth and monetary policy expectations for 2012 have remain unchanged since December’s survey, with analysts expecting slower growth than in 2011 and rate hikes totaling 100 basis points (bps). Headline inflation expectations for 2012 rose by five bps but remain lower than 2011, while the appreciation bias of the currency remains in place.
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.
Colombia’s industrial production and retail sales likely continued to show divergent paths in November. RGE expects industrial production to grow by 2.4% y/y (3.5% y/y three-month moving average (3MMA) through September), constrained by external demand, especially from Venezuela; an overvalued currency; low industrial confidence (5.2% y/y) and still-weak energy demand (1.2% y/y). Meanwhile, retail sales likely expanded robustly by 17.7% y/y (15.2% y/y 3MMA through September), driven by the still-high but falling consumer confidence (25.9% y/y), strong car sales (80% y/y) and improving consumer credit conditions (11.8% y/y). This has certainly contained Colombia’s economic growth in H2 2010.
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.