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
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.
The central bank of Peru (BCRP) increased rates by 25 bps as expected by the market and RGE, taking the policy rate to 3.75% on March 10. Similar to the previous month, the press release highlights that the hike is preventive in a scenario of high international food and energy prices, and seeks to limit the impact of supply-side shocks on private expectations, in the context of strong domestic demand.
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
The PMI stayed above 50 in February, advancing 2.9% m/m seasonally adjusted (SA) to 54.6, after growing 1.3% m/m SA in January and 5% m/m SA in December. The index is 43% above the low of 38.1 reached in January 2009, but 5.5% below the high of 57.8 in January 2010. Solid domestic demand rather than external demand generated strong growth in new orders, pushing companies to increase output and hire workers. Inventories decreased rapidly, while average input costs increased at a marked pace.
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.
Headline inflation climbed in January by 0.38% m/m (consensus, 0.35% m/m; RGE, 0.28% m/m), led by significant gains in housing and food costs. The sharp increase in housing costs (1.86% m/m from 0.19% m/m) comes as a result of revised electricity tariffs and potable water, and higher cooking gas prices resulting from adjustments in refineries during December. Fruits, edible oils, bread and some grain prices affected the food component of the index, which recovered from four months of negative monthly inflation, printing a positive 0.52% m/m in January 2011. Other goods and services also accelerated, driven by hotel lodging and personal items. Transport, apparel and health-care prices decelerated.
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.