In Brazil, the smooth recovery should guarantee the end of the easing cycle.The latest COPOM decision to cut the Selic by 50bps to 8.75% came in line with consensus and our view. We now expect the easing cycle to be over, even though the monetary authority made sure the wording of the statement left the doors open to an additional cut – “the level of the nominal base rate is at this moment consistent with a benign inflationary scenario in which inflation rates will converge to the targeted path within the relevant horizon as it is consistent with a non-inflationary recovery of the level of economic activity”.
Since the end of May, when the BRL broke the BRL2.000/USD barrier, the currency remained relatively stable within the range of 2.00 to 1.91/USD until the latest COPOM decision and is now below BRL1.900/USD. We maintain our year-end forecast at 1.85-1.92/USD range and thus expect further appreciation on the coming quarters. This scenario combined with a benign inflation path should also hold inflation expectations on a comfortable trajectory throughout 2009-2010 – another key variable monitored by the BCB. But on the downside, fiscal accounts continue to deteriorate and the BCB is certainly accounting for this aspect as well as incorporating the already implemented fiscal stimuli and its future lagged effects over the level of economic activity, in addition to the lagged effects that the 500bps cut in the base rate itself will have on future level of economic activity. Therefore, the most likely outcome is an extended pause, probably beyond H1 2010 but at this moment we still don’t see significant triggers for rate hikes anytime before the end of 2010.
The past week brought a calendar full of quasi-optimistic data from head to tail. Quasi-optimistic because it takes more than one data point for any macro indicator to be considered in trend and thus we take a cautious look at developments before calling a bottom and many significant and broad-based readings to call a recovery.
The Q1 2009 GDP brought a reading of -1.8% y/y, which was better than the consensus estimate (by Bloomberg) of -2.8% and our estimates of -2.3%. The seasonally adjusted (s.a.) rate came at -0.8% q/q (consensus of -1.9%), followed by the -3.6% reading in Q4 2008, to an accumulated decline of -4.4% since Q3 2008, the ‘start’ of the crisis.
BRAZIL – Q1 2009 GDP Likely on the Downside; COPOM to Keep Loosening as IPCA Slowly Trends Lower
This coming week’s most awaited data release is the GDP data for Q1 2009 which is widely expected to print a sharp decline. As we have already pointed out on our latest version of the RGE Global Outlook, we are expecting a severe deceleration on both private consumption and investments as suggested by the pattern of retail sales and the industry. At the same time, the collapse in both imports and exports add weight to the slowdown in the economy but to the national accounts point of view the fast deceleration of imports comes to our benefit at this moment.
In Mexico, the current account in Q1 2009 posted a smaller-than-expected deficit of USD 1.1bn or 0.5% of GDP (–USD 2.6bn in Q1 2008) vs. an expected deficit of USD 2.3bn. The collapse in domestic demand hurt imports and outbound tourism significantly, and the gloomy economic outlook discouraged foreign companies to reinvest. This was enough to counteract the sharp decline in exports and lower worker remittances inflows. Meanwhile, the capital account posted a sharp reversal to a deficit of USD 4bn from a surplus of USD 8.8bn in Q 1 2008 and USD 11.6bn in Q 4 2008. In Q1 2009, lower foreign investment (USD 1.7bn vs. USD 10bn in Q1 2008), both foreign direct (USD 2.7bn vs. USD 6bn in Q1 2008) and portfolio investment (USD 1 vs. USD 4bn in Q1 2008), weighted on capital inflows, while a sharp increase in assets held abroad (-USD 5.7bn vs. -USD 3bn in Q1 2008), in particular Mexicans investments abroad (-USD 3bn vs. +USD 0.5bn in Q1 2008), increased capital outflows. Given that we anticipate domestic demand to remain weak in the upcoming quarters due to poor labor dynamics and sluggish recovery in domestic confidence, while the export sector will likely lead the recovery in the H2 2009, we are lowering our current account deficit to USD 10bn from USD 20bn previously, with the risk tilted to a lower deficit.
Brazil – Improvement on the External Accounts Working its Way Through
This past week the statistics institute IBGE reported a slight fall of the unemployment rate from 9.0% in March to 8.9% in April, surprising the consensus and our estimate of an increase to 9.3%. Most of the surprise can be explained by the fact that the labor force continues to shrink and in a faster pace than initially expected. The real wages bill increased 3.9% y/y (data for March) while the per capita figure registered an increase of 3.4% y/y (for April). Even though the numbers came in better than expected, we maintain our estimated average rate of unemployment at 9.2% for 2009, up from 7.9% for 2008.
Mexico’s Economic Activity Declined Sharply in Q1 2009, What is Next?
Chile’s Q1 2009 GDP data came in tandem with our and the market’s expectations, printing a sharp decline of 2.1% y/y from the meager expansion of 0.2% in Q4 2008. A rough breakdown of the figures shows a dramatic collapse of domestic demand, -7.6% in Q1 2009 from -0.2% in Q4 2008, and a rapid deceleration in exports, -2.7% Q1 2009 from 3.4% in Q4 2008. Imports contracted at a faster pace than expected, -14.8% from a residual growth of 1.8% in Q4 2008, thus, certainly alleviating a more pronounced decline in output. Adjusted for seasonal factors, GDP posted a decline of 0.6% q/q (-2.5% SAAR) following contractions of 2% q/q (-7.9% SAAR) in Q4 2008 and of 0.9% q/q (-3.6% SAAR) in Q3 2009.
Total consumption, which represents more than 78% of GDP, decreased by 0.6% after having expanded by 1.1% in the last quarter of 2008, but the decline could have been worse if it wasn’t for the significant expansion of government consumption (3.9% from 2.7% in Q4 2008). Private consumption, 66.7% of GDP, collapsed (-1.4% from 0.8% Q4 2008) driven by a sharp decline in durable goods (-18.9%), especially automobiles, as credit conditions remained tight and domestic confidence worsened. Total investments, another important component of GDP (24.8% of total output), came within expectations (-9.3% vs. 10.4% in Q4 2008), and in this category too, capital goods such as machinery and equipments were hit the strongest (-16%). We highlight the fact that private investment had the largest negative contribution of 2.3 percentage points on the GDP result, which is larger than the -1.1 percentage points from exports and durable goods consumption. We also find interesting to point out that inventory adjustment was a significant figure too. The negative change in inventories represented nearly 4% of the total GPD and almost 5% of total consumption – we should not forget that the figure is likely to print positive and as significant numbers throughout the rest of the year when the recovery process starts to take place.
Headline and core inflation in January came in at +0.23% m/m (6.28% y/y) and +0.43% m/m (5.76% y/y), respectively, according to Banxico. The central bank target range for the 1Q09 is 5.75% y/y to 6.25% y/y. The monthly headline print was well below our expectation (+0.35% m/m) and that of the Bloomberg and Reuters consensus (+0.33% m/m), while core CPI was in line with forecasts (Ours +0.44% m/m; Bloomberg and Reuters +0.43% m/m).
Given the severity of the current financial turmoil and the drought of funding that corporations, both financial and non-financial, are facing all over the world, it becomes more and more relevant how exposed are companies in Latin America specially considering the trend towards more flexible exchange rate regimes in the last decade, and the resulting higher exchange rate volatility.
I thought it would be useful to post some high-frequency historical charts on both currency and 5-year dollar sovereign CDS spreads for each individual country in the LatAm region as more attention has been given to the analysis of those two variables in a comparative way.
Central government total revenues surged in July to R$62 bn, above the consensus of R$57.5bn and also pushing most of the year-over-year rates of growth to the upside. The real rate of growth (IPCA adjusted) went from 7.6% and 7.2% in May and June respectively to 14.7% in July while nominal rolling 12-month rate of […]