Latin America Talking Points: Economy, Social Issues - Itau Macro

LatAm Talking Points – Central Bank of Argentina hikes one-day repo rate

Our LatAm Macro Monthly report will hit your mailboxes today, featuring scenarios for Brazil, Mexico, Argentina, Chile, Colombia, Peru and the global economy. Talk of the day Argentina COVID-19 update: the latest official information from the Ministry of Health is that Argentina registered a daily increase of 418 deaths (406 on the previous day) and 14,392 confirmed cases (from 13,477). The 7-day moving average of deaths decreased to 366, from 367 on the previous day. The total number of deaths now stands at 16,937, with 750,988 confirmed cases, which implies a 2.3% mortality rate. The estimated reproduction rate (R) is currently at 1.17 (from 1.02). The Central Bank hiked the one-day repo rate and abandoned crawling peg policy to encourage export liquidation in a new attempt to prevent further drop in international reserves. The one-day repo rate was increased by 500 bp to 24%. In a statement, the monetary authority said it will abandon the uniform devaluation mechanism and switch to managed floating strategy to provide more volatility to the exchange rate. The monetary announcements were complemented by a temporary reduction in agricultural and mining export taxes and increase in tax rebates for industrial exports. In particular, the tax on soybean exports will fall to 30% from 33% in October and will return gradually to its original level by January 2021. Finally, the Treasury will auction dollar-linked bonds (payable in pesos) in addition to the fixed and floating peso denominated bonds.  Macro Scenario – Relying on controls: The central bank has decided to limit companies from accessing the official exchange rate to pay foreign currency debt (except trade financing). All dollar transactions will be taxed and be part of the monthly purchase quota for households. These measures may help to temporarily curb the decline of international reserves, but they will come at a cost for economic activity. The decision, in our view, intends to keep interest rates low and to slow the pace of nominal exchange-rate depreciation until an agreement with the IMF is reached (which should provide markets with a fiscal anchor). We note that without consistent fiscal and monetary policies, more controls are likely. We forecast a GDP contraction of 12.0% this year (from -12.7% in our previous scenario) and inflation of 37% followed by modest GDP growth and higher inflation in 2021 (4.5% and 50%, respectively). **Full story here. Peru COVID-19 update: the latest official information from the Ministry of Health is that Peru registered a daily increase of 66 deaths (72 on the previous day) and 3,061 confirmed cases (from 3,054). The 7-day moving average of deaths decreased to 85, from 116 on the previous day. The total number of deaths now stands at 32,462, with 814,829 confirmed cases, which implies a 4% mortality rate. The estimated reproduction rate (R) is currently at 0.59 (from 0.71). CPI posted a month-over-month rate of 0.14% (from 0.01% a year ago), above our forecast of -0.11% and market expectations of 0.02%. The figure was mainly driven by upward pressure from household living costs (0.53%) and transportation and communication (0.13%) due to an increase in energy prices. Likewise, food and beverages registered a price increase of 0.09%. Inflation in September remained below the central bank’s target of 2%. Annual headline inflation reached 1.82% in the month (from 1.69% in August), while core inflation (excluding food and energy) stood at 1.83% (from 1.79%). At the margin, headline and core inflation also accelerated. The seasonally-adjusted three-month annualized variation of the CPI was 1.86% in September (from 0.91% in August), while core inflation (excluding food and energy) stood at 1.49% (from 1.31%). We expect inflation at 0.9% by the end of 2020.  A wide negative output gap will put downward pressure on prices. **Full story here. Macro Scenario – Impeachment averted, but risks remain: Covid-19 contagion continued to recede in September, while another reopening phase of the economy was set for October, but even then, activities classified as high-risk, such as going to the movies or bars,will still be forbidden. In the middle of an economic and health crisis, the president was able to stop an impeachment process set in motion in Congress. Still, confrontation between lawmakers and the executive branch is likely to remain, creating the risk that populist measures will secure approval in Congress. We expect GDP for 2020 to fall by 11.9%, recovering to 9.6% in 2021 and supported by a large fiscal stimulus and expansionary monetary policy (we expect the central bank to keep the policy rate at 0.25% at least until the end of 2021). While the wide negative output gap will keep inflation low, we revised our forecast for year-end 2020 to 0.9% (before: 0.5%). **Full story here. Brazil COVID-19 update: the latest official information from the Ministry of Health is that Brazil registered a daily increase of 728 deaths (1,031 on the previous day) and 36,157 confirmed cases (from 33,413). The 7-day moving average of deaths receded to 696, from 711 on the previous day. The total number of deaths now stands at 144,680, with 4,847,092 confirmed cases, which implies a 3.0% mortality rate. The estimated reproduction rate (R) is currently at 0.95 (from 0.92). The trade balance in September was positive by USD 6.2 billion, but disappointed our forecast (USD 6.9 billion) and market consensus (USD 7.1 billion). Exports fell slightly by 1.0% mom/sa to USD 18.5 billion. Imports remained virtually stable since the previous month, at USD 12.3 billion, and remain much lower than before the crisis. Adjusting for the number of working days, exports dropped 9.1% yoy and imports plummeted 25.5% yoy. The annualized seasonally adjusted quarterly moving average for the trade surplus advanced to USD 83 billion in September from USD 79 billion in August. The decline in domestic activity caused by the coronavirus pandemic has had a significant impact on imports, which fell sharply throughout the year. Exports, in turn, also decreased in year-to-date terms but only mildly and already show signs of recovery, boosted by sales of major commodities, which climbed significantly vs. a year earlier (+10.2% from January to September 2020 vs. 2019). In the coming months, imports should remain at lower levels, reflecting the weak dynamics of the Brazilian economy and a weaker currency. We forecast a large trade surplus this year (USD 65 billion) as imports fall more sharply than exports. **Full story here. ​​​​​​ Tax collection came in at BRL 124.5 billion in August, slightly better than our call (BRL 121 billion). The indicator increased 1.3% yoy in real terms (July: -17.7%). The increase is explained by some repayment from the tax deferrals. It’s worth noticing that this data was delayed, given that the primary result for the same month was already released in the beginning of the week. Excluding revenues from the REFIS/PRT and the coronavirus tax deferrals and IOF exemption, tax collection decreased 10.9% yoy real in real terms (July: -15.4% yoy), with the 3mma going to -12.4% yoy from -10.5%. Going forward, tax collection is likely to improve ahead, with better economic activity. The Brazilian Supreme Court (STF) has precautionarily decided that Petrobras’ refineries sale won’t need legislative approval. The final result was 6 x 4 in favor of Petrobras (one minister was absent) – the ministries Alexandre de Moraes, Luís Roberto Barroso, Dias Toffoli, Camen Lúcia, Gilmar Mendes and Luiz Fux supported that the sale process of the refineries does not require legislative approval from the Lower House. It is worth mentioning that the decision was precautionary, which means that the court will still further discuss the matter in the future. Macro Vision – Treasury issuances going forward: 4Q20 and 2021: The amount of public debt issued by the National Treasury in a given period can be approximated by using the sum of expiring debt and the central government’s primary balance excluding cash adjustments. In the year through September, there was a significant increase in the borrowing requirements, which was partially offset by the use of funds from the National Treasury Account to the redemption of market debt, offset by repo notes. The borrowing requirements in 4Q20 is around BRL 273 billion and significantly lower than in the previous two quarters, due to lower expiring amounts and the reduction of the primary deficit, as some measures to fight the coronavirus come to an end. Next year, even if some of what was used from the Treasury account is replenished, the Treasury's cash position may become relatively lower as a share of gross debt and of borrowing needs within 4 quarters. This situation could require additional Treasury issuances. However, in this case, issuances would be under pressure and above the high level seen in 3Q20, which reinforces the need to keep pursuing fiscal rebalance. **Full story here.   Itaú Daily Activity Tracker: Our Daily Activity Tracker increased by 2.1 p.p., to 94.4 (latest available data from Sunday, September 27th). The 7-day moving average increased by 1.2 p.p., to 91.9. The indicator is up 37.8 p.p. from the bottom seen on April 11th, and is now 5.6% below the mid-March level, when the series started. See our report here. Day Ahead: August’s industrial production figures will be released at 9:00 AM (SP time). We forecast a 3.8% mom/sa increase, leading to a 2.3% yoy drop (market consensus: 3.8% and -2.0%, respectively), in line with the fast recovery process taking place since the strong drops in March and April. The improvement has been widespread, with the sectors that suffered the most during the crisis (such as vehicles, clothing and steel) posting the largest gains. Chile COVID-19 update: the latest official information from the Ministry of Health is that Chile registered a daily increase of 81 deaths (16 on the previous day) and 1,759 confirmed cases (from 1,691). The 7-day moving average of deaths decreased to 50, from 57 on the previous day. The total number of deaths now stands at 12,822, with 464,750 confirmed cases, which implies a 2.8% mortality rate. The estimated reproduction rate (R) is currently at 1.01 (stable). Despite strong retail sales data in August, overall activity remained weak with the monthly GDP proxy shrinking by a double-digit annual rate for the fifth consecutive month. The IMACEC contracted 11.3% yoy in August, deeper than the 10.7% drop in July as mining production slumped. The decline was sharper than both the market and we were expecting (8.5% and 8.4%, respectively). Mining production shrunk 3.4% yoy (+1.4% yoy in July), the first annual drop recorded this year. Meanwhile, non-mining activity shrunk 12.2% yoy in the month, similar pace to July, as sectors most affected by lockdown measures (services, construction, and manufacturing) remained key drags, while commerce gains partly contained the decline. At the margin, non-mining activity posted the greatest gains since the onset of the pandemic (+3.4% mom; 1.8% in July), but mining declined 1.9% mom. Overall, GDP remains around 12% below the level prior to the pandemic (recovering from the cycle low of -16.2% in May). With mobility restrictions easing further during September, services reopening (particularly in the hospitality industry), liquidity injections consolidating (pension withdrawals) and private sentiment improving, the activity recovery will advance in coming months. At the margin, activity rose 2.8% from July, building on the 1.7% and 0.8% gains in the previous two months. We expect a GDP decline of 5.5% this year (+1.1% in 2019), with a rebound of 5.5% next year. Significant monetary and fiscal stimuli, along with various business support measures, improved sentiment and individual liquidity injections would consolidate the recovery ahead. However, the upcoming constitutional reform referendum this month and the lengthy rewriting process ahead would nevertheless keep uncertainty high, something that risks hampering business sentiment (and investment decisions) ahead. **Full story here. The Icare’s business confidence index came in at 49.8 points (50 = neutral), dropping just 0.9 p.p. over twelve months, after a prolonged period of double digits falls recorded since November 2019 following the social unrest in the country. At the margin, business confidence gained 7.3 p.p., aided by improvements in the health front and stimulus measures, consolidating the view that the worst part of the pandemic shock has passed. Although the main drag still came from construction, which dropped 9.5 points over twelve months to 33.2, the sub-index is far above the cycle trough of 6.4. Mining confidence is also lower than last year’s, but posted a still elevated 63.6 amid higher copper prices and lighter mobility restrictions that likely allowed the sector to reassume operational levels. Retail confidence recorded the highest level since November last year, edging closer to neutrality at 48.9 points (-2.6 p.p. over 12 months). Meanwhile, industrial confidence was the only sub-index to have improved over 12 months (+5.2 p.p. to 51.6), returning to optimism for the first time in two years. Excluding the volatile mining component, business confidence was broadly stable from last year at 46.6, the highest level since October 2019 (40.5 in August). As economic conditions improve, business confidence gains would continue during 4Q20. Nevertheless, still elevated uncertainty due to the constitutional reform process could hamper business optimism ahead. Macro Scenario – The road to a new constitution begins: While the economy continues to open up on a grander scale, all eyes this month will be on the constitutional plebiscite. Surveys indicate that an overwhelming majority of Chileans favor a rewrite of the military-era Magna Carta. The process will be lengthy and will entail another referendum, this time to validate the new constitution, which is set for 2022. Although the requirement of significant quorums for the introduction of laws reduces risks, significant political noise ahead could well hinder investment decision-making and limit the recovery. We see the economy expanding 5.5% next year, following the expected 5.5% decline this year. Contained inflation and a large output gap support the retention of an expansionary monetary stance for a prolonged period (we expect stable rates, at 0.5%, at least until the end of 2021).**Full story here. Colombia COVID-19 update: the latest official information from the Ministry of Health is that Colombia registered a daily increase of 170 deaths (187 on the previous day) and 5,637 confirmed cases (from 5,839). The 7-day moving average of deaths decreased to 179, from 180 on the previous day. The total number of deaths now stands at 25,998, with 829,679 confirmed cases, which implies a 3.1% mortality rate. The estimated reproduction rate (R) is currently at 0.82 (from 0.87). Exports shrunk 21.3% yoy in August (similar to the fall in July). Oil exports dropped 38.9% yoy (-50.9% in July) while coal exports contracted 25.9% (-34.1% in July), mainly dented by lower prices compared to last year, although oil export volumes are also shrinking. In the quarter ending in August, exports shrunk 23%, milder than the 40.5% drop in 2Q20 on the back of a return to growth of 1.5% (15.3% drop in 2Q20) for non-traditional goods exports (ex. oil, coal, coffee, and ferronickel). At the margin, there are signs that exports momentum is improving. Exports grew 79.4% qoq/saar, (-78.8% in 2Q20) as commodity sales gained momentum. We expect a gradual narrowing of the current account deficit from 4.3% last year to 3.3% of GDP in 2020. Low terms-of-trade and still weak global activity mean Colombia’s external imbalances would persist. However, weakened internal demand and COP depreciation would aid the correction of the current account deficit. The full trade balance result will be released on October 15. Macro Scenario – Knocking on the IMF’s door: With the economy fully reopening in September, activity indicators are expected to consolidate the recovery already underway. We expect a 6% GDP contraction this year, with a bounce-back to +4.5% in 2020. Nevertheless, more-moderate fiscal support relative to peers could mean a steeper decline in activity. The central bank extended the easing cycle by 25 bps, to 1.75%, following a low inflation print in August and inflation expectations below the 3% target. Yet the communication tone signaling of limited room and prevalent risks (from capital outflows) favor a pause ahead. Colombia’s flexible credit line from the IMF was increased to USD 17.3 billion, from USD 10.8 billion, with the Treasury intending to withdraw USD 5.3 billion. While the announcement came as a surprise, the amount of foreign currency resources the Treasury will use this year seems unchanged from the latest guidance. **Full story here. Mexico COVID-19 update: according to the Johns Hopkins University, Mexico registered a daily increase of 483 deaths (560 on the previous day) and 5,053 confirmed cases (from 4,446). The 7-day moving average of deaths decreased to 385, from 402 on the previous day. The total number of deaths now stands at 77,646, with 743,216 confirmed cases, which implies a 10.4% mortality rate. The estimated reproduction rate (R) is currently at 0.97 (from 0.88). Macro Scenario – Pause in easing cycle as fiscal austerity continues: The economy reopened further in September. Official statistics show new cases continued to decelerate in September, but we continue to note that simultaneously declining testing rates and the high positivity suggest an inaccurate measurement of the outbreak. The Ministry of Finance expects narrower fiscal deficits for 2020 and 2021, supported by an improvement in tax collection and a recovery in oil prices for 2020 and 2021, respectively. Still, amid optimistic oil production and GDP growth assumptions, the risk of higher-than-targeted fiscal deficits is high. Banxico board members voted unanimously to cut the policy rate by 25 bps (bringing it to 4.25%), but the statement suggests a pause in the easing cycle. We expect Banxico to keep its policy rate unchanged for the rest of the year, resuming rate cuts next year (we expect a 2021 year-end level of 3.50%) as inflation decelerates, amid a stronger currency and a still-wide negative output gap. **Full story here. Paraguay Day Ahead: The central bank will publish the CPI inflation for September during the day. Inflation has been well behaved and has remained below the center of the target range (4%+-2%) since November 2018. We forecast an inflation of 0.3% mom. If our forecast is correct, the annual figure will remain unchanged at 1.6%.