Chile – Previous Week
Chile’s trade surplus in Feb. 09 (+USD 338mn, down 74% y/y) continued showing the impact of stressed global conditions (exports down 42% y/y) and weak domestic demand (imports down 32.5% y/y). Since total trade (exports plus imports, down 38% y/y) represents about 70% of GDP, it indicates that Chile’s economic dynamics remained under stress for the past two months. Moreover, Chile’s central bank board, in response to a swift improvement of inflation and inflation expectations, sharp widening of the output gap, and relatively strong CLP, unexpectedly slashed the monetary policy rate another 250bps to 2.25%. The CB has lowered rates by 600bps since Jan. 09. In the statement, the CB indicated that further cuts might be necessary; however, the magnitude and frequency will be comparable to “historical patterns” Reading from market indicators (CLP Fixed– Camara swap curve), rates are expected to fall to 2% in 3 months and to 1.8% in 6 months, and considering that the MPR has reached levels as low as 1.75% in 2004, we expect the CB to get to around that level (1.75%) in the near term.
In Mexico, inflation results for Feb. 09 were in line with expectations. Headline CPI continued on a normalizing pattern, while the core print remained sticky, especially goods prices, as a result of a weak currency (FX pass-through). We should point out, however, that over the last two weeks the MXN has strengthened by around 7% from recent record lows, with most of the gains occurring last week, and this should provide some relieve to the central bank. The local currency has rallied because of improvements in global risk appetite, a fresh central bank intervention policy (auctioning of USD 100mn daily), and news that local pension funds will soon come to an agreement to invest all new money locally over the next 12 months. Moreover, expectations that world policy makers (G-20 meeting) will likely promise, over the weekend, to deal with the current global crisis more forcefully and in a coordinated fashion, as well as provide more resources to the IMF to assist EM, including Mexico, helped the MXN (and other LatAm currencies). More resources available to Mexico by the IMF should ease market concerns about Mexico’s BOP dynamics this and next year. Overall, the recent sharp strengthening of the MXN, especially if it stays below the MXN 14.8 level, will provide more comfort to the CB to lower rates more forcefully (please see note below). We continue to believe that the deepening of the domestic recession, rising unemployment and low commodity prices should ease inflation pressures more forcefully moving forward, thus, inducing the CB to stay on a dovish stance.
In Colombia, the CB released the monetary policy minutes from the February 27th meeting, in which they surprisingly cut the ON lending rate aggressively by 100bps to 8%. According to the CB, the rapid weakening of domestic demand and normalization of the inflation outlook, despite a weak currency, called for a deep cut in interest rates. The CB stated, however, that such a bold move does not imply similar cuts in the future. In our view, since the last meeting, economic growth indicators have worsened, inflation and inflation expectations have improved, and the COP has rallied (6% in March), therefore, providing the CB with enough room to lower rates assertively again during the this Friday’s meeting (please see note below).
Mexico – Week Ahead
MEXICO—Sharp Contractions in Industrial Production (Jan. 09) and Aggregate Growth (4Q08). Banxico to lower rates by at least 25bps
The most important event next week will be Banxico’s monetary policy meeting, and we expect the CB to lower rates by at least 25bps. Although core inflation remained sticky in Feb. 09 due to the FX pass-through effect, the result was in line with expectations and the recent strengthening of the local currency (7% since the beginning of March), especially if the gains are sustained this week (MXN below 14.8). This should provide some relieve to the CB. Moreover, the rapid widening of the output gap, rising unemployment and low commodity prices should continue improving the inflation outlook moving forward, thus, allowing Banxico to continue with the easing cycle. The CB will also pay particular attention to industrial production for Jan. 09 as it will likely confirm that Mexico’s economy is under severe recessionary pressures. We expect Mexico’s output to contract by around 4% y/y in 1H09 and 3% in 2009.
INEGI will release industrial production data for Jan. 09 on Wednesday March 18th. We anticipate IP to have contracted by 12.2% y/y driven by a sharp decline in manufacturing output (-15.2% y/y). The deepening of the recession in the US manufacturing sector (-13% y/y NSA) and a severe drop in Mexico’s auto production (-51% y/y), as demand from the US and Europe waned, should have dragged industrial output deeper into negative territory. Moreover, falling oil output (-8.2% y/y) should have continued hurting mining (-7% y/y), at the same time that poor consumer confidence and tighter credit conditions likely exacerbated downside pressures on construction (-8% y/y). Overall, we see Mexico’s industrial output under intense downside pressure at least during 1H09 (-8.7% y/y), driven by the ongoing global economic and financial crisis; however, we see improvement by year-end due to expectations that external conditions become friendlier and the government’s infrastructure development program helps construction. In this context, we expect industrial output to contract by 5.6% y/y in 2009, after having declined by 1.3% y/y in 2008. The Bloomberg and Reuters consensuses expect industrial production in January to print a decline of 9.2% y/y and 10% y/y, respectively.
On Friday, March 20th, the central bank will decide on the monetary policy rate. We anticipate Banxico to lower the ON TIIE rate by at least 25bps. The possibility of a 50bps to 7% has certainly increased over the last week as the inflation print for Feb. 09 was in tandem with expectations and the local currency rallied. The latter, if sustained, should ease FX pass-through pressures on core CPI, particularly on goods inflation, and increase room for the central bank to maneuver. On growth risks, industrial production for Jan. 09, as well as recent data related to the auto sector, international trade and domestic confidence, signal that the economy is under severe recessionary pressures, which along with low commodity prices, ultimately should bring inflation towards a more pronounced normalization pattern. Overall, we maintain our view that Banxico will lower rates to 6% by mid-year as the output gap will continue widening sharply and the inflation outlook will improve in the coming months. The Bloomberg consensus expects a cut of 25bps during this Friday’s meeting.
Finally, on Friday March 20th, INEGI will report on aggregate growth for 4Q08, and we forecast a decline of 2.3% y/y (4.1% y/y in 4Q07 and 3.9% 9M08). On the demand side, our estimates considered a sharp deceleration in consumption (-1% y/y) and investment (0.5% y/y) as the global crisis hit domestic confidence, labor dynamics worsened, inflation stayed elevated, and credit conditions tightened. Moreover, exports likely declined sharply (-8.2% y/y) due to vanishing external demand. On the supply part, INEGI already reported a few weeks back that GDP declined by 1.8% y/y in 4Q08, and we expect imports to have contracted by 3.7% y/y. Moving forward, released data at the beginning of the current year indicates that Mexico’s economy continued under strong downside pressure in 1Q09. We expect Mexico’s output to contract by around 4% y/y in 1H09 and 3% in 2009. The Bloomberg consensus anticipates GDP to post a decline of 2% y/y in 4Q08.
CHILE—GDP Slowed Sharply in 4Q08
ntral bank will provide details on economic growth for 4Q08 on Wednesday March 18th, and we expect a sharp deceleration to 1.1% y/y from 4% y/y in 4Q07 and 4.2% y/y in 9M08. If we are correct, GDP should have expanded by 3.4% y/y in 2008 from 5.1% y/y in 2007. In our view, slower global and regional demand, tighter financial conditions, low copper prices, and waning domestic confidence took its toll on economic activity by the end of 2008. In this context, domestic demand likely decelerated sharply (5.7% vs. 10.3% in 9M08), driven by weakening consumption (2.7% vs. 5.6% in 9M08) and investment (10.3% vs. 23.7% in 9M08). Moreover, the external sector will likely corroborate that exports contracted by 2.6% (2.2% in 9M08) and that imports slowed down significantly to 5.8% (16.6% in 9M08). Moving forward, domestic and external data and conditions indicate that GDP will likely post a negative print in 1H09 (-1.5% y/y). Although we anticipate Chile’s economy to bounce back in the 2H09 (+3.1% y/y), as countercyclical policies take hold and external conditions improve and average growth for 2008 ends at 0.8% y/y, the risk to our scenario is to the downside. The Bloomberg consensus expects economic activity to be about 2.3% y/y in 4Q08.
COLOMBIA—Retails Sales and Industrial Production likely continued under Strong Downside Pressures in Jan. 09. The Central Bank will likely act Aggressively Again in Lowering the MPR
The CB committee will pay close attention to the results of this week’s economic activity indicators, as well as the behavior of the COP. Although the last monetary policy minutes suggest that the central bank might not act as boldly as in the last meeting, when it slashed rates by 100bps to 8%, the fact that the COP has strengthened by 6% since then and that domestic demand is weakening faster than anticipated, provide enough room for the board to cut rates aggressively again.
On Wednesday March 18th, DANE will report on industrial production and real retail sales for Jan. 09, which will likely indicate that the economy continued on a rapid deceleration trend. Industrial output likely declined by 11.3% y/y (+6.17% y/y in Jan. 08) and real retails sales dynamics likely worsened by dropping 4.4% y/y (+3.4% y/y in Jan 08). Overall, slower domestic and external demand, tighter credit conditions, and fading business and consumer confidence, should have continued dragging both activities down. Certainly, auto sales fell by 21% y/y in Jan. 09 (-5.5% y/y in Jan. 08), and energy demand from the manufacturing sector declined by 9.5% y/y. The Bloomberg consensus expects industrial production and retails sales to drop by 10.9% y/y and 4.1% y/y, respectively.
Finally, we expect the CB to slash rates aggressively again by 100bps to 7% during the Friday March 20th meeting. In our view, the balance of risks continues shifting towards a strong downside pressures to growth, as the output gap is widening swiftly, and inflation and inflation expectations are receding towards the 5% mid-point of the central bank target range. Moreover, the recent sharp strengthening of the local currency (6% so far in March) should further ease board members’ concerns about FX pass-through risks. In fact, the most recent economic activity indicators, namely industrial production, real retail sales, construction, energy generation, credit growth, and total trade, indicate that GDP remains under heavy stress. Moreover, given the current external context and limited domestic fiscal resources to pursue an aggressive fiscal stimulus, economic growth in the upcoming quarters is likely to stay limited and well-below potential. In this context, prompt monetary policy response by bringing the MPR closer to or lower than neutrality levels (6.5% to 7%) should help the country in dealing with the global crisis. The Bloomberg consensus expects the CB to lower rates by 75bps to 7.25% during this Friday’s meeting.
Peru—Slowing Economic Activity likely Intensified in Jan. 09.
On Monday March 16th, INEI will report on economic activity for Jan. 09, which will likely print a sharp deceleration to 3.4% y/y from 11% y/y in Jan 08 and 5.2% y/y in Dec 08. The unfriendly external conditions and slowing domestic demand should have continued weighing on economic activity at the start of 2009. Moreover, an elevated statistical base and more cautious consumer and business spending most likely exacerbated downside pressures to growth. In January, exports plus imports (around 50% of GDP) contracted sharply (-29% y/y), and leading sectors of the economy, such as construction (3.3% y/y), manufacturing (3.8% y/y), other services (3.7% y/y) and commerce (1% y/y), will likely reflect slow growth. Mining, however, will post a strong expansion (10.7% y/y), as indicated by INEI’s advance report on economic conditions. In a recent interview, the Finance Minister, Luis Carranza, announced that the fiscal stimulus (USD 3.1bn or 2.7% of GDP) is under way; however, it will not be felt until April 09 onward. Finally, INEI will inform on Friday about labor dynamics and we expect an increase on the unemployment rate to 9.5% from 8.8% in Jan. 09. The Bloomberg consensus expects GDP to expand by 3.9% y/y and unemployment to print 9.5% in Jan. 09.