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?
Economic activity plunged by 8.2% y/y in Q1 2009 (+2.7% y/y in Q1 2008), in line with the market’s and our forecast. Adjusted for seasonal factors, GDP collapsed by 5.9% q/q (-21.5% q/q SAAR) after having contracted by 2.5% q/q in Q4 2008 (-9.8% q/q SAAR) and 0.6% q/q in Q3 2008 (-2.3% q/q SAAR).
The deepening of the US recession and global financial crisis, together with waning domestic confidence in Q1 2009, dragged economic activity deep into the red. In fact, the industrial sector (33% of GDP) led the decline (-9.9% y/y) driven by a collapse in manufacturing (-13.8% y/y) and construction (-7.7% y/y). Utilities (-3% y/y) and mining (-1.1% y/y) declined at a lesser pace. The service sector (63% of GDP) also collapsed (-7.8% y/y) on the back of poor results in commerce (-17.2% y/y), real estate (-10.6% y/y), and transportation (-10.3% y/y). The agricultural sector improved marginally (1.4% y/y).
Overall, the current result reinforces our view that Mexico is being hit the hardest, among Latin American countries, by the global crisis. Moving forward, we are adjusting our Q2 2009 GDP to a contraction of 8.1% y/y from a decline of 6.7% y/y to better reflect continuing weakness in external and domestic demand dynamics, as well as the impact of the A H1N1 flu outbreak and a negative calendar effect (Easter Holidays). Although we see a recovery in the H2 2009, it is likely to be mild because of the weakness in the US recovery, along with massive adjustment in Mexico’s labor dynamics, limited fiscal response and a tardy monetary stimulus. Consequently, we are revising down our economic activity forecast for 2009 to a decline of 6.1% (5.5% to 6.5% range) from a contraction of 4.7% y/y. Moreover, we are revising our GDP growth forecast for 2010 to 2.5% from 1.8%.
Moreover, headline and core inflation came slightly below the markets and our expectations at -0.34% 2w/2w and 0.13% 2w/2w. The headline and core inflation prints signaled that the disinflation process continued as headline CPI decelerated to 6.06% y/y from 6.14% in April and core inflation went down to 5.54% y/y from 5.61% y/y. Although both inflation readings are above Banxico’s inflation target for the Q2 2009 (5.5% y/y to 6% y/y), we expect inflation to enter a more pronounced disinflation process in the upcoming months due to relatively low commodity prices and dissipating demand pull pressures. Our outlook sees headline and core CPI readings falling to 3.8% and 4% by the end of 2009 and to 3.5% y/y and 3.6% y/y by the end of 2010.
Overall, as we have pointed out before, the collapse in economic activity and improving inflation dynamics and outlook should provide the central bank with enough room to stay in the easing course. In the last communiqué pertinent to the May monetary policy meeting when it cut 75bps to 5.25%, Banxico stated that it will continue with the easing cycle but the size of the cuts will be less substantial, therefore, we anticipate a cut of 50bps to 4.75% in the June meeting. However, if growth and inflation data surprise on the downside, we do not discard a deeper cut of 75bps.
Brazil– Current Account Deficit Likely Narrowed in April
The coming week brings the current account figures for April. We expect a deficit of US$1.25bn in April, a much better reading than in April 2008 (-US$3.0bn) mainly due to a much lower flow of profits and dividends remittances and also lower non-factor services deficit. This reading would already push the 12-months current account balance from –US$22.9bn to –US$21.1bn and the ratio over GDP from -1.59% to something close to -1.47% of GDP.
On the first quarter of 2009 the Brazilian current account brought a total deficit of US$5.0bn (lower than the US$10.2bn deficit Q1 2008), a reading that remains in line with our full-year forecast of US$19.2bn deficit (down from –US$28.2bn in 2008) . During that same period, trade balance registered a surplus of US$3.0bn, higher than the US$2.8bn seen in the same period of 2008, while in April the trade balance surprised to the upside as exports came in higher than expected and imports a bit on the downside. The surplus of US$3.7bn in April is quite higher than the one seen in April 2008 (US$1.7bn) but we think it is too early to revise our projections, as the trade surplus is still likely to shrink vis-à-vis last year (from US$24.7bn in 2008 to US$21.3bn this year). The recent appreciation of the real is likely to put some pressure on the pace of recovery of exports throughout the coming months while imports for this same reason could recovery a bit faster.
Foreign direct investments are likely to post an inflow of US$2.7bn, which would push the YTD sum to US$7.7bn, and in fact higher than our initial expectations. Our forecast for the full-year FDI was US$11.0bn but we are revising up our estimate to US$20bn at the risk of having to revise it up again later this year. This changes our balance of payments estimates from nearly zero to a net inflow of US$8.0bn.
MEXICO—Slightly Wider Current Account Deficit in Q1 2009, Higher Unemployment Rate in April, and Milder Economic Activity Contraction in March
The most important piece of information during the week will be the release of the balance of payments (BOP) data for the Q1 2009. Analysts will pay particular attention to the impact of a sharp decline in domestic and external demand on the current account as well as FDI and portfolio movements in the capital account. Moreover, on Tuesday May 26th, INEGI will report on the unemployment rate for April (RGE 5%, Bloomberg 5%), and on Wednesday May 27th, it will inform about the economic activity indicator for March (RGE -4.7% y/y; Bloomberg 4.4% y/y). On the latter, a positive calendar effect (March 2009 had more business days than March 08 due to Easter Holidays) should have helped economic activity in March; however, the A H1N1 flu outbreak in April, the reversal of the calendar effect, and poor US data should have kept the growth in the beginning of the Q2 2009 in a poor standing.
On Monday May 25th, the central bank will report on the current account for Q1 2009. We expect a deficit of USD 2.67bn (-USD 2.58bn in Q1 2008) driven by a wider trade deficit (USD 1.9bn vs. USD 1.65bn in Q1 2009) and a smaller net transfer surplus, mainly remittances (USD 5.6bn vs. USD 5.9bn in Q1 2008). Moreover, we are anticipating a smaller deficit in net factor of USD 5.2bn (-USD 6bn in Q1 2009) but a slightly wider deficit in net non-factor of USD 1.2bn (-USD 800 in Q1 2009). The Bloomberg consensus expects a deficit of USD 2.3bn.
COLOMBIA—Monetary Policy Meeting
On Friday May 29th, we expect the CB to slash rates aggressively by 100bps to 5%. The central bank has lowered the ON Lending rate by 350bps so far this year. In our view, inflation and inflation expectations continued moving down and the economy remains unde
r downward pressure, therefore, providing enough room for the central bank to keep cutting interest rates aggressively. Moreover, the local currency has strengthened and its volatility has remained relatively stable. We maintain our view that the CB will lower the monetary policy rate to 4% in 2009.
CHILE— Contracting Industrial Production and Rising Unemployment in April
On Thursday May 28th, INE will report on industrial production for April, along with other important economic activity indicators, such as mining output, electricity generation, consumer spending, and unemployment rate. On industrial production, we expect a decline of 9.7% y/y, driven by a fragile global environment and limited domestic confidence. Moreover, a negative calendar effect (Easter Holidays) should have played against industrial production and the other economic activity indicators. In our view, all four major industrial groups (consumer non-durables and durables, intermediate and capital goods) likely contracted. On unemployment for the Feb-April 09 period, we anticipate a rate of 9.74% due to slowing economic growth and seasonal factors. The Bloomberg consensus expects manufacturing output to decline by 9% y/y and unemployment to print 9.6%.
PERU—GDP Likely Decelerated Rapidly in Q1 2009
During the week, INEI will report on economic activity for the Q1 2009, which will likely show a rapid deceleration to 2% from 10.4% in Q1 2008 and 6.6% in the 2008. In our view, unfriendly external conditions, along with a cyclical deceleration in domestic demand (adjustment in inventories) and high statistical base, should have taken a toll on exports as well as consumption and investment. As expressed before, these dynamics will likely be felt with more intensity during the H1 2009 when GDP will likely stay around 2% y/y, but less so during the H2 2009. In the H2 2009, accommodating macroeconomic policy will likely improve domestic demand dynamics while the external context should improve. The government’s fiscal stimulus plan will start to kick in April and we anticipate the CB to lower rates to 4% by mid-year. In our best case scenario, GDP will decelerate to 2.7% in 2009 (2.5% to 3.5% range).