Chile: COVID-19 and domestic events are the main challenges to sustain the recovery in activity

March 2, 2020 ( Newswire) Last week’s highlights: Chile’s Sovereign Rating: should we expect a downgrade? (see full note). During the last few weeks, we worked on the attached note. In it, we analyze in detail, for 30 countries, 20 macro, social and governance indicators that are well known and monitored by rating agencies with the aim of assessing the current and expected relative position in Chile, trying to respond to the recurring question these days about whether we expect a downgrade in Chile’s sovereign rating amid the social crisis. The short answer is yes, we should; the question is when, in our opinion. Overall, while we do think that our analysis provides a good approximation, we also acknowledge that rating agencies use additional stylish variables and their own judgments to which we do not have access. Hence, this exercise does not intend to replicate any rating model. In addition, we all know that the upcoming weeks in Chile will be critical to fine tuning all projections. In any case, we are of the view that the economic and social scenario for Chile has structurally changed (beyond the outcome of the Apr-20 plebiscite), which is likely to lead to lower economic growth and a material deterioration of fiscal accounts in the upcoming years, suggesting at least a one-notch downgrade in the Chile’s sovereign rating in the next 12-18 months. The coronavirus outbreak and the large exposure of Chile to China, unfortunately, also seem to support this view.

According to the BCCh, economic activity, as measured by the Imacec index, posted an increase of 1.5% y/y in Jan-20, slightly above market consensus (1.2% according to Bloomberg’s survey), and meaning an acceleration after the +1.1% y/y recorded in Dec-19. The mining Imacec advanced 2.2% y/y in Jan-20, a slowdown vs the 3.7% y/y of Dec-19, but still reflecting the low impact of the social crisis on the sector. On its part, non-mining activity grew 1.5% y/y, speeding up from 0.8% y/y in Dec-19, led by services and construction as reported by the BCCh’s. Jan-20 had the same number of business days of Jan-19. While economic growth remains well below the pace observed prior to the start of the social crisis (~3.5% y/y), data since Dec-19 has been better than expected, suggesting an apparent more rapid recovery of some sectors than initially projected. That said, we continue to believe that the developments around next weeks’ key domestic events will be critical for projections. In addition, unfortunately, we are of the view that the coronavirus (COVID-19) is likely to add further pressures on the Chilean economy as it maintains the largest exposure to China in the region in terms of trade (exports to China represent ~32% of total external sales or ~8% of GDP, well above the rest of countries in LatAm). Indeed, we believe that the external backdrop will potentially offset the upside surprises observed in Dec-19 and Jan-20. In addition, an improvement of both business and consumer sentiment is a decisive factor. All-in, we maintain our 2020 GDP growth projection at 1.2%.

Main data and events to come

On Friday, the INE will release the CPI figures of Feb-20 (consensus an Credicorp both at 0.2% m/m).

Colombia: mixed signals from the labor market in Jan-20, while business confidence continued to improve

Last week’s highlights

  • Mixed signals from the labor market in Jan-20. On one hand, the national labor market deteriorated again, as both the participation rate and jobs creation retreated (-1pp y/y to 62.5% and -0.5% y/y, respectively), meaning that the unemployment rate rose +0.2pp y/y to 13%, the highest level for a month of January since 2011. However, this continues to be mainly explained by the jobs destruction in agriculture (-6.3% y/y; -235k payrolls), as job creation excluding that sector stood at +1.5% y/y, the highest level since Mar-19, signaling a moderate recovery after a very weak 2H19. Thus, considering that in the labor urban market there are barely none agriculture jobs, its metrics improved remarkably in Jan-20. Specifically, the unemployment rate fell 0.9pp y/y to 12.9%, the strongest improvement since Jul-18, amid the increase in both the participation rate and jobs creation (+0.3pp y/y to 65.6% and +2.8% y/y, respectively).

All-in, we see the observed in Jan-20 as positive despite the increase in the national unemployment rate, as there have been several signs of improvement in the past 4 months after the abysmal dynamics in most of 2019, especially in jobs creation. While there are still pressures on the labor market like the strong increase in the minimum wage (6%) and the migration inflow from Venezuela, with the improving economic growth we think that the most likely outcome is a stabilization of unemployment rates ahead, rather than a sustained and fast recovery.

  • Widespread improvement of Fedesarollo’s business confidence indicators in Jan-20. Commerce confidence jumped +2.6pp m/m to 32.3% in Jan-20, its highest level since Aug-06. The improvement was explained by all the components of the index (inventory, expectations and current situation), but this was particularly noticeable in those related to current demand, in line with the ongoing strong dynamics of private consumption. Industrial confidence also improved in Jan-20, reaching 12.2% (+3.7pp m/m), its highest level since Feb-11. The increase was almost completely explained by the strong improvement of expectations for the next quarter (+17.4pp m/m to 43%).

More interestingly, in an annual survey carried out by Fedesarrollo, 64.9% of manufacturing companies increased capital expenditure in 2019 vs 2018, and 66.8% expect investment to increase further this year (vs 64.6% in early 2019). This reinforces our view of private investment being a major source of GDP growth from the demand side this year, even considering the strong performance observed in 2019. Moreover, expectations for exports, a quarterly survey by Fedesarrollo, also improved as 40.5% of industrial companies expect an increase in external sales in the coming three months, while just 10.4% expect a reduction of orders, despite the uncertain scenario for the global and regional economy.

Main data and events to come

  • On Thursday, DANE will release the CPI figures of Feb-20 (Consensus: 0.67% m/m; Credicorp: 0.52% m/m).

Peru: headline inflation remained below the midpoint of the target range in Feb-20

Last week’s highlights

  • Metropolitan Lima’s CPI rose 0.14% m/m in Feb-20, in line with market expectations (Bloomberg: +0.15% m/m). Hence, headline inflation remained at 1.9% y/y, accumulating six consecutive months below the midpoint of the target range of the Central Bank (1%-3%). Moreover, core inflation remained unchanged at 2.3% y/y for the fifth consecutive month, and within the target range for more than 3 years.

The monthly result was mainly explained by the Food and Beverages group (+0.28% m/m), which had a 78% incidence in the headline figure. There were notable increases in sugar prices (+6.6% m/m) and fresh legumes (+2.8%) due to seasonal and climate issues (rainfall and landslides) in productive areas, while gutted chicken prices rose 1.9% m/m, posting the highest incidence on the headline number in Feb-20 (+0.04pp.). Conversely, the Rental Housing, Fuels and Energy group declined 0.25% m/m, mostly due to a decease in natural gas tariffs for households (-2.0%).

  • We expect the BCRP to remain on hold in the Mar-20 monetary policy meeting. As we have pointed out previously, we foresee that an additional rate cut from the BCRP can occur if: i) inflation expectations decline towards 2% (Jan-20: 2.05%), ii) public investment disappoints (after a 117% y/y expansion in Jan-20 it advanced 30% y/y in feb-20), and iii) the deceleration of non-primary activity deepens (in 4Q19 it posted the weakest pace in 10 quarters). We believe that, with the available information, a rate cut from the BCRP in the Mar-20 meeting is unlikely. However, amid the recent deterioration of the international environment due to COVID-19 and the potential impact on the local economy, the Central Bank could opt for a rate cut in the upcoming months. We also believe that a change in the tone on the official statement would precede this potential movement.
  • Local assets register losses in line with the global risk-off mood. Upon markets opening on Monday, Sovereign 2029 yield stood at 3.92% (+16bps w/w, -30bps YTD), while Sovereign 2034 reached 4.61% (+18bps w/w, -28bps YTD). Moreover, the spread between Sovereign 2029 and the 10-year UST currently sits at 286bps, so it widened by 47bps last week (YTD: +56bps) to a 9-month high, while the spread between Global 2030 and the 10-year UST stands at 106bps (+36bps w/w, +50bps YTD), a level not observed in 38 months. Furthermore, the PEN is trading at 3.441, so it has weakened 1.2% w/w and 4.1% YTD, though it retreated from the 4-year high of USDPEN 3.458 observed last week.

Main data and events to come

  • On Thursday, the BCRP will publish the macroeconomic expectations survey of Feb-20.

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Credicorp Capital

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