Covid hotspots, GDP falls, austerity in Ecuador - Capital Economics
Latin America Economics

Covid hotspots, GDP falls, austerity in Ecuador

Latin America Economics Weekly
Written by William Jackson

Parts of Latin America are seeing some of the sharpest rises in new coronavirus cases globally, meaning that lockdown measures – and the corresponding hit to activity – are likely to remain in place for longer than in many other EMs. This has prompted us to revise down our 2020 GDP forecasts for Brazil, Colombia and Peru. Elsewhere, the Ecuadorian government’s pursuit of further harsh austerity might be welcomed by bondholders, but could spark protests like those that occurred last year, which would put renewed pressure on bond spreads.

Virus spread worsens growth outlook

Brazil has hit the headlines this week amid a rapidly developing political crisis and the rampant spread of coronavirus in the country. The number of new cases per day is nearing that in the US.

But Brazil is not the only country in the region still struggling to get the virus under control. On a per capita basis, similarly rapid rises are occurring in Chile and Peru. (For more, see our forthcoming Emerging Markets Update.) One consequence is that the economic damage caused by the coronavirus – caused by both social distancing and formal lockdown measures – is likely to persist.

Indeed, high-frequency mobility data published by Apple and Google suggest activity has stayed at depressed levels, even though conditions have started to improve in many other EMs which have been more successful at containing the virus. Similarly, the first survey figure for May in the region – the FGV industrial confidence measure for Brazil – was only slightly better than it was in April.

Our working assumption is that lockdowns will eventually be lifted as the virus comes under control. Even so, the fact that they will remain in place for longer than most EMs will make the region’s recovery slower. Taking this, together with a series of weak data in Q1, we’ve recently revised down our GDP growth forecasts for Brazil, Colombia and Peru. We expect GDP contractions in the order of 7-9% over 2020 as a whole. (See Table 1 for our full forecasts.)

Prolonged downturns will increase pressure on governments to provide more fiscal support. This shouldn’t be a problem in Chile and Peru due to strong government balance sheets. But it could exacerbate long-term debt vulnerabilities in Brazil, Mexico and, to a lesser extent, Colombia.

Ecuador: Has Lenín gone too far?

Ecuador’s aggressive austerity policies announced this week might be welcome news to investors, but there’s a risk that such drastic spending cuts during a health crisis spark a repeat of October’s protests.

This week’s decision to save $4bn (4% of GDP) via spending cuts and asset sales this year will partly offset the widening of the budget deficit caused by the collapse in tax receipts, low oil prices and higher healthcare spending.

It’s not the first time that President Lenín Moreno has prioritised fiscal consolidation. Mr. Moreno’s attempt in October to remove fuel subsidies quicker than the Fund recommended sparked major protests. Similarly, the recently announced front-loaded spending cuts seem overly aggressive, with the Fund recommending “sustained fiscal consolidation over the medium-term”.

The spending cuts are probably designed to placate bondholders ahead of a possible further debt restructuring. But they could backfire. The socioeconomic disruption caused by renewed protests would raise the risk that any further debt restructuring talks are not completed before next year’s election – which could herald a lurch back to the left. Debt talks under a left-wing government would be more acrimonious, justifying a further widening of bond spreads.

The week ahead

Attention in Argentina will focus on debt talks after the sovereign seems all-but-certain to formally default on external debt later today. Elsewhere, Brazilian inflation probably fell to 2.1% y/y in mid-May. And GDP figures due on Friday are likely to show a 2.5% q/q contraction in GDP. Colombia’s central bank is likely to cut its policy rate by 50bp to 2.75% next Friday.

Data Previews

Brazil GDP (Q1) Fri. 29th May

Forecasts

Time (BST/EDT)

Previous

Consensus

Capital Economics

GDP % q/q (% y/y)

13.00 / 08.00

+0.5% (+1.7%)

-2.5% (-1.0%)

Contraction in Q1, output to collapse in Q2

We think Brazilian Q1 GDP figures out next Friday will show a fall in GDP of 2.5% q/q.

Monthly activity figures weakened sharply in March. Services and the industry all suffered falls in output. The central bank’s own activity index points to a contraction in GDP of about 2% q/q. (See Chart 1.) That said, the relationship is not perfect, and given the plunge in some of the low frequency data, we think the fall in output could be larger, perhaps at 2.5% q/q. That would be consistent with a 1% y/y contraction.

Of course, the figures for April will be much worse. Surveys point to a fall in GDP of about 11% y/y last month. And it doesn’t look like things got much better this month. We expect GDP to contract by 8% over this year as a whole.

Chart 1: Brazil GDP & BCB Economic
Activity Indicator

Sources: BCB, Refinitiv

Colombia Interest Rate Announcement (May) Fri. 29th May

Forecasts

Time (BST/EDT)

Previous

Consensus

Capital Economics

Policy Rate (%)

3.25%

2.75%

2.75%

Another 50bp cut but greater caution ahead

We expect that Colombia’s central bank will cut its policy rate by 50bp, to a record low of 2.75%.

With coronavirus containment measures having a big impact on activity, and the drop in oil prices set to hit export revenues hard, Colombia’s economy is under severe pressure. We expect GDP to contract by around 7.0% over 2020 as a whole.

The central bank cut its policy rate by 50bp last month and we think another 50bp reduction is likely at this meeting. That said, policymakers are likely to act relatively cautiously from here. The latest inflation reading stood at 3.5%, and we think that the pass through from the fall in the peso over the past couple of months will keep it above the 3% mid-point of the central bank’s target range over the next 12 months. For now, we think that a cut this month would mark the last in the cycle. (See Chart 2.) But it’s possible that a deeper downturn and more prolonged lockdown might justify further easing. We will address this in a forthcoming Update.

Chart 2: Colombia Consumer Prices & Policy Rate

Sources: Refinitiv, Capital Economics

Latin America Weekly Diary

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Time (EDT)

Previous*

Median*

CE Forecasts*

25th May

Mex

Trade Balance (Apr)

(12.00)

(07.00)

+$3,392m

Mex

Current Account Balance (Q1)

(15.00)

(10.00)

+$2,486m

26th May

Mex

IGAE Activity Index (Mar)

(12.00)

(07.00)

-0.2% (-0.6%)

Mex

GDP (Q1, Fin., q/q(y/y))

(12.00)

(07.00)

-1.6% (-1.6%)

-1.6% (-1.6%)

Brz

IBGE Inflation IPCA-15 (May)

(13.00)

(08.00)

0.0% (+2.9%)

-0.5% (+2.1%)

Brz

Current Account Balance (Apr, US$)

(13.30)

(08.30)

+$868m

27th May

Mex

Inflation Report

(18.00)

(13.00)

Arg

Trade Balance (Apr, US$)

(20.00)

(15.00)

+$1,145m

28th May

Brz

Unemployment Rate (Apr)

(13.00)

(08.00)

12.2%

Mex

Central Bank Meeting Minutes

(15.00)

(10.00)

29th May

Mex

Budget Balance (Apr, MNX, YTD)

+26.9bn

Brz

GDP (Q1, q/q(y/y))

(13.00)

(08.00)

+0.5% (+1.7%)

-2.5% (-1.0%)

Brz

Primary Budget Balance (Apr, BRL)

(13.30)

(08.30)

-23.7bn

Brz

Nominal Budget Balance (Apr, BRL)

(13.30)

(08.30)

-79.7bn

Chl

Retail Sales (Apr)

(14.00)

(09.00)

(-14.9%)

Chl

Unemployment Rate (Apr)

(14.00)

(09.00)

8.2%

Chl

Industrial Production (Apr)

(14.00)

(09.00)

(+0.8%)

Col

Unemployment Rate (Apr)

(16.00)

(11.00)

12.6%

Col

Interest Rate Announcement (May)

3.25%

2.75%

2.75%

Selected future data releases and events

1st Jun

Col

Current Account Balance (Q1, US$)

-$3,523m

Per

Lima CPI (May)

(06.00)

(01.00)

+0.1% (+1.7%)

Chl

Economic Activity Index (Apr)

(13.30)

(08.30)

-5.7% (-3.5%)

Brz

Manufacturing PMI (May)

(14.00)

(09.00)

36.0

Mex

Manufacturing PMI (May)

(15.30)

(10.30)

35.0

Mex

IMEF Manufacturing (May)

(18.00)

(13.00)

40.5

Mex

IMEF Non-Manuf. (May)

(18.00)

(13.00)

35.5

Col

Monetary Policy Minutes

(19.00)

(14.00)

Brz

Trade Balance (May, US$)

(19.00)

(14.00)

+$6,702m

3rd Jun

Brz

Industrial Production (Apr)

(13.00)

(08.00)

-9.1% (-3.8%)

Brz

Markit Services PMI (May)

(14.00)

(09.00)

27.4

Uru

CPI (May)

(18.00)

(13.00)

+2.0%(+10.9%)

4th Jun

Ecu

CPI (May)

(15.00)

(10.00)

+1.0% (+1.0%)

Arg

Industrial Production (Apr)

(20.00)

(15.00)

(-16.8%)

5th Jun

Chl

CPI (May)

(13.00)

(08.0)

0.0% (+3.4%)

Uru

Unemployment Rate (Mar)

(18.00)

(13.00)

10.5%

*m/m(y/y) unless otherwise stated; † = previous day

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

Table 1: GDP & Consumer Prices (% y/y)

Share of

World1

2009-18

Ave.

GDP

Consumer Prices

2019

2020f

2021f

2022f

2019

2020f

2021f

2022f

Brazil

2.4

1.3

1.1

-8.0

3.5

2.0

3.7

2.8

3.0

3.5

Mexico

1.8

2.2

-0.1

-8.0

5.0

2.0

3.6

3.0

3.5

3.5

Argentina

0.6

1.0

-2.2

-5.0

2.5

1.0

53.5

45.0

35.0

30.0

Colombia

0.6

3.5

3.3

-7.0

5.0

2.0

3.5

3.5

3.8

3.5

Chile

0.4

3.1

1.1

-5.0

6.0

3.0

2.3

3.0

2.3

3.0

Peru

0.3

4.4

2.2

-8.5

11.0

3.5

2.1

1.8

2.5

3.0

Venezuela

0.2

-5.6

-40.0

-25.0

5.0

10.0

19,906

20,000

3,200

1,000

Ecuador

0.1

2.9

0.1

-6.5

3.0

2.0

0.3

-1.0

0.5

0.5

Uruguay

0.1

3.5

0.2

-6.0

3.0

2.0

7.9

9.0

8.5

8.0

Latin America2

6.5

2.0

0.7

-7.4

4.5

2.0

3.4

2.8

3.0

3.4

Sources: Refinitiv, Capital Economics. 1) % of GDP, 2019, PPP terms (IMF estimates). 2) GDP Excl. Venezuela; Consumer Prices Excl. Argentina & Venezuela.

Table 2: Central Bank Policy Rates (%)

Policy Rate

Latest

(22nd May)

Last Change

Next Change

Forecasts

End
2020

End

2021

Brazil

Selic Target

3.00

Down 75bp (May ‘20)

Down 50bp (Jun. ’20)

2.50

3.00

Mexico

Overnight Rate

5.50

Down 50bp (May ‘20)

Down 50bp (Jun. ‘20)

5.00

4.50

Colombia

Intervention Rate

3.25

Down 50bp (Apr. ‘20)

Down 50bp (May ’20)

2.75

2.75

Chile

Overnight Rate

0.50

Down 50bp (Mar. ‘20)

Down 25bp (Q3 ‘20)

0.25

0.25

Peru

Reference Rate

0.25

Down 100bp (Apr. ‘20)

Up 25bp (2022)

0.25

0.25

Sources: Refinitiv, Capital Economics

Table 3: FX Rates vs. US Dollar & Equity Markets

Currency

Latest

(22nd May)

Forecasts

Stock Market

Latest

(22nd May)

Forecasts

End
2020

End

2021

End
2020

End

2021

Brazil

BRL

5.56

5.25

4.75

Bovespa

82,057

89,750

103,750

Mexico

MXN

22.7

23.0

21.0

Bolsa

35,490

38,800

43,200

Argentina

ARS

68.0

90.0

115.0

Merval

41,627

37,000

44,000

Colombia

COP

3,775

3,800

3,700

COLCAP

1,057

1,370

1,610

Chile

CLP

804

800

750

IPSA

3,718

4,250

4,900

Peru

PEN

3.42

3.35

3.20

S&P/BVL

15,432

17,700

20,100

Sources: Refinitiv, Capital Economics


William Jackson, Chief Emerging Markets Economist, william.jackson@capitaleconomics.com
Quinn Markwith, Latin America Economist, quinn.markwith@capitaleconomics.com

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