Fiscal paths, Brazil’s uneven recovery, Argentine GDP - Capital Economics
Latin America Economics

Fiscal paths, Brazil’s uneven recovery, Argentine GDP

Latin America Economics Weekly
Written by Quinn Markwith
Latin American governments have started to outline the direction of fiscal policy from 2021, which support our relatively upbeat view on the prospects for Chile’s recovery. While parts of Brazil’s economy have shown signs of a strong pick-up in recent weeks, the government’s plans for harsh austerity from next year suggest that its overall recovery will lag behind.

Fiscal paths point to diverging recoveries

The governments of Brazil, Colombia and Chile have recently outlined plans that shed light on the path of fiscal policy beyond this year, which is likely to result in diverging recovery prospects.

At one end of the spectrum, Chile’s government announced its third round of stimulus last week, worth $12bn (around 5% of GDP), to be spent over the next two years. At the other end, Brazil’s treasury secretary Mansueto Almeida was reported this week as saying that a fiscal squeeze of 4% of GDP will be needed in the coming years.

Colombia lies somewhere in the middle – its government is clearly not too concerned about fiscal consolidation as it has decided to remove its deficit limit until 2022. This chimes with our view that Colombia is unlikely to unwind stimulus as quickly as most expect. (See here.)

These plans largely reflect the health of each governments’ public finances coming into the crisis and point to a divergence in the pace of their economic recoveries. The degree of fiscal support makes us relatively optimistic on Chile. And it appears that Colombia will avoid the sort of abrupt return to austerity that plagued the recoveries of Central European economies in the aftermath of the global financial crisis. But the Brazilian governments’ appetite for austerity points to a sluggish recovery at best. Moreover, we doubt that austerity will be politically sustainable for long and suspect that policymakers will turn to interventionist tools like financial repression to keep borrowing costs low instead. (See here).

Shining a light on Brazil’s recovery

Data published over the past few weeks show that the nascent recovery underway in Brazil is lopsided, with retail doing better than industry.

We already know that the hit from the coronavirus and containment measures varied widely across sectors. Car production and tourism were essentially at a standstill in April. But mining and some services (like ICT) held up well. (See here.)

High frequency data published in the central bank’s quarterly Inflation Report this week showed that tourism and car sales remained depressed up to the second week of this month. But sales of some durable goods – furniture and domestic electrical goods – have picked up sharply. And sales of non-durable goods appear to have returned to pre-coronavirus levels by mid-June.

Overall, while retail spending and construction seems to be making a relatively quick recovery, most manufacturing sectors are lagging behind. On balance, the risks to our view for an 8% fall in GDP this year look skewed slightly to the upside.

The IMF, Argentina and debt sustainability

The IMF’s latest macroeconomic forecasts made headlines this week for their downbeat tone. In many cases, they now sit closer to our own views. One point that seems to have slipped under the radar is that the Fund’s new forecasts for Argentina must surely challenge its previous assessment that public debt would become sustainable with the government’s recent restructuring offer.

As we noted before, that assessment was based on macroeconomic forecasts made in March, which included a forecast of a mere 2.3% fall in GDP this year. (See here.) The Fund now expects output to contract by 9.9% (similar to our own forecast of 10.0%). So even while there has been some positive news recently on debt talks, additional or larger restructurings may be needed.

The week ahead

We think Colombia’s central bank will cut its policy rate by a further 50bp when it meets next week. The manufacturing PMIs for June for Mexico and Brazil will probably confirm that recoveries in their industrial sectors remain weak.


Data Previews

Colombia Interest Rate Announcement (June) Tue. 30th Jun.

Forecasts

Time (BST/ET)

Previous

Consensus

Capital Economics

Policy Rate

2.75%

2.25%

2.25%

Another cut on the cards

We expect that Colombia’s central bank will cut its policy rate by 50bp, to a record low of 2.25%, when it meets next Tuesday.

All the incoming data strengthen the case for further rate cuts. Headline inflation fell from 3.5% in April to 2.9% in May. And expectations are also coming down – the central bank’s survey of analysts shows that 2020 inflation expectations have fallen to 2.2%, from 3.0% previously.

At the same time, coronavirus containment measures are having a big impact on activity. The central bank’s monthly ISE activity monitor (which has a close relationship with official GDP figures) contracted by 20.1% y/y in April. Our Taylor rule, which models the path for interest rates based on macroeconomic variables, also points to further easing. (See Chart 1.)

All told, we expect a 50bp cut in the policy rate, to 2.25%. Further out, we think there might be scope for the central bank to cut the policy rate to 2.00%. (See here). That’s a little more easing than is currently priced into financial markets.

Chart 1: CE Colombia Taylor Rule & 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*

29th Jun

Arg

Economic Activity Index (Apr)

(20.00)

(15.00)

-9.8%(-11.5%)

30th Jun

Col

Interest Rate Announcement

2.75%

2.25%

2.25%

Mex

Budget Balance (May, MNX, YTD)

-73.9bn

Brz

Unemployment Rate (May)

(13.00)

(08.00)

12.6%

13.2%

Brz

Budget Balance (May)

(13.30)

(08.30)

-115.8bn

Chl

Retail Sales (May)

(14.00)

(09.00)

(-31.3%)

Chl

Unemployment Rate (May)

(14.00)

(09.00)

9.00%

9.8%

Chl

Industrial Production (May)

(14.00)

(09.00)

(-3.8%)

Col

National Unemployment Rate (May)

(16.00)

(11.00)

19.8%

Arg

Current Account Balance (Q1)

(20.00)

(15.00)

+$2,984m

1st Jul

Per

Lima CPI (Jun)

(06.00)

(01.00)

+0.2%(+1.8%)

0.0%(+1.6%)

0.0%(+1.9%)

Chl

Economic Activity Index (May)

(13.30)

(08.30)

-8.7%(-14.1%)

Brz

Markit Manufacturing PMI (Jun)

(14.00)

(09.00)

38.3

Mex

Markit Manufacturing PMI (Jun)

(15.30)

(10.30)

38.3

Mex

IMEF Manufacturing Index (Jun)

(18.00)

(13.00)

39.2

Mex

IMEF Non-Manufacturing Index (Jun)

(18.00)

(13.00)

38.0

Col

Monetary Policy Meeting Minutes

(19.00)

(14.00)

Brz

Trade Balance (Jun)

(19.00)

(14.00)

+$4,548m

2nd Jul

Brz

Industrial Production (May)

(13.00)

(08.00)

-18.8%(-27.2%)

+7.5(-20.0)

Chl

Monetary Policy Meeting Minutes

(13.30)

(08.30)

3rd Jul

Brz

Markit Services PMI (Jun)

(14.00)

(09.00)

27.6

Uru

CPI (Jun)

(18.00)

(13.00)

+0.6%(+11.1%)

4th Jul

Col

CPI (Jun)

(18.00)

(13.00)

-0.3%(+2.9%)

+0.3%(+2.9%)

Selected future data releases and events

6th Jul

Ecu

CPI (Jun)

(15.00)

(10.00)

-0.3%(+0.8%)

7th Jul

Chl

Trade Balance (Jun)

(13.30)

(08.30)

+$1,403m

Uru

Unemployment Rate (Apr)

(18.00)

(13.00)

10.1%

Arg

Industrial Production (May)

(20.00)

(15.00)

(-33.5%)

8th Jul

Brz

Retail Sales (May)

(13.00)

(08.00)

-16.8%(-17.5%)

Chl

CPI (Jun)

(13.00)

(08.00)

-0.1%(+2.8%)

9th Jul

Mex

CPI (Jun)

(12.00)

(07.00)

+0.4%(+2.8%)

Mex

Monetary Policy Meeting Minutes

(15.00)

(10.00)

10th Jul

Per

Interest Rate Announcement

(00.00)

(19.00)†

0.25%

Mex

Industrial Production (May)

(12.00)

(07.00)

-25.1%(-29.3%)

Brz

IBGE Inflation IPCA (Jun)

(13.00)

(08.00)

-0.4%(+1.9%)

Also expected during this period:

9th – 13th

Per

Trade Balance (May)

-$679m

*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

-0.3

-8.0

5.0

2.0

3.6

3.0

3.5

3.5

Argentina

0.6

1.0

-2.2

-10.0

5.5

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

3.2

2.9

3.5

Chile

0.4

3.1

1.1

-5.0

6.0

3.0

2.3

3.0

2.2

2.5

Peru

0.3

4.4

2.2

-8.5

11.0

3.5

2.1

1.8

1.8

2.5

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

11.0

9.5

8.0

Latin America2

6.5

2.0

0.6

-7.9

4.8

2.0

3.4

2.7

2.9

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

(26th Jun.)

Last Change

Next Change

Forecasts

End
2020

End

2021

Brazil

Selic Target

2.25

Down 75bp (Jun. ‘20)

Down 25bp (Aug. ’20)

2.00

3.00

Mexico

Overnight Rate

5.00

Down 50bp (Jun ‘20)

Down 50bp (Aug. ‘20)

4.00

4.00

Colombia

Intervention Rate

2.75

Down 50bp (May ‘20)

Down 50bp (Jun. ’20)

2.00

2.50

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

(26th Jun.)

Forecasts

Stock Market

Latest

(26th Jun.)

Forecasts

End
2020

End

2021

End
2020

End

2021

Brazil

BRL

5.47

5.00

5.25

Bovespa

95,607

109,677

126,945

Mexico

MXN

22.9

21.5

21.5

Bolsa

37,738

41,741

46,459

Argentina

ARS

70.2

90.0

115.0

Merval

41,996

50,991

61,189

Colombia

COP

3,746

3,500

3,400

COLCAP

1,122

1,350

1,585

Chile

CLP

811

725

700

IPSA

4,031

4,363

5,032

Peru

PEN

3.50

3.20

3.10

S&P/BVL

16,688

19,357

21,967

Sources: Refinitiv, Capital Economics


Quinn Markwith, Latin America Economist, quinn.markwith@capitaleconomics.com