Protests in Ecuador, soft Latam inflation - Capital Economics
Latin America Economics

Protests in Ecuador, soft Latam inflation

Latin America Economics Weekly
Written by Quinn Markwith

Intensifying anti-austerity protests in Ecuador have threatened the government’s reform agenda and caused bond spreads to widen this week. But even if the government does water down its fiscal plans, we think it’s most likely that spreads will narrow before too long. Elsewhere, soft inflation figures out of Brazil and Mexico this week support our view that another 50bp of rate cuts are likely in each country by the end of the year.

 

Crisis in Ecuador rages on

Intensifying anti-austerity protests in Ecuador caused bond spreads to widen this week and threaten to dilute the government’s agenda. For now, though, we think that the government will be able to navigate this turmoil with significant fiscal savings still intact.

Some have drawn comparisons with previous protests, which forced presidents to resign in 1997, 2000, and 2005. The spreads of government dollar bonds widened by 100bp this week. And if the experience of 2005, when then-President Lucio Gutiérrez was ousted, is anything to go by, spreads could widen by a further 100bp. (See Chart 1.)

Chart 1: Spread of JP Morgan Ecuador EMBI Index over US Treasuries (T= Date Protests Escalated)

Sources: Refinitiv, Capital Economics

However, these are important differences between the current situation and those in which presidents were toppled. The 1997 and 2000 protests followed severe banking and sovereign debt crises; the economy was already in a much poorer state. And on all three occasions the protestors had the support of an opposition-controlled congress and key figures in the military. This time, both the legislature and the army are behind the president.

The president is open to concessions. The most likely outcome is that he will water down the reforms agreed with the IMF in March. The government has wiggle room to do so after reining in the budget deficit from 8% of GDP in 2016 to less than 1% now. And given that progress with fiscal consolidation, it seems likely that the IMF would remain on board.

All told, so long as these concessions appease protestors, dollar bonds are likely to rally. (For more see here).

Peru holds rate, leaves door open for more

Peru’s central bank surprised analysts by leaving rates at 2.50% on Thursday, citing a recovery in growth. The statement was dovish and noted a downside bias to inflation and the need to keep policy expansionary. While we expect that growth will recover in H2 2019, we see a window for cuts over the coming months. But with only two meetings left this year, we are taking out one of our 25bp cuts, meaning that we now expect the policy rate to go to 2.25% by year end (rather than 2.00%.)

Mexico & Brazil: Weak inflation will prompt cuts

Figures released this week showed that inflation slowed in the region’s two largest economies in September. Inflation in Brazil slipped to a softer-than-expected 2.9% y/y, which we think will prompt policymakers to cut the Selic rate from 5.50% to 5.00% on 30th October. (We’d previously expected a 25bp cut, see here.) Mexican inflation came in at 3.0%, as was widely expected. This supports our view that the central bank will cut its key rate by 25bp at the next two meetings, taking it to 7.25% by the end of the year. (See here.)

The week ahead

It’s a quiet week ahead. We expect September Argentina inflation to show a pick up.


Latin America Weekly Diary

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Time (EDT)

Previous*

Median*

CE Forecasts*

14th Oct

Brz

Economic Activity Index (Aug)

(13.30)

-0.2%

-0.1% (+0.6%)

15th Oct

Per

Economic Activity (Aug)

(+3.3%)

(+3.3%)

(+3.5%)

Per

Unemployment Rate (Sep)

5.8%

6.0%

Col

Retail Sales (Aug)

(16.00)

(11.00)

(+8.5%)

(+7.0%)

16th Oct

Ecu

Unemployment Rate (Q3)

5.6%

5.6%

Arg

National CPI (Sep)

(20.00)

(15.00)

+4.0% (+54.5%)

+4.0% (+50.8%)

17th Oct

No Significant Data Releases

18th Oct

Col

Trade Balance (Aug, US$)

(16.00)

(11.00)

-1088.4m

Col

Industrial Production (Aug)

(20.00)

(15.00)

(+3.1%)

(+3.0%)

Selected future data releases and events

21st Oct

Arg

Budget Balance (Sep, ARS)

+13746m

22nd Oct

Mex

Unemployment Rate (Sep)

(12.00)

(07.00)

3.6%

Col

Economic Activity Index (Aug)

(20.00)

(15.00)

3.7%

Arg

Trade Balance (Sep, US$)

(20.00)

(15.00)

+4440m

23rd Oct

Chl

Interest Rate Announcement

(22.00)

(17.00)

2.00%

24th Oct

Mex

Bi-weekly CPI (15th Oct)

(12.00)

(15.00)

Brz

Current Account Balance (Sep, US$)

(14.30)

(09.30)

-4274m

Arg

Economic Activity Index (Aug)

(20.00)

(15.00)

+1.2% (+0.6%)

25th Oct

Mex

Retail Sales (Aug)

(12.00)

(07.00)

0.0% (+2.1%)

*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

2007-17

Ave.

GDP2

Consumer Prices3

2018

2019

2020

2021

2018

2019

2020

2021

Brazil

2.5

2.1

1.1

0.8

2.0

1.8

3.7

3.8

3.3

3.5

Mexico

1.9

2.1

2.0

0.3

1.0

2.0

4.9

3.6

3.0

3.1

Argentina

0.6

2.3

-2.5

-2.0

-2.0

1.0

34.3

55.0

60.0

60.0

Colombia

0.6

4.1

2.6

3.0

2.3

2.3

3.2

3.5

3.8

3.5

Chile

0.4

3.4

4.0

2.0

3.5

3.5

2.7

2.2

2.3

3.5

Peru

0.3

5.5

4.0

2.5

4.0

4.0

1.3

2.1

2.2

3.4

Venezuela

0.2

-0.6

-19.4

-30.0

-10.0

10.0

65,374

34,000

20,000

3,200

Ecuador

0.1

0.2

1.4

-0.5

0.5

1.5

-0.2

0.5

1.0

1.0

Uruguay

0.1

0.1

1.6

0.0

-0.5

1.0

7.6

7.0

6.0

5.0

Latin America3

6.9

2.4

1.5

0.7

1.5

2.0

3.7

3.5

3.0

3.3

Sources: Refinitiv, Capital Economics. 1) % of GDP, 2018, PPP terms (IMF estimates). 2) Excl. Venezuela. 3) Excl. Argentina & Venezuela.

Table 2: Central Bank Policy Rates (%)

Policy Rate

Latest

(11th Oct.)

Last Change

Next Change

Forecasts

End
2019

End
2020

End

2021

Brazil

Selic Target

5.50

Down 50bp (Sep. ’19)

Down 50bp (Oct. ’19)

5.00

5.00

5.00

Mexico

Overnight Rate

7.75

Down 25bp (Sep. ’19)

Down 25bp (Nov. ’19)

7.25

6.75

6.75

Colombia

Intervention Rate

4.25

Down 25bp (Apr. ’18)

Up 25bp (Dec ‘19)

4.50

4.75

4.75

Chile

Overnight Rate

2.00

Down 50bp (Sep. ‘19)

Down 25bp (Oct. ‘19)

1.50

1.25

2.50

Peru

Reference Rate

2.50

Down 25bp (Aug. ’19)

Down 25bp (Dec. ‘19)

2.25

2.25

3.00

Sources: Refinitiv, Capital Economics

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

Currency

Latest

(11th Oct.)

Forecasts

Stock Market

Forecasts

End
2019

End
2020

End

2021

Latest

(11th Oct.)

End
2019

End
2020

End

2021

Brazil

BRL

4.11

4.30

4.25

4.25

Bovespa

101,817

93,000

104,000

111,250

Mexico

MXN

19.41

20.5

19.5

19.5

Bolsa

42,929

38,900

44,300

47,400

Argentina

ARS

57.92

65.0

90.0

100.0

Merval

31,743

27,000

32,000

38,000

Colombia

COP

3,428

3,650

3,450

3,450

IGBC

12,874

11,530

12,640

13,530

Chile

CLP

713

735

685

670

IPSA

5,056

5,000

5,550

5,950

Peru

PEN

3.36

3.45

3.25

3.20

S&P/BVL

19,034

20,800

23,100

24,700

Sources: Bloomberg, Capital Economics


Quinn Markwith, Latin America Economist, +44 20 7808 4072, quinn.markwith@capitaleconomics.com