Macro Analysis /

BancTrust & Co. LAC Daily Comments 16 March 2023

  • Honduras seeks to restore diplomatic relations with China

  • National Assembly declassifies documents to shore up impeachment against President Lasso

  • Activity surprises to the upside in Colombia, raising odds of further rate hikes

Ramiro Blazquez
Ramiro Blazquez

Head of Research and Strategy

Federico Cuba
Juan Sola
César Alexander Petit
BancTrust & Co.
16 March 2023
Published byBancTrust & Co.

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* Our tactical positioning is based on the rebalancing of our latest portfolio recommendation against the EMBIG Index’s weights of the credits we track. For more on this, please check LatAm and Caribbean Fixed Income Strategy: “Home-grown factors back on the front burner”, 10 February.


BCRA keeps selling dollars in the spot market amidst lower agricultural export due to the draught

The Central Bank of Argentina (BCRA) sold yesterday USD87mn in the spot market, accumulating USD639mn in sales MTD. YTD, the monetary authority has sold USD1.1bn, compared with USD237mn bought in the same period last year. This, together with dollar debt servicing, resulted in a drop of USD4.4bn to USD3.4bn in net reserves YTD. In light of the decline in exports due to the drought and the real appreciation of FX, we see increasing risks of further import repression to stem this steady drain on reserves. 

Argentina market run


Opposition growingly impatient about release assets for the humanitarian fund

A report by Reuters on Wednesday revealed that Venezuelan opposition leaders are growingly impatient about the process to distribute resources to the UN-administered humanitarian fund agreed with the government last November. The agency’s sources indicated that complex US clearance processes have delayed the transfer of funds. According to the article, letters have been sent to the US administration demanding the release of funds, but American authorities have only replied saying that the process would soon be completed. One of the sources pointed out that US and European representatives told the opposition leaders that there must be a replacement for Guaidó to authorise the transfers. The report also indicates that the opposition has held meetings with US authorities in Washington as part of the efforts to move small amounts of the country’s external resources while avoiding creditors..


The current account deficit stood at 14.3% of GDP and evidenced fundamental weaknesses

The current account posted a USD719mn (5.6% of GDP) deficit in 4Q22, compared to the USD816mn (7.3% of GDP) deficit registered in 4Q21. With this result, the current account deficit amounted to USD1,848mn (14.3% of GDP) in 2022, improving from the USD2,532mn deficit recorded in 2021. This outcome was slightly better than our current account deficit forecast of 15.6% of GDP. The improvement of the current account in 4Q22 compared to 4Q21 was mainly explained by the USD290.8mn (2.3% of GDP) rise in the travel balance that reached a USD816.8mn surplus. The higher tourism surplus was partially compensated by a USD135.4mn widening of the trade deficit compared to the same period last year, which stood at USD805.7mn. Both the primary income and secondary income balances of the current account remained virtually unchanged. The current account deficit was mainly financed during the last quarter of the year through the USD611mn reduction of international reserves and USD225mn in net FDI inflows. 

Notably, the level of FDI inflows was the highest for a quarter since 2Q18, but it was not enough to offset the bad year as net FDI inflows stood at 2.4% of GDP, the lowest level since 2002. In this regard, the authorities argue that the decline in FDI is driven by deficiencies in the statistical system that no longer record some real estate transactions. In the authorities' view, this is the flip side of higher Net errors and omissions in the balance of payments. It is worth highlighting that the Net errors and omissions account printed USD988.4mn in 2021 and was lowered to USD638.8mn last year. Despite this improvement, it remains at high levels, representing 5% of GDP in 2022. 

In our view, this result still evidences the weakness of the country's external account dynamics. As a reminder, stopover tourists reached 100% of pre-pandemic levels, while the sector is already showing signs of bottlenecks due to the lack of room supply. This means that this would be the best performance the current account can offer given current relative prices, which could end up forcing a devaluation of the BSD in the absence of new external financing.

Economic affairs minister in favour of implementing the 15% global minimum tax

Economics Affairs Minister Michael Halkitis stated that The Bahamas could collect some USD140mn (c1% of GDP) in revenue by adopting the OECD´s 15% global minimum tax on large companies operating in the country. Speaking at a panel discussion at the annual RF Economic Outlook conference, the minister said The Bahamas is fully within its right to reject the global minimum tax proposal. However, Mr Halkitis stressed that to do so would be to waste an important opportunity to increase revenue. In this context, Minister Halkitis acknowledged that “implementing the global minimum tax will require a tremendous amount of capacity building as this nation does not have a traditional corporate income tax or personal income tax”. Finally, he commented that the global tax would reach multinational enterprises with revenue of EUR750mn or higher. These statements go in the opposite direction of the government's plans to increase revenue to 25% of GDP without the need to create new taxes.


PM Mottley presented the Budgetary Proposals for FY 2023/2024

Prime Minister Mia Mottley presented the Budgetary Proposals for the upcoming fiscal year (April 2023-March 2024). During her speech, PM Mottley highlighted that the budget for FY23/24 featured no new taxes while it proposed several initiatives to enhance the management and control of SOEs. The proposals for the next fiscal year also included the intention of establishing an EXIM Bank of Barbados to offer a suite of trade, finance and insurance solutions to boost the growth of the Barbados export sector by providing critical access to finance. Also, the government would create a Blue-Green Investment Bank that would facilitate blue-green investment in the region. To point out, PM Mottley announced that the Government will restart domestic capital market operations with the introduction of new instruments such as Reverse Auctions and a Bonds-on-demand facility at commercial banks. On another note, Ms Mottley commented that the initial prospectivity analysis suggested that “there may be as much as over 42 trillion cubic feet of gas or 13 billion barrels of undiscovered oil” and said that until the international community becomes willing to pay for keeping the natural gas unexploited, the government would concentrate on gas as a clean energy bridge for the transition to net-zero emissions. To this end, the government will relaunch a new offshore bid round and would also seek bilateral partnerships. Finally, the Prime Minister explained that she made no mention of the OECD’s Global Minimum Corporate Tax in her proposals since there was “still much evolving on both sides of the Atlantic” while she assured that this issue will be addressed within six months. 

As a reminder, a month ago the government presented the Estimates of Revenue and Expenditure for FY23/24 (April 2023-March 2024). Back then, the government of Barbados budgeted an overall fiscal deficit of BBD179.9mn, equivalent to 1.4% of GDP, in line with the IMF targets. The Estimates of Revenue and Expenditure for FY23/24 featured no external bonded debt issuance for the next fiscal year. Instead, the BBD844mn financing needs (USD422mn) would be covered by a mix of IFI loans (55%) and domestic debt (45%).


Authorities disagree with Fitch´s decision to downgrade Bolivia´s rating

The Ministry of Finance expressed its disagreement with Fitch´s decision to downgrade Bolivia´s rating. In a press release, authorities said that the rating agency “did not take into account the strengths of the Bolivian economy, mainly stability, after suffering the impact of the pandemic”. In this sense, authorities stated that net international reserves will show a positive variation supported by higher exports of urea, lithium carbonate, iron, electricity and non-traditional products. In addition, they commented that pending loan disbursements, support from the export sector and the priority of maintaining resources, together with the “gold law”, will allow Bolivia to get through this delicate situation.


Retail sales post positive growth in January versus expectations of annual contraction

Retail sales increased 1.2% y-o-y in real terms in January, beating expectations of a 1.5% y-o-y decline according to the consensus of the Bloomberg survey and reversing the 1.8% y-o-y fall observed in December. The improvement was driven by higher purchases of footwear (14% y-o-y), alcoholic beverages and tobacco (12.8% y-o-y), clothing (10.1% y-o-y), accessories for vehicles (8.4% y-o-y) and cosmetics (7.1% y-o-y). In turn, lower purchases of pharmaceutical products (-17.1% y-o-y) and household appliances (-10.3% y-o-y) partially offset the overall growth. Finally, retail sales excluding fuels increased 0.7% y-o-y in real terms, while excluding both fuel and vehicles there was a 2.8% y-o-y real expansion. It should be noted that after adjusting for seasonality retail sales rose 2.8% m-o-m, recovering from the 3.4% m-o-m plunge posted in the previous month. Similarly, excluding fuels and vehicles, sales rose 2.6% m-o-m s.a., improving relative to the 1.6% m-o-m fall in December. 

Industrial production rose 0.8% y-o-y, beating expectations of output stability

The industrial production index (IPI) rose 0.8% y-o-y in January, slightly accelerating from the 0.7% y-o-y increase recorded in December. According to the statistical bureau DANE, manufacturing production rose 0.2% y-o-y beating expectations of a stable output according to the consensus of the Bloomberg survey. The improvement in industrial activity was led by the rises in electricity and gas supply (2.7% y-o-y) and mining (2% y-o-y), which compensated for the fall in sewage (-0.7% y-o-y).


Economic activity decelerated in January

The seasonally adjusted series of the economic activity index (IMAE) remained stable in January (0% m-o-m), decelerating relative to the 0.9% average m-o-m rise recorded in 4Q22. According to the central bank (BCCR), the increases in manufacturing (1.1% m-o-m s.a.) and construction (1.2% m-o-m s.a.) offset the falls in agriculture (-2.2% m-o-m s.a.), transport (-4.1% m-o-m s.a.), lodging and restaurants (-6.8% m-o-m s.a.) and communications (-2.8% m-o-m s.a.). Finally, the IMAE increased 4.8% y-o-y, which compares favourably relative to the 3.4% y-o-y rise in December.


Remittances continued to rise in February, although at a slower pace

Remittances continued their growth trend in February, although at a slower pace, as they increased 2.1% y-o-y to USD764mn, from a 5.6% y-o-y rise in January. With February´s reading, remittances accumulated a 3.9% y-o-y increase to USD1.56bn in the first two months of the year.


The National Assembly approved declassifying information to shore up impeachment charges against President Lasso

The National Assembly voted on 13 March to declassify documents tied to investigations into allegations of corruption in state-owned companies, in a bid to shore up impeachment charges against President Guillermo Lasso. "We have unanimously approved both the lifting of the classification of the information from the Superintendency of Companies - the box was opened in our presence - and the lifting of the classification of the logs from the presidency," Pachakutik party lawmaker Darwin Pereira told journalists. The information is not yet available to the public, but according to journalist from La Posta Andersson Boscán, it will show that Hernan Luque, former CEO of state-owned corporate holding EMCO who fled the country in January, visited President Lasso several times. This would be at odds with President Lasso’s statements suggesting he had little relation with Mr Luque, one of the main characters in the corruption scandals in state-owned companies. It should be mentioned that lawmakers from the ruling coalition showed no resistance to the disclosure of information, as the proposal was approved by unanimity. 

President Lasso removed two generals after knowing they sought to discard a sensitive investigation

President Lasso removed two generals from the National Police on 13 March. The government’s decision followed the unveiling of broadcasting material made by La Posta news outlet, showing these generals asked to close an investigation carried out by the anti-drug division to protect the government, according to daily La Hora. The investigation, which was dismissed by the Attorney General's Office and reopened recently, suggested Rubén Cherres, a close friend of Mr Lasso’s brother-in-law Danilo Carrera, appears involved in an alleged corruption scheme in public companies denounced by the “Great Godfather” investigation. In an official press release, the government emphasised President Lasso did not request the dismissal of the investigation, and that he even requested the Attorney General to reopen the investigation after it was made public. 


President Bukele's approval rating improves further along with the positive perception on his security policy

According to a survey conducted by newspaper La Prensa Gráfica, President Nayib Bukele´s approval rating stands at 91%, improving by 3ppts compared to December´s survey. As in the previous polls, respondents highlighted the government´s policies in terms of security, with 89.7% saying that crime has been reduced in El Salvador. In this sense, 66.7% of those surveyed agreed that President Bukele has fulfilled his campaign promises. On the other hand, the population´s opinion about the economy was not so positive, as only 40.5% of respondents said President Bukele´s policies have helped to improve the economic situation in the country. The population’s strong approval of the government’s security policy reinforces our view that the government would focus its electoral campaign on this front rather than on a meaningful fiscal push, as we noted in our El Salvador Economics and Strategy Report: Bukele’s success in fighting crime bodes well for fiscal accounts and bonds, 15 March.


Castro instructs Chancellor Reina to start actions to establish relations with China

President Xiomara Castro announced late on Tuesday, through social media, that she had instructed Chancellor Eduardo Reina to pursue the opening of diplomatic relations with China. Castro indicated that the decision showed her determination to continue carrying out the government’s plan and “expand Honduras’ frontiers with freedom”. Indeed, restoring relations with China was one of her main campaign promises. Chancellor Reina later offered further details about the decision, affirming that the government aimed for larger trade and investment flows. He revealed that the Executive had looked for larger financial support from Taiwan, but that it did not find it. Reina stated that authorities wanted to “reformulate the relationship with Taiwan”, and that he expected trade and aid support to continue. Honduras’ Chancellor also mentioned that the government did not want to lose “the good relationship with the United States”. In this regard, US Senator Bill Cassidy (R) showed his rejection of Castro's decision and his concern regarding the rapprochement with China. Domestically, the head of the National Party in Congress Tomás Zambrano described the decision as a “direct confrontation with the United States”.

Soon after the news, China officially welcomed the decision by Xiomara Castro. The Asian government stated that it would establish a relationship with Honduras under the condition that it abides to the principle of “Only One China”. This would obviously imply a rupture of relations with Taiwan. 

Meanwhile, Taiwan Foreign Minister issued a communication urging the Honduran government to carefully reconsider the situation and “not fall into China’s trap”, making an erroneous decision that could put at risk the bilateral relationship. The Taiwanese Executive indicated that its country has offered help and assistance to Honduras for more than 80 years, in which it has demonstrated to be a trustable partner and a contributor to Honduras development, to the best of its capacities. An eventual break of relations between Honduras and Taiwan would reduce the number of countries that recognise the island to 13. In addition to Honduras, only Guatemala and Paraguay in the Latin American region have relationships with Taiwan, after Costa Rica broke with the island in 2006, Panama in 2017, Dominican Republic and El Salvador in 2018, and Nicaragua in 2021. The decision by the Honduran government occurs, however, at a particularly delicate conjuncture, when tensions between the US and China over Taiwan are at historically high levels.

UN calls for constructive dialogue on tax reform

United Nations representative in Honduras Alice Shackelford called on Tuesday for a constructive dialogue about the proposed tax reform. Shackelford recalled that the 2030 Agenda of Sustainable Development Goals incentivised countries to broaden its tax base and use it with efficiency and efficacy. The UN representative emphasised that a progressive tax reform was critical to eradicate poverty and inequality.


Inflation decelerates to 7.8% y-o-y in February

The CPI printed a 0.5% m-o-m increase in February, reversing from a 0.6% decline in January. Notwithstanding the volatility of monthly figures, inflation stood at 7.8% y-o-y, slowing down from 8.1% y-o-y in January and recording the lowest annual pace since December 2021. The result was mainly driven by a 2.7% m-o-m increase in the Housing, Water, Electricity, Gas, and Other Fuels sub-index, due to higher electricity tariffs, partially offset by a 2.4% m-o-m decline in Vegetable prices. This result is in line with what we expected in our 2023 Year Ahead Outlook: “Lingering challenges”, 16 December 2022, as inflation started to decelerate soon after the spikes in the last quarter of last year. This outcome also supports the decision taken by the Bank of Jamaica (BOJ) back in November to keep the monetary policy rate (MPR) at 7% until the transmission mechanisms had a full impact on the economy. According to the last BOJ’s Inflation expectations survey, 12-month ahead inflation expectations remain well above both annual inflation and the target rate (5% +/- 1%) at 11.5% in November 2022. Therefore, we see no reason for the BOJ to cut the MPR in the following meeting, since the expected real MPR stands at -4% (the BOJ estimates the real neutral MPR range at 0% +/- 2.6%). We expect the monetary policy rate to remain at 7% for the remainder of the year, making the BOJ adopt a tighter stance and a positive real MPR as inflation recedes throughout 2023. In this vein, we see inflation returning inside the 5% +/- 1% target rate by end-2023. The next monetary policy decision is set for Wednesday 29 March.


Japan to continue financing Metro expansion

The Executive Cabinet approved on Wednesday subscribing a new loan with the Japan International Cooperation Agency (JICA), this time for USD692.8mn, to continue executing the Line 3 expansion project of the Panama Metro (project progress: 35%). The contract is part of the financing agreement signed in April 2016, which established a credit line for up to USD2.6bn for this plan, making it the second most important infrastructure project in the country’s history after the Canal. The decision was communicated on the same day that national authorities inaugurated Line 2 of the transport system, which connects the centre of Panama City to the country’s main international airport. The construction of new Metro lines has been an important driver of Panama’s economic expansion in recent years, one that would probably allow the country to continue growing above its long-term potential in the short and medium term.


Economy contracts in January; employment partially recovers in February

The monthly national production estimate built by the National Statistics Institute (INE) showed a contraction of 1.1% y-o-y in January. The decline was larger than expected by local private agents, according to a survey implemented by Bloomberg, where participants forecasted, on average, a decrease of 0.9% y-o-y. However, the drop was less acute than the projection made last week by a high-ranked executive of Peru’s Central Bank, who estimated a 1.4% contraction. The social crisis directly affected the performance of several sectors, most notably construction (-11.7% y-o-y), telecommunications (-9.3% y-o-y), and financial services (-6.0% y-o-y). The key mining and hydrocarbons sector also fell, but by a lower amount (-3.6% y-o-y). The economy was partially supported by the resiliency of manufacturing (+1.1% y-o-y), commerce (+1.2% y-o-y), and hotels and restaurants (+8.0% y-o-y). On a more positive note, the unemployment rate diminished in February to 7.3%, after the jump to 8.0% observed in the first month of the year. The negative (but economically favourable) gap with the rate observed in the same month of last year widened (in absolute terms) to 1.6 pp, after dropping to just 0.6 pp in January. The improvement in labour conditions constitutes a positive signal that points to a rapid recovery from the shock caused by the most recent episode of national unrest.

Executive introduces bill to finance economic recovery

The Executive Cabinet presented to Congress, on Wednesday, a bill that proposes several supplementary credits to finance the increase in government expenditures in 2023, for up to PEN8.2bm (USD2.1bn). The increase in spending is part of the government strategy to reactivate the economy after the social crisis and to face emergency outlays caused by recent adverse climate conditions. The public policy measures covered range from direct support to households’ consumption to regional and local investment projects. This new set of fiscal policy actions imply a government impulse of approximately 0.8% of the country’s 2023 projected GDP.


Minister Young reports progress in development of promising gas field

Energy Minister Stuart Young informed that Trinidad and Tobago signed a non-disclosure agreement with the Venezuelan government in the next step of the ongoing negotiations to activate the Dragon gas field, located in Venezuelan territorial waters. “The agreement governs the negotiations between the parties and the exchange of information as we progress the technical and commercial aspects of the planned development”, Mr Young said in a media release. In this regard, the minister commented that the Venezuela team was led by President of state-owned company PDVSA Pedro Rafael Tellechea, who was accompanied by other key members of PDVSA. To keep in mind, the project will allow Trinidad and Tobago to increase its natural gas production by 150 million standard cubic feet per day, approximately 5.7% of Trinidad and Tobago´s total daily production.

Our Latest Reports:  

El Salvador Economics and Strategy Report: Bukele’s success in fighting crime bodes well for fiscal accounts and bonds, 15 March

Argentina Flash Report: “Treasury leaks a misleading swap result, as private sector participation disappoints”, 10 March

Venezuela Economics and Strategy: “Our views on 9 critical issues for bondholders”, 9 March

Argentina Fixed Income Strategy: “Provincial fundamentals take the front seat”, 03 March

Ecuador Flash Report: “More pain to come”, 01 March

Panama Economics and Strategy: “The risk of fiscal mirage”, 28 February

Venezuela Economics and Strategy: “Moderation, the essential ingredient for a feasible transition”, 14 February

LatAm and Caribbean Fixed Income Strategy: “Home-grown factors back on the front burner”, 10 February

Peru Economics and Strategy: “Relative spreads to deteriorate further as politics remain unsupportive” 07 February

Ecuador Flash Report: “Reduce exposure on bonds as governability is set to deteriorate”, 06 February

Trinidad and Tobago Fixed Income Strategy: “TRITOB 24s: A story of overstated risks”, 03 February

Ecuador Flash Report: “Court rules to uphold tax reform and reduces fiscal uncertainty”, 02 February

Ecuador Economics and Strategy: “Political risk back to the spotlight”, 26 January

Venezuela Economics: “Chevron’s strong start and the outlook for the Venezuelan oil sector”, 23 January

Argentina Flash Report: "Massa pulls another rabbit out of the hat", 18 January.

Venezuela Economics and Strategy: “A key year for the opposition and for bondholders”, 16 January

Argentina Economics and Strategy: “The new elephant in the room”, 12 January

Argentina Flash Report: “Little upside on BUEAIR 27 from Supreme Court ruling”, 21 December 2022

2023 Year Ahead Outlook: “Lingering challenges”, 16 December 2022

BancTrust & Co. Research & Strategy Team.