Macro Analysis /

BancTrust & Co. LAC Daily Comments 17 March 2023

  • Costa Rican Central Bank pioneers interest rate cuts in the region

  • Ecuador opposition lawmakers filed a request to impeach President Lasso

  • Panama’s Finance Minister acknowledges “creativity” to meet fiscal targets

Ramiro Blazquez
Ramiro Blazquez

Head of Research and Strategy

Francisco Schumacher
Federico Cuba
Bruno Gennari
BancTrust & Co.
17 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.


Central Bank hikes rates after February inflation surprise

The Central Bank of Argentina (BCRA) lifted the monetary policy rate by 300bps to 78%, following 6 months without changes. The monetary authority also raised the minimum rate for term deposits to 78% from 75%. The hike comes after February CPI surprised to the upside, posting a 6.6% increase. With this rise, the monthly MPR stands at 6.5%, slightly above March's 6.1% inflation expectation print, but below February’s reading. Going forward, we think the central bank will hold rates around this level expecting some inflation slowdown to 6%, which would imply a real annual MPR of 5.7%. Although a sharp decrease in inflation is wishful thinking in the coming months, a moderation of beef prices could help inflation to converge towards the 6% zone. Indeed, in February overall inflation, excluding beef prices which jumped 30% m-o-m, increased by 5.4% m-o-m.

Gasoline pump prices increase by 3.8% nationwide 

Gas stations, including state-owned company YPF, announced a 3.8% increase in fuels nationwide as of yesterday. This is the last of the four increases agreed between gas stations and the government in November 2022, under the “Precios Justos” price agreement. In the coming months, we expect higher increases than those announced, as the adjustment mechanism agreed for the latest months resulted in increases below inflation. This will underpin the indexation of the economy, reducing the likelihood of slower inflation in the short term.

BCBA cuts further agricultural production due to the drought 

The Buenos Aires Grain Exchange (BCBA) cut its soybean and corn production forecast for this season, amidst the intense drought that hits the country. The BCBA cut 2022/23 soybean production by 4mm tn to 25mm tn and corn production by 1.5mm tn to 35mm tn. Based on these estimates, soybean and corn output this campaign would fall by 42.2% y-o-y and 30.7% y-o-y, respectively. According to our estimates, this lower agricultural production would imply a fall of USD19bn in exports, equivalent to 20% of last year’s exports.

Jujuy Governor launches his presidential candidacy

Jujuy Governor and leader of the Unión Cívica Radical (UCR) Gerardo Morales announced he would run for president in this year's election. It should be recalled that the UCR is a member party of the main opposition front Juntos por el Cambio (JxC). Hence, Mr Morales would compete in the JxC´s primaries with other pre-candidates of JxC such as Buenos Aires Mayor Horacio Rodriguez Larreta, former Home Office Minister Patricia Bulrrich and JxC’s lawmaker Facundo Manes. During the announcement of his presidential candidacy, Mr Morales stated that “JxC must place itself in the centre of the political spectrum, not on the right”.

Argentina market run


Protests rise on February

The Venezuelan Observatory of Social Conflict (OVCS) announced on Thursday that it documented a total of 762 public manifestations of unrest during February, for an average of 25 a day. The figure represents an increase of 18.7% y-o-y, as accelerating inflation and the lack of adjustment in the minimum salary and pensions forced a larger number of Venezuelans to the streets. Protests were registered in every state of the country and were mostly associated with economic, social, cultural and environmental rights (88.7% of the total), specifically labour compensation demands and public services complaints. Demonstrations related to civilian and political rights represented only 11% of the total. The government of Nicolás Maduro will have to concentrate efforts, in the short term, in resuming the disinflationary strategy adopted to exit hyperinflation so as to improve economic conditions ahead of the 2024 elections. Although imperfect, if the strategy is accompanied by a greater (and sustained) commitment to reducing monetary financing of the fiscal deficit, national authorities would be able to reduce the rate of depreciation of the exchange rate in a more sustainable way.


Relaxation of public finance controls debated in Parliament

Prime Minister Philip Davis said “there is no ulterior motive” behind the 2023 Public Finance Management Bill that was debated on Wednesday amidst criticism from the opposition. “Every change in the new bill either strengthens loopholes within the existing legislation or covers blind spots and addresses unintended consequences”, Mr Davis stated. He also said that the prior legislation had proven “unworkable” in practice because it was not adapted to the realities of The Bahamas. The PM´s statements came after the opposition´s finance spokesman Kwasi Thompson said  that the IMF had voiced serious concerns over legal reforms that seemingly reduce the Fiscal Responsibility Council´s independence. Once enacted, the new bill will repeal and replace the 2021 Public Finance Management Act, the 2018 Fiscal Responsibility Act, and sections of the Financial Administration and Audit Act. Among other things, the new legislation allows for temporary deviations from the government’s fiscal objectives and also relaxes the government's formal reporting requirements, which have not been met in a timely manner since the previous law came into force.

Bidders selected for the development of the Grand Bahama International Airport

Minister of Tourism, Investments and Aviation Chester Cooper unveiled that the new Grand Bahama International Airport will be developed by a Bahamian group, Aerodrome Limited, along with two other partners. The minister said that the project will be completed “no later than the end of 1Q25”. Moreover, he said that the project would cost USD200mn and will be funded through UK Export Finance. As a reminder, the development of the Grand Bahama International Airport is key for achieving the Grand Lucayan sale.


DLP President disappointed with PM Mottley’s budgetary proposals

Democratic Labour Party (DLP) President Ronnie Yearwood said the budgetary proposals and financial statement presented by Prime Minister Mia Amor Mottley were “the worst in history”. Mr Yearwood explained that the PM did not address the figures or the economic situation but instead spoke about objectives for 2030, which is not the purpose of a budget. Mr Yearwood also stressed that while there were no new taxes or tax hikes, the government’s decision not to cut several rates was bad news for Barbadians as the cost of living continues to rise. Finally, the DLP president expressed disappointment that neither the NIS reform nor the pension reform were addressed.


Standard and Poor's places Bolivia´s long-term sovereign credit ratings on CreditWatch on international reserves pressure

Standard and Poor´s placed its “B” long-term sovereign credit ratings on Bolivia on CreditWatch with negative implications. At the same time, the rating agency affirmed its “B”' short-term sovereign credit ratings. In the statement, S&P explained that the CreditWatch negative reflects the risk of a downgrade due to potentially increased external vulnerabilities given the ongoing loss of international reserves and a worsening of the sovereign´s external profile. In this context, the rating agency stressed that failure to restore public confidence “in a timely manner” could result in a continued decline in international reserves, which could further weaken external liquidity. On the flip side, S&P said it could keep the credit rating at its current level if the government were to take steps that reinforce policy credibility, containing the risk to the country´s external profile. The rating agency said it expects to resolve the CreditWatch within the next three months.

The Lower House approves USD139mn in credits from the CAF

The Lower House approved two loans totalling USD139mn from the Development Bank of Latin America (CAF) for road construction amidst a high need for dollars to bolster international reserves. Now, the two loans will pass to the Senate for discussion. It should be noted there are other loans under discussion that would unlock around USD600mn more, mainly a USD500mn credit line with the Inter-American Development Bank (IADB). On another note, Planning Minister Sergio Cusicanqui informed that the French Development Agency (AFD) granted Bolivia a credit line of EUR200mn (cUSD212mn) to support the Treasury. At a press conference, the minister said that this loan has already been approved by the Senate, which means that the government will be able to draw on these resources without the need for any additional approval.


BanRep co-director Villamizar showed concerns about risks of sharp economic slowdown 

Central bank (BanRep) co-director Mauricio Villamizar stated that the monetary policy stance is tight enough to bring inflation back to the 3%+/-1ppts target range by the end of 2024. “We are now thinking that we are at a sufficiently contractive monetary policy stance to reach the target in the medium term,” Mr Villamizar said according to Bloomberg. “This does not necessarily mean that we are done hiking, or that we can rule out reacting to unexpected shocks.”, he added. Mr Villamizar underscored that risks of a sharp economic slowdown are now greater than the threat of faster inflation. “We do see clear signs of a marked slowdown in domestic activity since the last quarter of last year,” Mr Villamizar said. “You can see that very clearly in imports, consumption and banking credit, for example.” He also noted that the effects of last year's rate hikes are still to be seen as monetary policy affects output after a lag of about 9 to 12 months. In this regard, he expects economic growth to slow to between 0% and 1% this year, down from 7.5% in 2022. Also, he expects inflation to slow to between 8% and 9% by the end of this year, supported by a fall in food inflation from 24% y-o-y to single digits by the end of the year. Finally, Mr Villamizar stated that a “monotonous path” for interest rates is generally preferable to avoid the perception of erratic moves and that the BanRep’s credibility remains strong despite it missed the inflation target in the last years.

Despite Mr Villamizar’s dovish tone, we expect the BanRep to continue tightening its policy rate by 50bps to 13.5% in the 30 March meeting. This is 25bps below our previous call following February’s inflation print, which showed core prices continue to increase at a relatively fast speed (1.4% m-o-m). Nevertheless, we believe that the moderation of inflation expectations for the next 12 and months to  7.2% and 3.6% could give the BanRep some space to smooth rate hikes. Still, our forecast is more aggressive than the median of market analysts surveyed by the BanRep, who expect a 25bps hike this month. In our view, further rate increases are needed to place the policy stance in neutral territory. After all, at the current 12.75% levels, the real monetary policy rate would reach -6.8% a.r. and -3.5% a.r., using February’s headline and core inflation as a benchmark. This compares negatively to the policymakers’ 2.2% estimate of the real neutral MPR. The ex-ante real policy rate is likely to remain negative, as core prices would likely remain high in March, boosted by the impact on tradable goods of the 3.9% weakening of the COP since February. Additionally, the last retail sales and industrial production gauges surprised for the upside,  a point that will likely be raised in the next policy meeting.   The recent deterioration of the external backdrop could also push authorities to take a more aggressive stance in the next meeting. 


Costa Rica central bank pioneered policy easing in the region with a 50bps cut in its monetary policy rate

Costa Rica's central bank (BCCR) cut its policy rate by 50bps to 8.5% on 15 March. This is the first cut after authorities concluded its tightening cycle in October 2022. The central bank argued that downward trending headline and core inflation gauges since September 2022 have been consistent with their disinflation path. They also highlighted that particularly sticky inflation expectations have been gradually converging to the 3%+/-1ppts inflation target. In this regard, the BCCR noted that expectations for the next 12 and 24 months stood at 5% and 4% in February, with the latter hitting the upper bound of the inflation target. In turn, authorities are more optimistic relative to private analysts, as they expect inflation to converge to the inflation target by end 2023, thanks to the drop in commodity prices and the slowdown of domestic demand following the central bank’s tightening. In this regard, authorities noted that the 4.2% y-o-y increase in the trend-cycle economic activity index in January, would not add inflationary pressures.   Finally, authorities underscored that there is upside risk on their inflation forecasts, mostly from the potential effects of an escalation of geopolitical tensions or from a slower policy tightening in advanced economies.

We were expecting that instead of cutting rates authorities would just start signalling policy easing given the new bout of global uncertainty. In this regard, we think that a further deterioration of the global backdrop could prompt BCCR to hold rates. On the other hand, in the event of a stabilisation of external financial conditions, we would look to BCCR shaving rates by another 50bps in the 20 April monetary policy meeting, as the policy stance continues to be significantly restrictive. In fact, the policy rate deflated with 12-month ahead CPI expectations and the last core inflation gauge (0.26% m-o-m) stands at 3.7% and 5.5%, well above the 1% neutral level estimated by the central bank. We are currently forecasting the MPR at 8.0% by year end, although, barring a further deterioration of external sentiment, the appreciation pressures on the CRC and the Board’s unexpected move pose downward risks to our projection.


Opposition lawmakers filed a request to impeach President Lasso

Opposition lawmakers filed yesterday an impeachment request against President Lasso. The proposal was signed by 59 lawmakers, surpassing the 46 signatures threshold required to begin the proceeding. Lawmakers argued in favour of impeaching Lasso under subsection 2 of article 129 of the Constitution, which includes the crimes of extortion, bribery, embezzlement, or illicit enrichment. President Lasso was allegedly “a participant in a corrupt structure to obtain benefits for himself and third parties”, according to a document obtained by Bloomberg News. Now President of the National Assembly (NA) Virgilio Saquicela will have two days to forward the request to the NA’s Legislative Administrative Council (CAL) for its review, which would later pass to the Constitutional Court (CC).  Afterwards, the CC will have six days to review and validate the petition, meaning its decision should be available by 26 March. If validated, the CC would notify the NA, and the Auditing Commission in the NA will have 30 days to elaborate a report recommending whether or not to proceed with the impeachment. Afterwards, the report will pass to the NA’s Plenary for its debate, which according to La Posta news outlet should be concluded by 13 May. 

The indigenous call other social sectors to join them in assessing the current situation  

Ecuador´s Native Communities Federation (CONAIE) invited non-indigenous organisations to join their gathering today. In a press release the CONAIE invited peasants, students, workers´ unions, professionals, environmentalists, farmers, and other social groups to review Ecuador's current economic, political, and social situation.

Two-thirds of the population want to call early elections according to Clima Social

According to a survey conducted by Clima Social, 82.7% of the population disapproves of the Lasso administration. In this context, 66% of those surveyed said the National Assembly (NA) should remove President Guillermo Lasso and that early elections should take place. The survey was carried out on 14 March and polled 3,000 people in the province of Pichincha.


One year after its implementation, El Salvador extends the state of emergency for one more month

The Legislative Assembly (LA) approved the extension of the state of emergency regime, which has been in force since March 2021, for an additional 30 days. Despite the controversy of the measure, it has boosted the population´s favourable opinion of Bukele´s administration. In this context, we expect authorities to continue extending the measure.


New reactions by key US congressmen while China and Taiwan reaffirm their stances

The Chairman of the US Senate Foreign Relations Committee Bob Menendez (D) warned that “Honduras’s decision to align with Beijing will have implications lasting long beyond the current leadership”. The US legislator went further by urging Hondurans “to be diligent in protecting their sovereignty and human rights even as they deepen relations with one of the world’s most autocratic regimes”. Meanwhile, a member of the US House of Representatives, Mario Diaz-Balart (R), was even harsher after stating, through social media, that “the decision of the Honduran government to restore relations with communist China is condemnable”.

The Chinese Foreign Ministry said during a press conference on Thursday that establishing relations with China would translate into more opportunities for Honduras to grow its economy and improve the well-being of its population. The spokesperson of the Ministry reiterated that, “under the principle of Only One China”, they are willing to establish friendly cooperative relations with every country. Also on Thursday, a representative from the Taiwanese Foreign Ministry said that its government will try “until the last minute” to preserve diplomatic relations with Honduras, reaffirming that the island would help the Central American nation “in everything possible”.

Economists Association rejects tax reform

The Honduran Association of Economists issued a public letter on Wednesday urging sectors involved in the discussion of the tax bill to embrace a technical and responsible dialogue, one that facilitates the adoption of a reform that guarantees legal security to investments. In particular, the professional organisation said that it was unadvisable to abruptly eliminate, in the short term, the fiscal regimes and exemptions currently in place, in order to limit uncertainty and negative impacts on economic activity and employment. The broad rejection of the draft reform bill by different sectors of the Honduran society suggests that national authorities will have to make major revisions to the proposed legislation in order to be politically viable in Congress.


TransJamaican Highway Ltd.’s (TRAJAM) senior secured notes revised to Positive from Stable by Fitch, following similar revision to Jamaica on 7 March

Fitch Ratings has revised the Rating Outlook for TransJamaican Highway Ltd.'s (TRAJAM) senior secured notes to Positive from Stable following a similar revision to Jamaica's sovereign Rating Outlook. Fitch has affirmed the rating at 'BB-'. The Rating Outlook revision of the Jamaican sovereign rating reduced the concerns of higher risk of controls on convertibility and the transfer of foreign currency to serve the debt, according to the report. TRAJAM's metrics are robust for the assigned rating according to applicable criteria, but the rating is ultimately constrained by Jamaica's country ceiling at 'BB-'.


Finance Minister shows optimism on fiscal consolidation, but acknowledges “financial creativity”

Economics and Finance Minister Héctor Alexander showed optimism on Wednesday about meeting the fiscal consolidation goal established for this year (deficit equivalent to 3% of GDP). Alexander underlined that the reduction of the fiscal disequilibrium from a level “slightly larger than 10% in 2020” to 3.9% in 2022 is helping to reduce the rate of growth of the country’s debt. The Minister explained that these dynamics have translated into “an important reduction of the debt-to-GDP ratio, which last year was below 60%”. Alexander referred to the swap operation that allowed the government to reduce interest expenses in 2022 by USD364mn, admitting that the government “has had to use financial creativity in a certain way (…) to stay in the road that benefits us in the management of public finances”. The operation has been criticised for delaying interest payments for future periods, when meeting lower fiscal deficit ceilings will be more demanding.

Consumption basket stable in February

After increasing at a relatively rapid rate of by 0.9% m-o-m in January, the Consumer Price Index showed stability in February (0.0% m-o-m). After this outcome, annual inflation declined to 2.0%, from 2.7% in the first month of the year. Note, however, that the behaviour of prices among the different consumption groups was somewhat heterogeneous, with an increase of 3.2% m-o-m in “Education” during the month being offset by declines of 0.4% m-o-m and 0.1% m-o-m in the “Transport” and “Food and Beverages” categories.


Opposition candidate Efraín Alegre leads vote intentions according to Atlas Intel

According to a survey conducted by pollster Atlas Intel, opposition candidate Efraín Alegre from the Concertación Alliance would be leading vote intentions ahead of the 30 April presidential elections. According to the poll, Mr Alegre would obtain 38.2% of votes, followed by the Colorado´s party (ANR) candidate Santiago Peña with 36.1% and Paraguayo “Payo” Cubas from Cruzada Nacional with 14.3%. The remaining candidates would obtain 6.5% of votes, while 0.8% of the surveyed would vote blank or null and 4.2% preferred not to answer. The study was carried out between 10 and 13 March and polled 1,600 people.

Consumer Confidence dropped in February

The Consumer Confidence Index (ICC) dropped 4.7% m-o-m to 52.8 in February, reversing the 9.7% m-o-m increase observed in January. Despite the decline, it remained above the neutral region of 50. Optimism about the current economic situation deteriorated in February, as the Economic Situation sub-index fell 4.3% m-o-m to 37.5. Additionally, optimism about future economic conditions also deteriorated, as the Economic Expectation sub-index dropped 5.2% m-o-m to 68.2. However, it should be noted that, at these levels, economic expectations remain very optimistic.


Communities encroached a station of the NorthPeruvian Pipeline

Petroperú informed on Thursday that community groups invaded the Morona Station of the North-Peruvian Oil Pipeline, in an attempt to pressure national authorities to answer their social demands. The company alerted about the risks of the action for surrounding communities, workers, and the oil transportation infrastructure of the country. The pipeline is the largest in Peru and it is key for the normal supply of crude (100k bpd) to the country’s refining facilities in the Pacific coast.

Hunt Oil Peru (HNTOIL) ratings affirmed at 'BBB' by Fitch, on solid credit metrics, low capex needs, strong long reserve life, and its strategic importance for Peru.

Fitch Ratings has affirmed Hunt Oil Peru (HNTOIL) ratings at 'BBB'. The Rating Outlook is Stable. According to the report, the ratings incorporate the company's manageable capex investment plan required to maintain the reserve life of blocks 88 and 56 due to the nature of the fields and amounts invested in the past (approximately 8% of cumulative EBITDA over the past three years). The ample reserve life of Camisea's blocks 88 and 56 and steady production levels at a low production cost, support the company's strong cash flow generation.

As of December 2022, debt to EBITDA was 0.8x, down from peak 2.7x at ye2020. Fitch expects HOCP's leverage to remain at around 1.0x over the rating horizon. The company also reported low leverage when measured as total debt to equity-adjusted proven reserves of approximately USD1.6/boe, sizeable reserves, and stable production levels, according to Fitch.

Fitch analysts explained that the ratings incorporate Camisea's strategic importance for Peru (IDR: BBB/Negative) as it provides 85% of the country's natural gas supply, 40% of the effective power of the electrical interconnected system (SEIN) and 92% of the country's thermal power. The ratings reflect the long-term license agreements expiring in 2040 and 2044 for blocks 88 and 56 and the large reserve base of Camisea.


The IMF expects growth to be supported by new energy projects

The IMF concluded its Article IV Consultation on Trinidad and Tobago. In the official statement, the Fund highlighted the recovery of the economy last year, supported by the non-energy sector, which was partially offset by an unexpectedly weak performance of the energy sector. In this sense, real GDP is estimated to have expanded by 2.5% in 2022, according to the Fund. Looking forward, the multilateral institution commented it expects the economy to gain broad-based momentum in 2023 with a 3.2% GDP expansion, boosted by the development of new energy projects. This figure is 0.9ppt below our 2023 GDP forecast (See our 2023 Year Ahead Outlook: Lingering challenges, 16 December 2022).  Nevertheless, the Fund warned that potential growth could slow down to 1.5% if these projects do not materialise. On the fiscal side, the IMF remarked that higher global energy prices and prudent consolidation measures contributed to a fiscal surplus last year but warned of a fiscal deterioration over the medium-term. In line with our view the Fund expects both the fiscal and external positions to deteriorate in 2023. The IMF now expects the overall fiscal deficit to swing from a 0.3% of GDP surplus in FY22 to a 2.8% of GDP deficit in FY23, mainly due to lower energy revenues. Finally, the IMF also expects a weaker external position in the context of declining prices, resulting in a narrower current account surplus this year (6.6% of GDP versus 18.9% of GDP in 2022).

Net international reserves contract in February

Net international reserves decreased by USD72.2mn (-1.1% m-o-m) in February and stood at USD6.75bn. With this reading, net international reserves accumulated a contraction of USD78.7mn (-1.2%) since the beginning of the year. Despite the fall, they stood above February´s 2022 levels by USD104.7 (+1.6% y-o-y). Finally, according to the Central Bank of Trinidad and Tobago, net international reserves now cover 8.5 months of imports.

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.