Morning Note /

Latam Daily: Regional growth outlook starting to dim

  • Talking Points: Mexico and Brazil growth slowing, Colombia remains a standout for now

  • Forex: Latam FX may be pressured by rising geopolitical tensions

  • Fixed Income: Peru dollar bonds under pressure, regional CDS spreads rise

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Danny Greeff
Daron Hendricks
Kieran Siney
ETM Analytics
14 February 2022
Published byETM Analytics

Talking Points: Mexico and Brazil growth slowing, Colombia remains a standout for now

Brazil: It is a quiet start to the week in terms of economic data. As always, the start of the new week does bring with it the BCB’s weekly Focus survey, which will provide the latest forecasts for GDP, inflation, the Selic rate and FX. Given the lack of domestic data, the focus in the session ahead is centred on the tensions between Russia and Ukraine.

All eyes were on the central bank’s economic activity print on Friday. The central bank said that economic activity expanded by 0.33% m/m in December, less than the 0.50% forecast by economists. This meant that Brazil’s economy expanded by 4.5% in 2021, according to the central bank’s main gauge of activity. However, we are waiting for the official figures to be released on March 4 to confirm how strong the economic recovery was last year. Going forward, risks to the outlook for Brazil are skewed to the downside amid rising interest rates, surging omicron infections and record-high household debt. That said, BCB President Campos Neto said that economists who predicted 0% growth for 2022 will have to revise growth higher, adding that recent data shows an improvement in commerce and industry. Campos Neto noted that consumer confidence is still below pre-pandemic levels but is improving.

Mexico: Mexico's industrial production expanded faster than expected in December, implying that the country's fourth-quarter economic data may be revised slightly higher. According to data released by the country's statistics institute on Friday, industrial production increased by 3% y/y compared to 1.6% y/y in the month prior, exceeding a 2.1 y/y estimate by analysts in a Bloomberg survey. Recall that the local economy fell 0.1% q/q in the fourth quarter, putting the country in recession after a previous contraction in the third quarter, based on last month’s preliminary estimate. The increase in industrial production may help improve the final GDP figures, which will be released on February 25. Despite an improved performance in the final month of the year, overall conditions for the industry remain challenging. In this regard, there are issues on multiple fronts, including existing supply chain constraints, broad price pressures and an increase in COVID-19 cases.

According to a monthly survey released on Friday, the Mexican Institute of Financial Executives, or IMEF, reduced its economic growth estimate for 2022 from 2.7% to 2%, owing to the above challenges. The IMEF expects inflation to rise to 4.4% this year, up from 4.3% previously estimated. From a monetary policy perspective, the analysts forecast the central bank’s end-of-year reference rate to be 6.75%, up from 6.5% earlier. In terms of monetary policy, economists expect the central bank's end-of-year reference rate to be 6.75%, up from 6.5% before, implying 75bps worth of interest rate hike risk.

Colombia: Colombian President Ivan Duque is in Europe to meet with NATO Head Jens Stoltenberg and EU Foreign Policy Chief Joseph Borrel today. This forms part of the president's tour through the continent to address international issues. The meetings hold limited market-moving potential, however, with global focus currently on Russia-NATO tensions around Ukraine, while domestic focus will be on economic data with December trade, industrial, and retail stats scheduled for release.

The trade stats are expected to reflect a large, but slightly improved trade deficit of $1.2bn for December. This month-on-month improvement is expected to be due to both higher exports and lower imports, although imports remain extremely elevated due to Colombia's strong economic performance of late and will continue to weigh on the country's currency.

The retail sales data, meanwhile, are expected to show a notable improvement in growth from 7.4% y/y to 12.0% y/y. The year-on-year print may, however, mask a slight month-on-month decline, which would be consistent with expectations for Colombia's economy to be losing some momentum more broadly after a spectacular rebound from the pandemic.

Chile: The Central Bank Chief Rosanna Costa has ruled out an emergency meeting following the high January inflation reading which had some market participants calling for swift action. She did however confirm that tighter monetary policy is on the horizon, Bloomberg quoted the following - “We’re concerned about the evolution of inflation and this is going to require adjustments in monetary policy,” the newspaper cited Costa as saying, “Achieving convergence to the target will require a different monetary policy.” The bank stated earlier last week that it has rejected a 175 bpt hike at the last meeting for fear of causing confusion amongst the investment community. We view the risks as certainly tilted to an aggressive move at the next meeting which only comes at the end of March 2022.

The plight of truckers and rising crime in the northern parts of Chile which has been blamed on migrants is a social issue that will undoubtedly be in the spotlight for the foreseeable future. Chilean truck drivers have lifted the blockades in northern and central Chile which have been in place since a local trucker died when three Venezuelans threw rocks at his rig because he refused to give them a ride. The government has assured the truckers that new safety measures will be put in place. The incoming President Gabriel Boric will be under pressure to deliver a sustainable solution as voters expressed concerns about migration and crime during the elections last year.

Peru: BCRP Chief Economist Armas was on the wires on Friday, warning that greater political instability could further lower business confidence and reduce investment in the economy. Armas did, however, suggest that the central bank has a high response capacity to deal with such a situation. Furthermore, the economy is back at pre-pandemic levels going by the December and January economic data while employment levels increase by around 5.4% y/y in December, according to the central bank, which corroborates the case for it to keep normalizing policy by hiking rates.

Speaking of political instability, we had Peru's congressional constitutional commission approve a bill that would leave President Castillo with even less power and more vulnerable. The bill eliminates the mandatory vote of confidence when the PM presents his Cabinet to Congress. The bill still needs to be approved by Congress, but there is little doubt that it would fail to pass. It has been some time in the making now but is more or less confirmed. Congress retains its power to impeach a president on the grounds of moral incapacity, but the President has very little power now to influence Congress.

Forex: Latam FX may be pressured by rising geopolitical tensions

Brazil: While the BRL ended relatively flat on Friday, it was another week of gains for the local unit. Last week marked the fifth straight week of gains for the BRL, with the local currency gaining 1.44% against the USD even as global risk sentiment took a blow amid growing tensions between Russia and Ukraine. Underpinning the bull run in the BRL in recent weeks has been the sustained rally in international commodity prices, which is helping to support Brazil’s trade account, and expectations for the BCB to hike rates further as it continues with its fight against inflation. While the BRL will find it tough to break below the 5.2000 mark, we remain bullish on the local unit..

Mexico: The MXN finished the week on a high note, closing at 20.5376/USD after initially rising to a two-week high of 20.3633/USD. The strengthening of the local currency was partially offset by increased risk aversion as a result of the escalation of tensions between Russia and Ukraine, as well as the expectation of accelerated tightening of monetary policy in the US following the January inflation data. Despite this, the MXN ended the week with back-to-back weekly gains. The MXN is nearly unchanged on year-to-date basis, with a small loss of 0.04%. Trading is cautious at the start of the new week, putting the MXN, among other risk assets, on the back foot. In the coming session, the local currency may weaken towards the 50-and-100-dayDMA’s around 20.6700/USD.

Colombia: Despite a 0.25% retreat on Friday, the COP still closed last week 0.65% stronger than it started, just north of 3930/$. With this move, the COP finds itself closer to the middle of its recent trade range, with the market still lacking significant momentum at present. The COP is looking comfortable consolidating between its 100-session and 50-session moving averages, and will require a strong catalyst to trigger a new trend.

Chile: The USD-CLP had a tight trading day on Friday with the pair closing marginally higher at 808.65. Not much to report back on for the day to be fair. The EU session has seen a slight shift to risk off with the likes of the TRY and RUB trading weaker, ZAR and MXN flat to mildly weaker suggesting a measured start for the session.

Peru: The USD-PEN rebounded on Friday following Thursday's plunge. Weaker copper prices and risk-off trading conditions led to some dip buying on the pair, which closed the week at 3.7755. Risk conditions remain tetchy this morning, and we could well see the pair open higher once again. Liquidity levels, meanwhile, could remain fairly low which will leave the pair open to bouts of volatility.

Fixed Income: Peru dollar bonds under pressure, regional CDS spreads rise

Brazil: The flattening bias in the bond market intensified on Friday as commodity prices, particularly oil, surged. This came on the back of hawkish comments from BCB President Campos Neto on Friday. Specifically, Campos Neto said that the central bank would use all of its tools to bring inflation to the target. The combination of the hawkish central bank comments and rebound in oil prices saw yields on the front-end of the curve notch higher with the 2yr yield, for instance, climbing 12bps to end the day at 12.08%. While we expect the flattening interest to persist in the months ahead, we do see scope for some steepening in the curve in the second half of the year, with inflation pressures expected to moderate against the backdrop of expectations for increased fiscal and political risk as Brazilians go to the polls.

Mexico: On Friday, a few Mexican bonds were offered, notably the 1yr, 3yr, and 5yr tenors, as investors assessed the global economic background amid mounting fears that Russia could attack Ukraine at any time, sending investors back to safe-haven government bonds they had been dumping all year. The yield curve had pushed 10bps – 15bps higher by the end of the week, notably from the 3yr out to the 15yr tenor. Meanwhile, the USD 5yr CDS spread increased from 107bps to 114.8bps, the most since November 2021. Mexico's political risk has risen in the last month, raising the risks associated with Mexican bonds. The CDS market-implied default probability over the next five years is at 7.02%, according to ICE data.

Colombia: The Colombian yield curve remains under notable bear-flattening pressure, with the 2-year tenor at the short-end of the curve, for instance, adding more than 60bps to its yield last week. Investors are positioning for aggressive monetary policy action for the months ahead, both in Colombia and in financing nations. This has also been evident in the IRS market, where spiking rates suggest there are no signs of the uptrend coming to an end anytime soon. More of the same is expected in the sessions ahead, especially if data out of Colombia come out stronger than expected over the next two sessions.

Chile: Payers remained active on the bond curve which given the reassessment of the trajectory of rates coupled with the increased fiscal pressures as the economy slows does not surprise. The 2030 bond finished a whisker below the 6.00% mark, while the shorter dated 2024 bond is marking time just ahead of the 6.65% mark. Overall it is difficult to see a full scale reversal of the bearish undertone until we get some positive signs that the economy is able to withstand the monetary tightening that is undoubtedly a feature of the first half of 2022 at the very least.

Peru: Nothing much to report back on in terms of movements along the local yield curve on Friday, highlighting how there were no real surprises at Thursday's BCRP decision. Dollar bond yields, meanwhile, rose across the board with the curve flattening out. Yields at the nearest end of the curve were up around 6bp, with the 2026 tenor yield still surging to record highs. The trend is likely to remain entrenched and we could see the 2.800% mark tested very soon with eyes on the big 3.000% figure.