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LatAm Macro MonthlyScenario Review
November 2013
Please refer to the last page of this report for important disclosures, analyst and additional information. Ita Unibanco or itssubsidiaries may do or seek to do business with companies covered in this research report. As a result, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should not consider thisreport as the single factor in making their investment decision.
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Global EconomyEasier Monetary Conditions to Extend into 1Q14 3We believe that the Fed will wait for stronger evidence of an improvement in economic activity,before reducing its monetary stimulus.
BrazilConstraints for further fiscal expansion 6The room for further fiscal and quasi-fiscal policy expansion has narrowed. Our 3Q13 GDPforecast went through a slight upward revision, contributing to a rise in our estimates for GDPgrowth in 2013 and 2014.
Mexico
An Unbalanced Recovery 11The economy is recovering, but growth has been unbalanced, with exports up and internaldemand down. The lower house introduced positive changes in the tax reform bill.
Chile
Easing Cycle to Continue 14Consumption decelerated in September and several fundamentals point to below-trend growth.The central bank cut the interest rate in October and there is more to come.
Peru
Growth Slows, Composition Changes 17Growth continues to slow, but business confidence improved in September, indicating that thedeceleration will not be steeper than contemplated in our scenario.
ColombiaAn Important November on Peace Negotiations 19November 18th is the deadline for the government and the FARC to announce a peaceagreement. This is a key issue for President Santos to decide if he will be a candidate in nextyears elections.
Argentina
Falling Reserves and Political Shake-Up 21The opposition gained an important victory against Kirchnerism in the mid-term election, on theroad to the 2015 presidential election.
Commodities
We Expect an Additional Drop in Sugar Prices 24
Fundamentals explain just some of the past gains in sugar prices, so we expect further reversal inprices. WTI discount to Brent crude will probably remain wide until early 2014.
Macro ResearchIta
Ilan GoldfajnChief Economist
Tel: +5511 3708-2696E-mail:[email protected]
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A window of opportunity for the Emerging
Markets
The Fed signaled that it would not start tapering its monetary stimulus this year. Economic data has
been showing only a moderate recovery, particularly in the labor market. The Fed is likely to wait for
stronger evidence of an improvement before reducing its monetary stimulus, probably in March next
year.
The Feds tapering delay and improving growth numbers in Europe and China have created a more
favorable liquidity environment for emerging markets. Financial inflows resumed, opening room for
lower interest rates, a stronger exchange rate or both.
In Latin America, Mexico and Chile reduced their interest rates in October, while Peru made another
cut in its reserve requirements for local currency deposits. We expect further interest rate cuts in
Chile and Colombia this year. The monetary policy reaction should help reverse the decelerating
trend observed in the region. Country-specific factors, such as the tax reform approval in Mexico, a
possible peace agreement with the FARC in Colombia, and a recovery in business confidence in
Peru will also contribute to the reversal.
In Brazil, the higher global liquidity is reflected in the appreciation of the real, a movement that has
been reinforced by the central banks FX derivatives sales program. We have maintained our forecast
for the exchange rate by year-end at 2.35 reaisper dollar. For the end of next year, our forecast is
now 2.45 reais per dollar, from 2.55 previously. The current data suggests a slight improvement in
economic activity, which led us to revise up our GDP growth 2014 from 1.7% to 1.9%. Higher interest
rates and expected reduction of quasi-fiscal stimuli in 2014, however, cap the pace of recovery.
In Argentina, the highlight is the government's defeat in the October mid-term elections. The result
makes it difficult for the government to pursue a constitutional reform that would allow Cristina
Kirchner to be elected to a third term. Given the uncertainties regarding the economy and the loss of
international reserves, we expect a further tightening of FX controls and acceleration in the official
exchange rate depreciation.
Hope you enjoy,
Ilan Goldfajn and Macro Team
Current Previous Current Previous Current Previous Current Previous
GDP - % 2,8 2,8 3,3 3,3 GDP - % 2,6 2,5 2,7 2,7
Current Previous Current Previous Current Previous Current Previous
GDP - % 2,4 2,3 1,9 1,7 GDP - % 1,3 1,3 3,6 3,6
BRL / USD eop 2,35 2,35 2,45 2,55 MXN / USD eop 12,8 12,8 12,0 12,0
Monetary Policy Rate - eop - % 10,00 10,00* 10,25 10,25* Monetary Policy Rate - eop - % 3,50 3,75 3,50 3,75
IPCA - % 5,8 5,9 5,9 6,0 CPI - % 3,6 3,6 3,7 3,5
Current Previous Current Previous Current Previous Current Previous
GDP - % 2,7 2,0 0,0 0,0 GDP - % 4,2 4,2 4,4 4,4
ARS / USD eop 6,1 6,1 8,2 8,2 CLP / USD eop 500 500 525 525
BADLAR - eop - % 21,0 21,0 25,0 25,0 Monetary Policy Rate - eop - % 4,50 4,50 4,00 4,00
CPI - % (Private Estimates) 28,0 28,0 35,0 35,0 CPI - % 2,2 2,2 2,6 2,6
Current Previous Current Previous Current Previous Current Previous
GDP - % 3,8 3,8 4,2 4,2 GDP - % 5,0 5,0 5,2 5,2COP / USD eop 1880 1880 1950 1900 PEN / USD eop 2,70 2,70 2,80 2,80
Monetary Policy Rate - eop - % 3,00 3,00 3,00 3,00 Monetary Policy Rate - eop - % 4,25 4,25 4,25 4,25
CPI - % 2,5 2,5 2,9 2,9 CPI - % 3,1 3,1 2,5 2,5
Scenario Review
Brazil Mexico
2013 201 4 2013 201 4
World Latin America and Caribbean
2013 201 4 2013 201 4
Argentina Chile
2013 201 4 2013 201 4
Colombia Peru
2013 201 4 2013 201 4
*We changed our forecast on October 17th, after the Copom minutes release.
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Global economyEasier Monetary Conditions to Extend into 1Q14
We expect the U.S. Fed to maintain the current pace of its monetary stimulus until March.
Meanwhile, we forecast growth in the U.S. to improve in 2014, while China has confirmed bettermomentum in 2H13 and Europe continues to stabilize.
With no material change in the world growth outlook, the prolonged monetary expansion in theU.S. should benefit emerging markets.
We now believe that the U.S. Fed will start tapering its asset-purchase program only in March
(we previously expected this in December). There is little evidence that activity is improving in 4Q13,
and the labor market has moderated in the second half of the year. We maintain our expectation that
growth will accelerate to 2.5% in 2014 from 1.5% in 2013. But we believe that the Fed will wait for
stronger evidence of an improvement before reducing its monetary stimulus.
China confirmed the pick-up in activity, with GDP up 7.8% yoy in 3Q13 compared with 7.5% in2Q13. We see some moderation in 4Q13, but overall, China is more supportive for world growth in
2H13.
In Europe, Spain returned to growth in 3Q13 after nine quarters of contraction , another sign that
the region has stabilized. Overall, the recovery in the euro zone is still incipient in an environment of
very low inflation. But Europe now contributes to world growth instead of being a drag, as was the
case until earlier this year.
With no material change in the world growth outlook, the prolonged monetary expansion from the
U.S. Fed benefits emerging markets. Financial inflows reaccelerate, creating room for interest-rate
cuts and/or for exchange-rate appreciation. Indeed, we believe that the central banks in Chile and
Colombia will feel more comfortable to go ahead with a further rate cut this year, as we expect. And inBrazil, the global environment favors a more appreciated Real at the end of the year than we
previously expected. Liquidity conditions would become less favorable next year, when the Fed finally
goes ahead with the QE tapering.
U.S. Fed likely to maintain current stimulus pace until March 2014
The U.S. Congress agreed to fund the federal government until January 15 and suspend the
debt limit until February 7. The solution came after a 16-day shutdown of the federal government
that increased uncertainty and reduced the public sector output in 4Q13. Moreover, the fiscal
uncertainty should remain relatively high at least until mid-January, when Congress has to approve
the budget to avoid another shutdown and a longer-term debt ceiling.
The economic impact of Octobers fiscal battle is not large but is enough to prevent theeconomy from accelerating significantly in 4Q13. We estimate that U.S. GDP grew 2.0%
(seasonally adjusted annual rateSAAR) in 3Q13. With the shutdown, we expect this moderate pace
to continue in the 4Q13 (see graph).
In addition, the labor market was showing some weakness even before the shutdown. The 3-
month-moving average of the non-farm payrolls decelerated to 143k per month in September. This is
significantly lower than the 223k of last April (see graph), right before FOMC members started to
signal a QE tapering this year.
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We now believe that the Fed will start reducing
the asset purchase program in March instead
of December. A 2% (SAAR) GDP growth pace is
below the FOMC forecast of 3% in 4Q13. We think
the Fed would be more comfortable to start
tapering once non-farm payrolls are over 180k,
instead of the less-than-150k level seen recently.
Moreover, the fiscal deal in October was short
term and hence keeps some uncertainty for 1Q14.
Finally, the shutdown has affected the collection
and release of economic data, reducing the
visibility of the pace of recovery. Overall, the
economy doesnt seem to have accelerated in
2H13 as might have been expected by the FOMC.
We think that the economy will pick up in 2014, but the Fed will likely wait for strong evidence before
slowing down its asset purchases.
We see balanced risks around the March tapering start. The last FOMC meeting statement reinforcedthat the asset-purchase program is data dependent. The economy could pick up in the coming
months and Congress address the fiscal issue by mid-December, leading the FOMC to start tapering
before March. However, there seems to be similar probability that the current economic fog will not
clear until March, leading the FOMC maintain its monetary stimulus longer.
We lowered our forecast for the 10-year Treasury to 2.65% from 2.80% at the end of 2013 but keep it
at 3.4% at the end of 2014. In terms of growth, we maintain GDP growth forecasts at 1.5% in 2013
and 2.5% in 2014.
ChinaFocus shifts to reforms as the pick-up in 3Q13 GDP is confirmed
Chinas 3Q13 GDP was 7.8% yoy, in line with expectations . This represents a considerableincrease in the pace of sequential growth to 8.8% qoq (SAAR) from 6.4% and 7.6% in 1Q13 and
2Q13, respectively.
Activity was strong in July and August, but has fizzled out slightly in September. September
industrial production was 10.2% higher than one year ago, compared with 10.4% in August. Urban
fixed-asset investment grew 20.2% year-to-date, compared with 20.3% in the previous month. Finally,
retail sales were up 13.3% yoy in September compared with 13.4% in August.
The NBS Purchasing Managers Index (PMI) increased to 51.4 in October from 51.1 inSeptember. The improvement suggests a good start to activity in 4Q13, although we still expect
some moderation toward the end of the year.
With the 7.5% growth target for 2013 almost assured, policymakers in China are moving to a
more neutral stance and focusing on structural reforms. Activity was better in 3Q13 as
policymakers signaled more support to short-term activity after the slowdown seen in the first half.
Now, the official 7.5% growth target for 2013 is all but assured. Hence, we see the PBoC fine-tuning
its communication and liquidity policy to a more neutral stance in 4Q13, compared with 3Q13.
Overall, policymakers have also shifted the emphasis of their statements toward maintenance of
policies in 2H13 and a focus on structural reforms.
The Communist Partys Third Plenary Session in November will be an important focal point forreforms. We do not expect to see details for implementation, but broad outlines for policy direction
for the next few years. These will likely focus on the structure of the government, tax reforms,financial liberalization, the household registration system, measures to improve the productivity of the
private sector and ways to increase the influence of market forces in the economy.
100
120
140
160
180
200
220
240
260
280
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
Source: BEA, Ita
qoq SAAR thousandsper month
Forecasts
Economy to improve in 2014 (but the Fed will wait)U.S. GDP and Non-Farm Payroll
GDP (left)
Payroll (3-monthsmoving average)
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We maintain our growth forecasts at 7.7% and 7.3% for 2013 and 2014, respectively.
Spain returns to growth
In Spain, GDP increased 0.1% qoq in 3Q13 after
nine quarters of contraction (see graph). Net
exports are the main driver of growth in the country,
but domestic demand is also stabilizing. We believe
that Spain has exited its prolonged recession.
The country is the fourth largest economy in the euro
area and was strongly hit by the debt crisis. We see
its return to growth as another sign that the
region has stabilized.
Euro zones inflation slows further,bringing back discussion of a rate cut
The euro zones CPI declined to 0.74% yoy in October from 1.10% in September. Lower energyand food inflation were the main culprits, but services inflation also weakened in the month. Overall,
the picture of low inflation in the euro area has sharpened.
We see the ECB on hold, but this further decline in inflation from an already low level creates
a significant risk of easing in December. Although the full breakdown of Octobers CPI is not yet
available, we suspect that one-off factors prevailed. If so, the ECB could look beyond this recent fall
in inflation and stay put. However, the composite PMI in October declined to 51.5 from 52.2 in
September. Given this very-low-inflation environment, another weak PMI in November would tilt the
balance towards further easing.
CommoditiesWe expect an additional drop in sugar prices
The Ita Commodity Index (ICI) remained roughly flat in October, falling 0.4% through the
month. The breakdown shows small changes in all sub-indexes: agricultural (-1.8%), metals (0.5%)
and energy (0.0%). Among single commodities, the main highlights were the rise of sugar and the fall
of WTI crude oil prices.
Overall, there were no major data releases or changes to fundamentals in October to prompt
strong moves in prices or adjustments to our forecasts. The fiscal uncertainty in the U.S. was
resolved without a major impact in the growth outlook. The activity pickup in China was confirmed in
3Q13, but we (and the market consensus) continue to see it as temporary. Moreover, the shutdown of
the federal government in the U.S. created a vacuum of commodity-specific data in the month. Major
agencies, like the USDA, DOE and CFTC, have delayed their data releases.
Sugar prices rose a strong 7.5% until October 18, before reverting part of the gains and
closing the month 1.0% up. The movement followed the 5.1% gain seen in September. The
increase is consistent with the global deficit we forecast for the 2H13. But the outlook is for the global
surplus to resume in 1H14. This explains the partial reverse in the end of October. We believe the
adjustment is not over and, hence, we see additional drops in sugar prices ahead.
Supply conditions for corn and soybean improved, with favorable weather for the harvest in
the U.S. and planting in Brazil. It didnt change our forecasts, but it reduced upside risks to prices in
both markets.
The Energy ICI remained unchanged as the increase in Brent prices was offset by the decline
in WTI prices. The WTI discount to Brent widened to USD 12.0/bbl in late October from an average
of USD 4.5/bbl in September as Crude oil surpluses returned to Central U.S. (i.e. inflows greater than
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
2010 2011 2012 2013
Spain Exits its RecessionSpanish GDP growth
Source: Eurostat, Haver
qoq
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use and outflows to the Gulf Coast and East Coast). Outflow capacity is expected to outpace inflows
only in 1Q14, hence the discount may remain above USD 8/bbl until the end of 2013. Meanwhile,
Brent prices remained within the USD 106-110/bbl range. With a higher WTI-to-Brent discount in the
short term, we now expect the ICI energy sub-index to increase 5.8% yoy in 2013 and fall 0.1% yoy in
2014 (previously: 6.6% and -0.8%, respectively). It is worth mentioning that our 2014 year-end level
forecast remains the same.
Forecasts: World Economy
GDP Growth
World GDP growth - % 2.8 -0.6 5.2 4.0 3.2 2.8 3.3
USA - % -0.3 -2.8 2.5 1.8 2.8 1.5 2.5
Euro Area - % 0.3 -4.4 2.0 1.5 -0.6 -0.3 0.9
Japan - % -1.0 -5.5 4.7 -0.6 2.0 1.9 1.4
China - % 9.6 9.2 10.4 9.3 7.8 7.7 7.3
Interest rates and currencies
Fed Funds - % 0.2 0.1 0.2 0.1 0.2 0.2 0.2
USD/EUR - eop 1.40 1.43 1.34 1.30 1.32 1.37 1.33
YEN/USD - eop 90.3 92.1 81.5 77.6 86.3 100.0 105.0
DXY Index* - eop 83.1 76.8 80.0 79.6 79.8 83.5 83.5
2014F2008 2009 2010 2011 2012 2013F
Source: Central Banks, IMF, Haver and Ita.* The DXY is a leading benchmark for the international value of the U.S. dollar, measuring its performance against a basket of currencies thatincludes the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona.
Brazil
Constraints for further fiscal expansion
The room for further fiscal and quasi-fiscal policy expansion has narrowed. Risks of a sovereign
rating downgrade reduce the room to maneuver. As a result, we have increased the forecast for theprimary budget surplus in 2014 to 1.3% from 1.1% of GDP. Our estimate for 2013 remains
unchanged at 1.7% of GDP, given the recent fiscal data worsening. We expect slower growth in
public investment and in administrative expenses in the coming years.
The postponement of QE tapering in the U.S. and the outlook for a milder decline in primary
surplus in 2014 remove some of the pressure on the exchange rate. We have maintained our forecast
for the exchange rate by year-end at 2.35 reais per dollar. For the end of next year, our forecast is
now 2.45 reais per dollar, from 2.55 previously.
A relatively stronger currency helps to relieve inflationary pressures. We have cut our estimate for
the IPCA consumer price index this year to 5.8% from 5.9%. Our forecast for 2014 has been revised
downward to 5.9% from 6.0%.
Our 3Q13 GDP forecast went through a slight upward revision, contributing to a rise in our
estimates for GDP growth, to 2.4% from 2.3% in 2013, and to 1.9% from 1.7% in 2014. After the
release of the minutes for the October monetary policy meeting, we revised our forecast for the
benchmark interest rate. We expect the Selic rate at 10.00% p.a. by the end of this year and 10.25%
p.a. next year.
Fiscal policy: Worse results in the short term, but less room for maneuvering
should restrain new stimuli
The public sector posted a primary deficit of 9 billion reaisin September, which equals 2.3% of
GDP. The reading was much worse than market estimates (a surplus of 500 million reais), marking
the weakest performance for the month in the historical series started in 2002. The September deficit
was influenced by both atypical and permanent factors, particularly the pick-up in federal spending.
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Central government outlays expanded 12% yoy in real terms, the fastest pace since 2011. Over 12
months, the primary budget balance stands at 1.6% of GDP (August: 1.8%), the lowest since late
2009. The annual recurring surpluswhich removes atypical revenues and expenseswas 1.1% of
GDP in September (August: 1.3%), the lowest since 2010.
Central government budget figures point to a
gradual recovery in tax revenues. Expenses,
which had been on a downward trend, rebounded
sharply in September. The six-month moving
average of revenues managed by the Revenue
Service posted the fastest year-over-year growth in a
year (2% in real terms). Average six-month growth in
central government spending had been declining,
reaching about 4% in August. However, in
September, outlays picked up again (influenced by
expenses related to the Labor Ministrys FAT fund,
pensions and subsidies to the electricity sector, as
well as by investments), bumping up the half-yearlyexpansion pace to around 6%, the highest in nearly a
year.
Quasi-fiscal incentives, especially National Treasury loans to state-owned banks, are
moderating in 2013. Federal governments loans to BNDES, the state development bank, should
reach 35 billion reais this year, extending the gradual and steady decline seen in recent years. In
2012, the Treasury loaned about 45 billion reais to BNDES, down from 55 billion reais in 2011.
Although the overall quasi-fiscal stance is still expansionary, credit incentives as a percentage of
GDP have been on a downward trend this year.
Some signs of stabilization in the growth of central government expenditures in previous
months and a recent accommodation in loans to state-owned banks suggest that the room for
new fiscal stimuli is vanishing. Notwithstanding the delay in QE tapering in the U.S., we
understand that a scenario of lower international liquidity (in the medium term) and risks of a
sovereign ratings downgrade for Brazil (in the short term) will drive fiscal (i.e., budget) and quasi-
fiscal (i.e., off budget) government policies.
With less room for fiscal maneuvering and signs of a more parsimonious stance towards
fiscal and quasi-fiscal policies, our estimates for the primary budget surplus in the medium
and long run have been revised slightly upward. Our forecast for the consolidated primary
balance in 2013 is unchanged at 1.7%. The federal tax revenue should expand 1.5% in real terms
this year, while federal expenses should increase 5.4%. Our estimate for the primary balance of
regional governments remains at 0.4% of GDP. For 2014, we now expect a less steep decline in thefiscal performance. The expected drop in the primary budget surplus next year is partly explained by
lower atypical revenues in real terms, as compared to 2013. However, we have revised upward our
estimate for the primary budget balance to 1.3% of GDP from 1.1%, due to a reduction of
approximately 8 billion reais in our spending forecast compared with our previous scenario. Our
estimate for real growth in federal tax revenues in 2014 was unchanged at 2.3%, with federal
spending rising 4.2%. We maintained our forecast for the primary balance of states and municipalities
at 0.2% of GDP.
We anticipate a reversal of federal tax breaks and a slight increase in the tax burden starting
in 2015. We also expect stricter control of central government expenses, particularly in 2015. This
additional fiscal effort by the central government (which we expect to come from the part of public
investment and personnel expenses) should be partly offset by a sharper structural decline in the
primary budget balance of regional governments. The latter should follow the fiscal room (which we
estimate around 0.2 to 0.3% of GDP) created by the change in the index that adjusts the regional
-10%
-5%
0%
5%
10%
15%
20%
Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13
Source: National Treasury, Ita
Total revenuesTotal spending
yoy, 6mma,IPCA deflated
Central Government ExpensesOutgrow Revenues
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government debt owed to the federal government (a bill was recently approved in the Lower House
and now awaits approval in the Senate). In the add-up, we upwardly revised our estimate for the long-
term primary budget balance to 1.7% of GDP from 1.5%. In this scenario, the public sectors net debt
should reach 39% of GDP in 2020 (previous forecast: 40%; 2012: 35%), with the general
governments gross debt probably around 60% by the end of the decade (previous forecast: 61%;
2012: 59%).
A less depreciated currency and a slower decline in the current-account deficit
We have maintained our forecast for the exchange rate by the end of 2013 and changed for
2014. We have maintained our forecast for the exchange rate by the end of 2013 at 2.35 reaisper
dollar. The Central Bank is expected to maintain its daily swap program until the end of the year, but
is unlikely to fully roll over auctions that are due soon. The roll-over should be adjusted according to
the behavior of the exchange rate. The scenario in 2014 should include some volatility, driven by
monetary policy in the U.S. and by the election cycle in Brazil, which we expect to contribute to
weaken the local currency. But we now expect this devaluation to be less intense than previously
thought, as the decline of primary surplus should be smaller than we expected. We revised our
forecast for the exchange rate by the end of 2014 to 2.45 reaisper dollar from 2.55.
The current-account deficit narrowed in
September to USD 2.6 billion. A larger trade
surplus and hefty inflows of profits and dividends
largely explain this slide. Foreign direct investment
stood at USD 4.8 billion in September, remaining
robust. The highlight in terms of flows was once
again the local fixed-income market, where inflows hit
another all-time high, at USD 7.2 billion. Adding this
to USD 2.3 billion in inflows to the stock market, USD
9.6 billion entered the local market, the most since
November 2009.
We have revised our estimates for the trade
balance and for the current-account deficit in
2014. We broke down our forecasts for the trade
balance, which unveiled a not-as-favorable scenario for next year, even with few changes in our
assumptions. After incorporating into our disaggregated models the expectation of low prices for iron
ore and soybeans and of an abundant corn crop in the U.S. (reducing demand for Brazilian corn), our
forecast for the trade balance came out lower than estimated by aggregate models. This scenario is
reinforced by the outlook of a less depreciated currency. All in all, we have revised our forecast for
the trade surplus in 2014 to USD 7 billion from USD 12 billion. As for the balance for crude oil and its
byproducts, we expect a deficit of USD 9.5 billion in 2014, meaning a net improvement of USD 7billion, because of higher production and the absence of accounting distortions which characterized
the first half of 2013. A lower trade surplus and a relatively stronger currency will slow down the pace
of the adjustment in the current account gap, which should end 2014 at 3.1% of GDP (previously
2.7%).
Slight downward revision in our inflation forecasts for 2013 and 2014
Our estimate for the IPCA in 2013 has been reduced slightly, to 5.8% from 5.9%. Inflation should
pick up in 4Q13 (to 1.9% from 0.6% in 3Q13), but less than we forecasted. Seasonal factors, such as
pressure on food, clothing and some travel services, and the lagged effect of currency depreciation in
previous months put pressure on inflation late in the year. But pressure from the exchange rate, for
instance, will be less intense. Recent appreciation in the Brazilian realreduces the magnitude of the
exchange-rate pass-through to prices in the short term. Additionally, we pushed forward the increase
in fuel prices to mid-December, transferring part of the effect on inflation to early next year (our
10.1 9.9
11.0
4.4
8.9
1.5 2.2
7.8
0.0 0.0
5.8
0.0 0.00
2
4
6
8
10
12
Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14
FX Swaps Expirations Accumulate inthe Coming Months
billion dollars
Source: BCB, Ita
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scenario contemplates a 6% hike in gasoline and diesel prices at refineries by mid-December, with an
impact of 0.16 p.p. on the IPCA distributed over December 2013 and January 2014). There is an
ongoing discussion about a pricing methodology for fuels, which could move the price hike up to late
November.
Our estimate for the IPCA in 2014 has also been
revised downward, to 5.9% from 6.0%. A higher
real interest rate and a less-depreciated currency
have helped to reduce the inflation forecast. But
unemployment rate at a lower level than initially
expected cushions that impact.
Slower increases in market-set prices and
sharper lifts in regulated prices in 2014. Market-
set prices should rise 6.3%, with some relief in food
and service prices. We anticipate a smaller change in
the food group (slightly above 6%), following two
years of increases that were much higher thanheadline inflation. Service prices should slow down
somewhat due to the expectation of accommodation
in the labor market, including a smaller hike in the minimum monthly wage. Regulated prices should
advance 4.5%, as the effect of discounts on electricity tariffs will not be repeated.
For the IGP-M, we have revised the forecast for 2013 upward and the estimate for 2014
downward. We have raised our forecast for the IGP-M in 2013 to 5.5% from 5.3%, as current data
point to somewhat higher inflation at the wholesale level. Producer prices (IPA-M) should climb 5.1%,
as manufacturing prices rise 7.8% and agricultural prices slide 1.4%. For the other components, we
forecast increases of 5.4% for the IPC-M and 8.2% for the INCC-M. Our estimate for 2014 has been
lowered to 5.5% from 6.0%, due mostly to a less depreciated exchange rate in our scenario.
Milder decline in the third quarter increases GDP estimates for 2013 and 2014
GDP contraction in 3Q13 was probably milder
than we expected. We have revised upward our call
for 3Q13 GDP to -0.3% qoq/sa from -0.5%. Retail
sales were stronger in July and August, boosting
activity in retail and service sectors. Temporary
factors (such as earmarked credit for furniture and
appliance purchases) boosted household spending in
3Q13, limiting the slide in economic activity. One
remaining uncertainty surrounding the 3Q13 GDPreport is the methodology change in National
Accounts to incorporate data in the Monthly Service
Survey (PMS). This change may impact quarterly and
annual GDP readings.
Revised 3Q13 GDP raises growth estimates for
2013 and 2014. Given a smaller slide in 3Q13 and maintaining our 4Q13 forecast at a gain of 0.6%,
we have increased our estimate for GDP growth in 2013 to 2.4% from 2.3%. A smoother decline in
3Q13 GDP increases the carry-over for 2014. Hence, even maintaining expected quarterly growth
paths throughout 2014, our GDP forecast increased to 1.9% from 1.7%.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
Source: IBGE, Ita
IPCAMarket-set pricesRegulated prices
yoy
Upward Regulated Prices in 2014
forecast
6.2
4.63.8
2.40.5 0.0 0.2
1.9
3.5
6.9
10.5
-0.2
-13.6
5.34.1
9.7
-0.4
2.0 2.1
4.7
2.3
4.7
-15
-10
-5
0
5
10
15
Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13
Source: IBGE, Ita
CoreBroad
%, real salesqoq/saar
Growth in Core Retail Sales Accelerates
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Fundamentals still point to moderate economic
growth ahead. We have maintained our estimates for
quarterly growth in 2014 at a moderate pace.
Confidence among industrial entrepreneurs dropped
again in October, by 0.2%. This index has fallen 8.3%
since March. Lower confidence reinforces a scenario
of slowing investment. Still-high manufacturing
inventories are also a sign of slow economic growth
ahead. Furthermore, we have adjusted our scenario
for somewhat higher interest rates and for slower
growth in government spending. These are additional
sources of growth moderation in 2014.
Labor-force growth slows down; unemployment
should advance less than expected. The working
population has expanded at a slower pace, indicating a cool-down in the labor market. Employment
among youths aged 18 to 24, for instance, has declined more sharply in recent months. But the
unemployment rate remains low because of the behavior of the labor force, which decreased inrecent months, preventing an increase in unemployment. Thus, with the unemployment rate already
at a lower level, we now expect it to reach a lower level than we previously estimated, even
considering normal behavior for the labor force throughout next year. We expect the average
unemployment rate to be closer to 6.1% than to 6.5% (previous forecast).
Non-earmarked new loans are stable. The daily average of non-earmarked new loans was virtually
stable in September in real terms (0.1% mom/sa). Low growth was partly caused by the beginning of
a labor strike by bank tellers. Overall delinquency remained at 3.25%, with a marginal decline in non-
earmarked delinquency and marginal increase in earmarked delinquency. As for the total credit stock,
annual growth in non-earmarked credit, which had been slowing down for more than a year,
rebounded to 2.7% in September from 2.5% in August, in real terms. The market share of state-owned banks was stable, interrupting an upward trend seen since October 2011.
Copom: Extending the cycle, but not that much
The benchmark interest rate should continue to rise. The minutes of the latest meeting by the
Monetary Policy Committee (Copom) maintained the tone of previous documents and official
statements. It was a sign that the tightening cycle should be extended for a while longer to help to
reverse inflationary resilience that is still observed. Forecasts published in the minutes indicate the
IPCA remaining above the target until 2015, reinforcing the need for additional adjustment in
monetary conditions.
However, the Copom signals preliminary factors that could help the prospective scenario forinflation.On the domestic front, we believe that the Copom expressed more confidence that fiscal
policy will move toward a neutral zone, by stating that it understands the fiscal momentum as the
change in the structural surplus in relation to what was observed in the earlier period.
Recent strengthening in the exchange rate also helps to reduce inflationary risk. The minutes
highlighted a cool-down in the volatility (...) of currency markets, referring to the substantial
appreciation of the Brazilian real in the weeks before the meeting, which will be an important driver for
future inflation dynamics. In our view, successful interventions by the central bank in the currency
market provide more confidence to the Copom that the recent stability in the Brazilian real will be
more permanent.
Hence, interest rates should not increase much beyond the current 9.50% level. We believe thatalready-implemented monetary tightening and the recent evolution of inflation drivers (especially
60
70
80
90
100
110
Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13
Declining Confidence
Confidence among entrepreneurs
Source: FGV
ServicesManufacturing
index 2010=100, sa
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exchange-rate dynamics) make the Copom more comfortable in relation to the prospective scenario.
Hence, the tightening cycle should not be extended much beyond current Selic levels.
We forecast another 50-bp increase in the next Copom meeting in November and a final 25bphike in January, taking the Selic rate to 10.25%.
Forecasts: Brazil
Economic Activity
Real GDP growth - % 5.2 -0.3 7.5 2.7 0.9 2.4 1.9
Nominal GDP - BRL bn 3,032 3,239 3,770 4,143 4,403 4,789 5,132
Nominal GDP - USD bn 1,652 1,620 2,142 2,473 2,252 2,218 2,135
Population (millions) 191.5 193.5 195.5 197.4 199.2 201.0 202.8
Per Capita GDP - USD 8,623 8,371 10,956 12,529 11,304 11,034 10,528
Unemployment Rate - year avg 7.9 8.1 6.7 6.0 5.5 5.5 6.1
Inflation
IPCA - % 5.9 4.3 5.9 6.5 5.8 5.8 5.9
IGPM - % 9.8 -1.7 11.3 5.1 7.8 5.5 5.5
Interest Rate
Selic - eop - % 13.75 8.75 10.75 11.00 7.25 10.00 10.25Balance of Payments
BRL / USD - Dec 2.40 1.75 1.69 1.84 2.08 2.35 2.45
Trade Balance - USD bn 25 25 20 30 19 0 7
Current Account - % GDP -1.7 -1.5 -2.2 -2.1 -2.4 -3.6 -3.1
Foreign Direct Investment - % GDP 2.7 1.6 2.3 2.7 2.9 2.7 2.3
International Reserves - USD bn 194 239 289 352 379 377 381
Public Finances
Primary Balance - % GDP 3.4 2.0 2.7 3.1 2.4 1.7 1.3
Nominal Balance - % GDP -2.0 -3.3 -3.3 -2.6 -2.5 -4.6 -4.0
Net Public Debt - % GDP 38.5 42.1 39.1 36.4 35.2 36.2 37.1
2013F2011 2012 2008 2009 2014F 2010
Source: IMF, IBGE, BCB, Haver and Ita.
(For our monthlyBrazil forecasts,click here.)
Mexico
An Unbalanced Recovery
Mexicos lower house introduced positive changes in the tax reform bill submitted by Pea Nietos
government. The senate approved most of the changes. A political reform is likely within the next
weeks, which would make way for the debate on energy reform.
The economy is recovering during 3Q13, but growth composition has been unbalanced, with
exports up and internal demand down. We expect the economy to grow by 1.3% this year and 3.6%
in 2014.
Tax hikes will likely keep inflation above the target center (but within the target range) next year.
We now expect 2014 inflation at 3.7% (3.5% in our previous scenario).
The central bank reduced the policy rate by 25 bps but closed the door on new rate cuts.
The end of the easing cycle, a successful energy sector reform and the economic recovery will
likely support the Mexican peso next year. The postponement of the tapering will also help in the
short term. We continue to expect the peso to end 2014 at 12.0 to the dollar, from 12.8 at the end of
this year.
Tax reform and, last, but not least the energy reform
Mexicos lower house approved a modified version of the tax reform bill sent to congress byPea Nietos government. The house voted 317-164 to approve the bill, as the left-wing PRDsupported the initiative and the PAN opposed to it. The bill approved doesnt include VAT on private
http://www.itau.com.br/itaubba-en/economic-analysis/forecasts/http://www.itau.com.br/itaubba-en/economic-analysis/forecasts/http://www.itau.com.br/itaubba-en/economic-analysis/forecasts/http://www.itau.com.br/itaubba-en/economic-analysis/forecasts/ -
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education tuition, mortgages, home rentals or sales, which were contained in the initial version of the
bill. However, the top income-tax rate for individuals was raised to 35% from a proposed 32%. In
addition a 5% tax on high-fat foods was created. The new tax regime for PEMEX will be discussed,
together with Energy sector reform. Among the proposals from the initial version that were included in
the approved bill are: equalization of the VAT rate on the border with the one charged in the rest of
the country; taxing sugar beverages at MXN 1 per liter; a 10% tax on capital gains from the stock
exchange and on dividend payments; and a 7.5% Mining Royalty tax. The senate later approved the
bill with few changes, so the tax reform is now back to the lower house for final approval. The PAN
refused to participate in the senate voting session.
According to the government, the approved bill would add around 1.1% of GDP in fiscal
revenues in 2014 (versus 1.4% in the previous version of the bill). To offset the lower revenues
next year, legislators raised the oil price forecast (a key variable for the budget). Finance Minister
Videgaray, however, estimates that the reform will add 2.8% of GDP in revenues by 2018 (slightly
below the Finance Ministrys estimates before the modification of the bill).
Apart from the new tax code, the congress approved the fiscal responsibility law. This includes
the governments proposal to create a sovereign wealth fund to save part of the excess revenuesduring good times. In addition, the lower house included in the bill a cap of 2.5% for real current
expenditure growth in 2015 and 2016. From 2017 on, real current expenditure growth is capped at
the potential growth rate of the economy.
In our view, the changes introduced by the congress are positive because they limit the risks
to growth next year and make more credible the fiscal 0% medium-term public deficit target
(excluding PEMEX investments). By removing the governments proposed taxes on the Housing
sector, congress has avoided hurting an already fragile Construction sector. In addition, caps on
current public expenditures will leave the fiscal accounts less vulnerable to political conditions.
The PAN and the PRD each presented its own versions of political and electoral reforms. The
PAN initiative was presented in the senate, while the PRD sent its reform proposal to the lowerhouse. The debate is significant for the macro outlook because PAN has made its support for Energy
sector reform conditional on approval of political and electoral reforms, and without the PAN, the PRI
would not be able to pass far-reaching energy legislation.
According to political analysts, the PRI and the PAN will be able to find common ground on
political reform, so an energy reform before the end of this year is likely. In this context, the
secondary laws regulating the new framework for the energy sector could be approved during the first
quarter of 2014. Still, the clashes between the PAN and the PRI during the tax reform debate show
that there is the risk that the PRI could meet resistance from the PAN to approve the energy reform.
An unbalanced recoveryOn one hand, the IGAE (monthly proxy for
Mexicos GDP) increased 0.22% from July toAugust, bringing quarter-over-quarter growth to
2.6% (annualized). The number confirms that
Mexicos economy is recovering gradually from a very
weak first half. Manufacturing activity grew 7.1%
qoq/saar, consistent with a recovery in external
demand (in fact, manufacturing exports gained 11%
during 3Q13).
On the other hand, retail sales grew by only 0.1%in the same period, hinting that private
consumption continues to be sluggish. In addition,98
100
102
104
106
108
110
112
114
116
Jan-10 Dec-10 Nov-11 Oct-12 Sep-1
Export-Driven Growth
Source: INEGI, Ita
ManufacturingProduction
ConstructionRetail sales
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construction activity (down 7.0% qoq/saar in August) and imports of capital goods (down 9.5% during
3Q13) point to another contraction in gross fixed investment.
We expect Mexicos economy to continue its gradual recovery over the next quarters. U.S.growth will likely continue to lift Mexicos export sector, which should support internal demand. We
expect the economy to grow 3.6% next year, following an estimated 1.3% expansion in 2013.
Headline inflation falls further, while core inflation continues below the target
center
Headline inflation fell to 3.27% year over year during the first half of October, close to the
center of the target range. The decrease was due to both a reduction in non-core inflation (to 5.85%
from 5.96% previously) and in core inflation (to 2.46% from 2.5%). While the exchange rate
weakened over the past few months, inflation for core goods fell further, to 2.47% (core goods ex-
food inflation is below the lower bound of the target range). Meanwhile, core services inflation is at
2.46%, highlighting the lack of demand-side inflationary pressures in Mexico. Within non-core prices,
non-processed food inflation is running at a low 0.71%, while inflation for regulated prices increased
to 9.15% (previously 8.97%), influenced by the removal of gasoline subsidies.
We expect inflation to end this year at 3.6%. For 2014, we expect inflation at a similar level
(3.7%). Unfavorable base effects will likely drive headline inflation higher in November and
December. Next year, the fiscal package will likely sustain inflation above the target center, but within
the target range. In our previous scenario, we were expecting inflation at 3.5% by year-end 2014.
No more cuts
Mexicos central bank reduced the policy rate by 25 bps in October, bringing it to 3 .5%. Thiswas the second consecutive meeting in which the board decided to lower rates. Although the tone of
the press statement shows that the board is still concerned about the recovery of the economy and
very comfortable with the inflation outlook, the central bank makes clear that it does not intend to cutrates further (additional reductions of policy rate are not advisable in the foreseeable future.)
The board classifies the domestic economic recovery shown by some indicators as
incipient. Also it still sees considerable slack both in the labor market and in the overalleconomy. Although the board expects a narrower output gap in the monetary policy forecast horizon,
it still expects a lot of slack for a long time to come.
The central bank considers that the balance of risks for inflation has improved. Board
members once again noted that core inflation is hovering around record-low levels, while non-core
inflation is falling as the temporary shocks that were lifting it in recent months fade. In addition, they
highlighted that the severe storms that hit Mexico in September have not impacted inflation at this
point. Inflation expectations for 2014 increased in response to the likely tax hikes next year, but
inflation expectations for the longer term continue stable. Economic growth is the key downside risk
for inflation. While financial-market volatility and tax changes were cited as upside potential, the
board downplayed each of those factors.
We do not see policy-rate moves at least until 2015. In our scenario, Mexicos economy
continues its gradual recovery throughout the rest of this year and the next. So we see the policy
rate unchanged at 3.5% both by the end of 2013 and by the end of 2014 (from 3.75% in our previous
scenario).
A stronger peso ahead
Although the Fed will likely start the tapering during 1Q14, we see room for the Mexican peso
to appreciate. Our exchange-rate forecasts are unchanged at 12.8 to the dollar by year-end 2013
and 12.0 to the dollar by year-end 2014. A successful energy reform will be crucial to drive the
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currency stronger. The ongoing economic recovery and the end of the easing cycle will also help to
strengthen the peso.
Forecasts: Mexico
Economic Activity Real GDP growth - % 1.4 -4.7 5.1 4.0 3.8 1.3 3.6
Nominal GDP - USD bn 1,101 895 1,047 1,161 1,177 1,261 1,410
Population (millions) 109.5 111.3 112.9 114.3 115.6 116.8 117.9
Per Capita GDP - USD 10,055 8,040 9,276 10,161 10,185 10,800 11,956
Unemployment Rate - year avg 4.0 5.5 5.4 5.2 5.0 5.0 5.0
Inflation
CPI - % 6.5 3.6 4.4 3.8 3.6 3.6 3.7
Interest Rate
Monetary Policy Rate - eop - % 8.25 4.50 4.50 4.50 4.50 3.50 3.50
Balance of Payments
MXN / USD - eop 13.54 13.06 12.36 13.99 13.01 12.80 12.00
Trade Balance - USD bn -17.3 -4.7 -3.0 -1.5 0.0 -7.0 -8.0
Current Account - % GDP -1.8 -0.9 -0.3 -1.0 -1.2 -2.0 -2.2
Foreign Direct Investment - % GDP 2.5 1.9 2.2 2.0 1.3 2.5 2.5
International Reserves - USD bn 85.4 90.8 113.6 142.5 163.5 193.0 208.0Public Finances
Nominal Balance - % GDP -0.1 -2.3 -2.8 -2.5 -2.6 -2.4 -3.4
Net Public Debt - % GDP 18.1 28.6 30.2 32.1 33.7 34.0 35.0
2013F20122011 2014F 200 8 200 9 2010
Source: Central Bank, IMF, INEGI, Haver and Ita.
Chile
Easing Cycle to Continue
Consumption decelerated in September and several fundamentals point to below-trend growth.We maintain our GDP forecasts at 4.2% and 4.4% for 2013 and 2014 respectively.
Annual inflation fell to 2.0% in September, while core measures remain below the lower bound of
the central bank target. We expect the weaker currency to offset the negative contribution from the
looser output gap, leading to higher inflation. We keep our CPI forecasts at 2.2% and 2.6% for this
and the next, respectively.
The central bank cut the interest rate by 25 bps in October (to 4.75%). The timing was surprising,
considering the most recent consumption figures we had been expecting the easing cycle to start in
November. We think that below-trend growth and inflation below the target leaves room for another
cut by 25 bps in November and 50 bps more in cuts during 1Q14.
The Chilean peso has weakened, led by the earlier-than-expected start of the easing cycle. We
still expect that lower domestic interest rates and worse terms of trade will lead to a weaker currency
next year. We maintain our forecast at 500 pesos to the dollar at year-end 2013 and 525 for year-end
2014.
Presidential and parliamentary elections will be held on November 17, while a potential runoff will
be held on December 15. According to recent polls, Michelle Bachelet (from Nueva Mayoria, the
opposition coalition) and Evelyn Matthei (from Alianzapor Chile, the government coalition) will likely
compete in the runoff.
The economy grows below trend in 3Q13Growth was weak in September. The IMACEC (monthly proxy for GDP) grew 3.9% year over year,
below both our expectations and the Bloomberg consensus. On a sequential basis, activity fell 0.8%
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from August, bringing the quarter-over-quarter growth to a still below-trend rate (4.1% annualized)
during 3Q13, following a weak 1.4% increase during 2Q13 and 3.1% during 1Q13. Consumption
slowed in September, while manufacturing and building-permit growth remained in negative territory.
Retail and supermarket sales rose 7.0% and 1.3% year over year, respectively (after increasing
12.0% and 9.3% in August), while manufacturing production and building permits fell by 1.0% and
11.2%, respectively.
In addition, several factors are still pointing to below-trend growth ahead. Although business
and consumer confidence improved somewhat in September, this was due to temporary factors. Also,
lower copper prices will continue reducing investment growth. Finally, fiscal policy will be less
expansionary. On the other hand, lower policy rates will likely contribute to smoothing the impact of
these factors on the economy.
We maintain our GDP forecasts. We still expect Chiles GDP to grow 4.2% this year and 4.4% in
2014.
Inflation returns to the lower bound of the target
Headline CPI fell to 2.0% year over year in September, reaching the lower bound of the target
range, while the key core measures are still below the range. Excluding food and energy, inflation
increased to 1.4% (from 1.2%).
We expect inflation to remain below target throughout this year and the next. In our view, lower
private demand growth will contribute to keep non-tradable inflation in check (currently at 3.5%).
However, a weaker currency will lead to a higher tradable inflation. In the short term, we cantrule out
that recent frosts lead to temporarily higher prices for non-processed food. We maintain our forecasts
at 2.2% and 2.6% for year-end 2013 and year-end 2014, respectively.
The Central Bank starts the easing cycle
The central bank reduced the interest rate by 25 bps in October, surprising both us and the
market consensus. The decision does not represent a major departure from our previous scenario
(we were expecting that the first rate cut of the cycle would take place in November), and it is justified
by below-trend economic growth and a below-target inflation rate. However, its timing was puzzling,
especially considering that the decision took place after the release of the strong August retail sales
number, and the central banks tone had beensuggesting that the board was uncomfortable providing
stimulus to an economy in which consumption continues to expand at an unsustainable pace.
In the press statement that accompanied the
decision, the board cited some new elements
supporting the cut. The Feds decision to postpone
the tapering (and its impact on the U.S. dollar); thefact that many leading indicators are pointing to a
further slowdown of internal demand; and lower short-
term inflation expectations. Furthermore, the central
bank cited a consolidation of a less-favorable
external scenario in the medium term (lower global
economic growth, worse terms of trade, tighter
external financial conditions and the end of the global
cycle of mining investment). In our view, a tighter
domestic fiscal policy aided the decision.
We expect another rate cut in November, so the
policy rate would end this year at 4.5%. In the short term, we expect the central bank to deliver the
same amount of monetary stimulus signaled in its most recent monetary policy report (50 bps). In
4.3
4.5
4.7
4.9
5.1
5.3
Jan-12 Jul-12 Jan-13 Jul-13
The Easing Cycle Has Begun
Source: Bloomberg, Ita
Monetary PolicyRateSWAP 3mSWAP 6m
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2014, we expect growth to continue below potential and inflation below the target, leaving room for
two additional 25-bp cuts in the first quarter of 2014.
Weaker currency after the Central Bank decision.
The Chilean peso has weakened since the rate cut. Despite the postponement of the tapering by
the Fed, the peso has weakened 4.2% since the central bank reduced rates.
We forecast the peso at 500 and 525 by year-end 2013 and 2014. In our scenario, we expect that
lower interest rates and worse terms of trade will lead to a weaker currency.
Higher public deficit led by lower mining tax revenues
We adjusted our forecasts of fiscal balance from -0.3% of GDP to -0.9% in 2014. The
government announced recently that fiscal spending will grow 3.9% in 2014, after increasing an
estimated 5.9% this year. However, the government estimates a 22.8% reduction in private-mining
tax revenues, due to rising costs in the sector. In addition, the government also mentioned that in
2014 the transitory increase of the mining tax will end, which will also contribute to lower revenues.
Presidential elections to be held soon
Presidential and parliamentary elections will be held on November 17. Nine candidates will run
in the elections. If there is no candidate with more than 50% of the votes, the president will be
elected in a runoff (December 15). According to the latest available polls, there will be a runoff
between Michelle Bachelet (socialist, from the opposition coalition) and Evelyn Matthei (from the
government coalition) and Michelle Bachelet will likely become the next president.
Michelle Bachelet, if elected, pledged to raise corporate taxes to finance educational reform
and to change the constitution through the current legislative mechanisms. She would aimto raise revenues by 3% of GDP, mainly by gradually increasing the corporate tax rate from 20% to
25% in 2018. The extra resources would be used to finance educational reform (which would cost
about 2% of GDP) and to reach a zero structural fiscal balance by the end of her term. Although Ms.
Bachelet will likely fail to get the number of seats in congress necessary for a constitutional change,
she explicitly said that her government would not seek changes through a constituent assembly.
Forecasts: Chile
Economic Activity
Real GDP growth - % 3.3 -1.0 5.8 5.9 5.6 4.2 4.4
Nominal GDP - USD bn 179.6 172.3 217.6 251.2 267.5 283 290
Population (millions) 16.8 16.9 17.1 17.2 17.4 17.6 17.7
Per Capita GDP - USD 10,715 10,180 12,727 14,563 15,375 16,137 16,359
Unemployment Rate - year avg 7.8 9.6 8.3 7.2 6.5 6.2 7.0Inflation
CPI - % 7.1 -1.5 3.0 4.4 1.5 2.2 2.6
Interest Rate
Monetary Policy Rate - eop - % 8.25 0.50 3.25 5.25 5.00 4.50 4.00
Balance of Payments
CLP / USD - eop 629 506 468 521 479 500 525
Trade Balance - USD bn 6.1 15.4 15.6 10.5 3.4 2.5 -0.6
Current Account - % GDP -3.2 2.0 1.5 -1.3 -3.5 -3.7 -4.1
Foreign Direct Investment - % GDP 8.6 7.5 7.1 9.1 11.3 6.5 5.5
International Reserves - USD bn 23.2 25.4 27.9 42.0 41.6 43.0 45.0
Public Finances
Nominal Balance - % GDP 4.7 -4.3 -0.3 1.5 0.6 -0.8 -0.9
Net Public Debt - % GDP -22.6 -12.0 -7.8 -10.7 -7.8 -7.8 -8.6
20 0 8 2 00 9 20 10 2 0 14 F 2 0 1 3 F 2 01 1 2 0 12
Source: Central Bank, IMF, INE, Haver and Ita.
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Peru
Growth Slows, Composition Changes
Growth continues to slow, but business confidence improved in September, indicating that the
deceleration will not be steeper than contemplated in our scenario. We maintain our forecast of GDP
growth at 5.0% this year and 5.2% in 2014.
Construction is slowing, while mining activity accelerates. In our view, this change in composition
will consolidate in coming years, generating a healthy decrease in the current account deficit.
The Feds tapering delay reinforces our forecast of a more appreciated currency this year, at 2.70
soles per dollar, depreciating to 2.80 next year.
Slower growth, different composition
GDP grew 4.3% year-over-year in August (4.5% in July), lower than market expectations for the
fourth month in a row. The result was in line with our estimate (4.3%). The 3-month average annual
growth declined to 4.4%, from 4.6% in July and 5.6% in June.
Construction is slowing and mining is picking up. Construction activity (7.7% year-over-year)
decelerated notably, although it continues to outgrow the overall economy. The 3-month average
annual growth stood at 8.7%, the lowest in 19 months. Mining growth, on the other hand, accelerated
to a solid 7.9% year-over-year, from 3.5% in July. In recent years, growth in Peru was led by
investment, particularly the construction of mining projects. These investments are maturing and
construction is decelerating, while mining production accelerates. Going forward, especially into
2014/15, mining will probably consolidate as the sector with stronger growth in the Peruvian
economy, because important mining projects will begin operations.
Business confidence improved in September.After
7 monthly declines in a row, the central banks indexthat measures businesses opinion about the state of
the economy in the next 3 months increased to 53
points in September (48 in August). The index is
tightly correlated with private investment growth and
its recovery in September indicates that the
economys slowdown will not be more pronounced
than contemplated in our scenario. We maintain this
years GDP growth forecast at 5.0%, which assumes
that the economy will grow at a 5.5% annualized pace
in coming months. Our GDP growth forecast for next
year stands at 5.2% (also unchanged).
Current account deficit to improve ahead
The trade surplus remains low.Perus trade surplus reached 0.5 billion dollars in the twelve months
ended in August, down from 3.5 billion dollars in January and 9.7 billion dollars in the beginning of
2012. The deterioration stems from the decline of Perus terms of trade and the strong growth in the
volume of imports, while the volume of exports remained roughly flat.
The change in the composition of growth will help to correct the external imbalance. Going
forward, we expect the deceleration of investment to slow down imports, while the pickup in mining
production will boost the volume of mining exports especially in 2014 and 2015. Therefore, despite
the ongoing declining trend of Perus terms of trade, we see the current account deficit declining to
4.5% of GDP next year, from 5.2% of GDP this year.
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Aug-05 Aug-07 Aug-09 Aug-11 Aug-13
Growth Composition Changing
yoy,3m avg
Source: INEI, Ita
GDPMiningConstruction
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We expect FX at 2.70 soles per dollar by yearend.The Peruvian sol has appreciated recently, after
reaching levels above 2.80 to the dollar during late August and early September. The central bank
has stopped selling dollars since September 15 (except from one small operation in October 9). The
change in consensus for the beginning of the Feds tapering from December 2013 to March 2014
reinforces our forecast of a more appreciated currency this year, at 2.70 soles per dollar, depreciating
to 2.80 next year.
Central Bank Cuts Reserve Requirements Again
Consumer prices in Lima increased 0.04% in October, slightly above market consensus.As a
result, CPI increased 3.04% year over year (from 2.83% in September), reaching the upper limit of
the central banks target (between 1% and 3%). Between January and October, prices increased by
2.91%. The breakdown showed that inflation was driven by higher prices in some food components
and furniture, adding 0.22 p.p. to monthly inflation, partially offset by lower prices in transport. We
expect inflation at 3.1% by the end of this year. For next year, we expect 2.5%.
The central bank reduced once again the reserve requirement for deposits in soles, from 17%
to 16%. The reserve requirement for deposits in dollars remained unchanged, as the central bankhas been aiming to stimulate the expansion of credit in the local currency. With growth decelerating to
below-potential, the central bank could see room to cut the policy rate in coming quarters and in
2014. However, the prospect of reduction in monetary stimulus in the U.S. next year and its effects on
an economy which is still partially dollarized will probably bring caution to the central bank. We see
the policy rate remaining at the current 4.25% until the end of 2014, and additional cuts in reserve
requirements.
Politics: Changes to the cabinet
The Prime Minister Juan Jimenez Mayor tendered his resignation to President Humala.Cesar
Villanueva, previously the regional president of San Martin, assumes the prime minister role. In his
first public pronouncement, Villanueva stated that improving public security is one of presidentHumalas priorities. This may be the first of more changes to the cabinet. But the Minister of Finance
will likely continue in his post.
Forecasts: Peru
Economic Activity
Real GDP growth - % 9.8 0.9 8.8 6.9 6.3 5.0 5.2
Nominal GDP - USD bn 126.6 127.0 153.5 176.2 200.3 214 227
Population (millions) 28.8 29.1 29.5 29.8 30.1 30.5 30.9
Per Capita GDP - USD 4,396 4,360 5,212 5,913 6,612 7,023 7,360
Unemployment Rate - year avg 8.4 8.4 7.9 7.7 6.8 6.0 6.0
Inflation
CPI - % 6.7 0.2 2.1 4.7 2.6 3.1 2.5Interest Rate
Monetary Policy Rate - eop - % 6.50 1.25 3.00 4.25 4.25 4.25 4.25
Balance of Payments
PEN / USD - eop 3.11 2.88 2.82 2.70 2.57 2.70 2.80
Trade Balance - USD bn 2.6 6.0 6.7 9.3 4.5 -0.3 0.3
Current Account - % GDP -4.2 -0.6 -2.5 -1.9 -3.6 -5.2 -4.5
Foreign Direct Investment - % GDP 5.4 5.1 5.5 4.7 6.1 5.0 5.0
International Reserves - USD bn 31.2 33.1 44.1 48.8 64.0 72 80
Public Finances
Nominal Central Govt Balance - % GDP 2.4 -1.3 -0.2 1.9 2.1 0.3 0.4
Gross Central Govt. Debt - % GDP 24.2 27.3 23.5 21.2 18.4 16.5 15.7
2008 2009 2010 2013F 2011 2012 2014 F
Source: Central Bank, INEI, Haver and Ita.
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Colombia
An Important November on Peace Negotiations
November 18this the deadline for the government and the FARC to announce a peace agreement.
This is a key issue for President Santos to decide, until November 25
th
, if he will be a candidate innext years elections.
Economic activity data have been mixed, with strong retail sales and weak manufacturing.
Leading indicators continue to hint at weakness ahead. We maintain our forecast of GDP growth at
3.8% this year and 4.2% in 2014.
In its latest monetary policy meeting, the central bank sounded less confident about the pickup of
economic activity. We believe in a 25-bp rate cut in December and dont expect rate hikes in 2014.
The FX rate is hovering close to our year-end forecast of 1880 pesos to the dollar. The central
bank continues to buy around 10 million dollars per day.
Focus on peace negotiations
President Santos needs to decide until November 25 whether he will be a candidate in next
years election. His decision seems to be closely tied with the peace negotiations with the FARC.The deadline for the peace agreement, stipulated by the government, is November 18, exactly one
year after the negotiations began. Up to now, agreement has been reached only on land reform, one
of the five-point agenda. Recently, authorities have reduced the length of breaks within the
negotiation process, attempting to improve the chances of reaching an agreement in the short-term.
This change includes establishing a longer negotiating period with only a four day interval (reduced
from nine). It seems that, for Santos to announce its candidacy, more advances need to occur before
the deadline, such as reaching agreement on the issue of FARC rebels participation in politics.
Uribes Centro Democrtico has chosen scar Ivn, former finance minister (2007-10), to bethe candidate for next years presidential elections. Uribes party is clearly against the peacenegotiations, which may be an incentive for the FARC to agree on peace with the government and
increase the chances of Santos reelection.
Mixed data on economic activity
Retail sales continue to strengthen. Retail sales
grew 6.9% year over year in August, above both
market consensus and our forecast (5.3% and 4.6%,
respectively), while sales ex-vehicles increased 8.6%
versus one year ago. Between January and August,retail sales reached an annual growth of 3.7% (4.8%
excluding vehicles). The data reveal that consumption
of goods continues to strengthen. The improvement
can also be observed in the credit market, with a
decline in delinquency rates and pickup in new
consumer loans.
Manufacturing remains weak. Manufacturing
production declined 3.9% year over year (after
growing 0.2% in July), below both our estimates and
market consensus (-1.5% and -1.1%, respectively). The 3-month average annual growth ofmanufacturing production has been in negative territory for one year now, in concert with low
business confidence in the industrial sector. The trend reveals that the sector continues a drag for the
economy.
-10%
-5%
0%
5%
10%
15%
20%
25%
Aug-09 Aug-10 Aug-11 Aug-12 Aug-13
Strong Retailing, Weak Manufacturing
Source: DANE, Ita
Manufacturing ProductionRetail Sales ex-fuel
yoy, 3mma
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Confidence remains at low levels.According to Fedesarrollo, consumer confidence increased only
slightly to 14.6% in September, from 13.4% in August (the numbers represent the balance between
positive and negative answers). Excluding the previous month, this is the lowest level of consumer
confidence since May 2011. The breakdown shows that lower confidence has been led by the
worsening of expectations about the economy in the next 12 months, which is the only sub
component in negative territory (-8.7%).Business confidence in the industrial sector improved to 0.4%
in September (from -1.8% in August) but remains at levels consistent with sluggish production growth
going forward.
Other leading indicators also hint at slower
growth ahead.The central bank has updated its
IMACO leading indicator, which correlates well with
GDP growth 5 months ahead. The index declined
further in the last couple of months, indicating that the
economy will decelerate in the second half of this
year.
Our GDP growth forecast stands at 3.8% this yearand 4.2% next year.In all, we believe the data is
consistent with our scenario of growth slowing down
in 2H13, after a positive surprise in 2Q13.
Central bank sees higher downside risks to growth
The central bank kept the policy rate unchanged at 3.25%, as widely expected. The decision
was unanimous according to governor Uribes post-decision speech. Members continued to state that
the interest rate is at a level that stimulates the economy.
The central bank seemed less confident with economic activity than in the previous statement.
In the forward-looking paragraph, members continued to argue that downside risks for economicgrowth are not negligible, but added that those risks may have increased recently. The central
banks GDP growth forecast for this year is between 3.5% and 4.5%, which means that activity would
be growing below trend in the second half. In fact, the central bank removed from the statement the
analysis that economic activity forecasts show a level of product converging to its potential.
The monetary authority remains comfortable with the inflation outlook. Members mentioned that
the 12-month CPI remained stable at 2.3% in September and that inflation remains at the lower
bound of the target range (2-4%). They also said that inflation expectations remain anchored at
center-target (3.0%).
We expect a rate cut in December and no moves in 2014.In our scenario, the economy will also
grow below potential in the second half of this year, which would lead the central bank to implement
an additional rate cut of 25bps in December. In addition, we do not expect rate hikes in 2014, as the
economy continues to grow below potential and inflation remains in check.
We forecast FX at 1880 to the dollar by year-end. The peso is hovering close to our year-end
forecast. The central bank continues to buy around 10 million dollars per day, in line with the program
of up to 1 billion dollars in purchases announced in the September monetary policy meeting.
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Nov-93 Nov-98 Nov-03 Nov-08 Nov-13
IMACO Indicates Slower Growth
Source: Dane, Central Bank , Ita
GDP growth(12M/12M)
IMACO
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Forecasts: Colombia
Economic Activity
Real GDP growth - % 3.5 1.7 4.0 6.6 4.2 3.8 4.2
Nominal GDP - USD bn 244 234 287 336 359 388 397
Population (millions) 44.5 45.0 45.5 46.1 46.6 47.1 47.7
Per Capita GDP - USD 5,496 5,199 6,305 7,304 7,706 8,244 8,321 Unemployment Rate - year avg 11.3 12.0 11.8 10.8 10.4 9.0 8.5
Inflation
CPI - % 7.7 2.0 3.2 3.7 2.4 2.5 2.9
Interest Rate
Monetary Policy Rate - eop - % 9.50 3.50 3.00 4.75 4.25 3.00 3.00
Balance of Payments
COP / USD - eop 2244 2044 1914 1943 1767 1880 1950
Trade Balance - USD bn 0.4 1.7 1.4 5.0 4.9 4.0 4.5
Current Account - % GDP -2.8 -2.1 -3.1 -2.8 -3.1 -3.5 -3.4
Foreign Direct Investment - % GDP 4.3 3.1 2.4 4.0 4.3 3.8 4.0
International Reserves - USD bn 24.0 25.4 28.5 32.3 37.4 42.3 47.8
Public Finances
Nominal Balance - % GDP -0.5 -2.2 -2.7 -2.9 -2.4 -2.2 -2.1
Gross Public Debt - % GDP 30.9 36.1 36.4 34.2 32.2 30.9 30.0
20 12 20 13 F 20 14F 2010200 8 2 009 20 11
Source: Central Bank, DANE, Haver and Ita.
Argentina
Falling Reserves and Political Shake-Up
The opposition gained an important victory against Kirchnerism in the mid-term election, on the
road to the 2015 presidential election.
There are uncertainties about the course of economic policies in the coming months. We expect
further tightening of FX controls to stop the drain on international reserves, and an acceleration of theofficial exchange rates depreciation.
Adverse results for the government in the mid-term elections
The opposition gained an important victory against Kirchnerism in the mid-term election.New-
Peronist forces and opposition parties will likely pose a tough challenge to Kirchnerism in the
presidential election of 2015. According to the final results of the mid-term election, the former chief of
the cabinet and current mayor of Tigre County, Sergio Massa, garnered almost 44% of the votes in
the province of Buenos Aires for the lower chamber, while the candidate supported by Kirchner won
32%. The result exceeds the 5% vote difference won by Massa in the August primaries. Massa has
criticized the high inflation, underperforming officials and safety problems in Argentina. His economic
team is led by former top officials from the first term of the Nestor Kirchner government.
It will be very difficult for the government to pursue a constitutional reform that would allow
Cristina Kirchner to be elected to a third term. In the City of Buenos Aires, Macris candidates for
the Senate obtained 39% of total votes while the incumbent got third place. In this way, Kirchnerism
lost all its senators in the city. Kirchnerism has also lost in the other main electoral districts such as
Mendoza, Crdoba and Santa F. Although Kirchnerism may maintain the majority in both chambers,
political analysts do not discard future realignments in Congress and further loss of political power. To
reform the constitution requires a special majority (2/3 of votes) in each congressional chamber.
There are now strong potential presidential candidates for 2015:Sergio Massa (Peronist party),
Mauricio Macri (right-wing PRO), Hctor Binner (Socialist party) and Julio Cobos (Radical party).
Kirchnerism does not have a candidate yet. Daniel Scioli (governor of the Province of Buenos Aires)
will likely try to take the post. President Kirchner did not vote because she is still recovering from
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surgery at the beginning of October to remove a blood clot on her brain. The exact date she will
return to office is still unknown, but will most likely be during November.
The odds that a political change could lead to market-oriented economic reforms have
increased. However, it is still a long road to 2015 from a political point of view. In addition, there
are uncertainties about the course of economic policies in the coming months. We expect further
tightening of FX controls to stop the drain on international reserves, and an acceleration of the official
exchange rates depreciation.
International reserves position continues to deteriorate
Argentinas trade balance showed a USD 0.8billion surplus in September, similar to the
amount reported in September 2012. The last-12-
month surplus remains at USD 9.4 billion. Exports
registered a significant deceleration (-9.8% QoQ/saar)
after posting 6.1% QoQ/saar growth in August and
23.3% QoQ/saar growth in July. Imports are currentlyfalling at a pace of 16.2% QoQ/saar. Despite the
decrease in fuel imports (-8.7% YoY), the 12-month
rolling energy balance deficit worsened to USD 5.8
billion, from USD 5.7 billion. Fuel exports dropped
30% YoY in September. We see downside risk to our
USD 10 billion trade-surplus estimate for 2013 due to
the recent poor export performance. We expect the
surplus to fall to USD 8.0 billion in 2014.
The trend in international reserves is worse than we thought. The central bank has borrowed
USD 1.3 billion to support the level of international reserves during September and October through
external credit lines. However, international reserves continued to fall at a rapid pace (almost USD
10.0 billion year to date). International reserves stand at USD 32.0 billion, net of the recently
confirmed external loans an additional USD 8.7 billion in USD reserve requirements are also
computed into the central banks liability. We now expect international reserves to fall USD 9.0 billion
(to USD 34.3 billion) in 2013 instead of USD 6.0 billion (assuming that the central bank will make use
of the remaining USD 1.7 billion available in credit lines from foreign banks). Our expectation for
Argentinas international reserves by year-end 2014, which implies a USD 7.0 billion decrease from
year-end 2013, does not assume a triggering of the GDP warrant.
A one-off sharp depreciation risk is low in our view. Instead, we expect authorities to allow the
peso to depreciate more rapidly and see a risk of a formal multiple-exchange-rate regime to address
over-valuation. We also believe that the government is likely to introduce new controls on travelsabroad to stop the drain of dollars and put renewed pressure on companies to bring dollars into the
country. The worsening trend in international reserves increases the expectation of currency
devaluation and the introduction of a dual-exchange-rate system. Our current scenario assumes a
30% annual depreciation pace for the remainder of 2013, which would bring the exchange rate to 6.1
pesos to the dollar by the end of the year. For 2014, we expect a 35% depreciation pace, which
would bring the FX rate to 8.24 by December. In the informal FX market, the so-called blue dollar
surpassed the 10 pesos mark (70% above the official FX market), while the Badlar rate continued to
rise to 19.5%. We keep our interest rate forecasts for the end of this year and the next at 21% and
25%, respectively.
0
10
20
30
40
50
Apr-12 Aug-12 Dec-12 Apr-13 Aug-13
Just Taking a Breather
Source: BCRA, Ita
Official FXAnnualizedDepreciation Rate
Monthly changes
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Positive surprise in activity
A better-than-expected figure in September and revisions led us to increase our growth
forecast for this year. The IGA, a GDP proxy produced by the consulting firm OJF, increased 1.0%
(seasonally-adjusted) in September, after three consecutive declines in the previous months. The
result, propelled by a rebound in the industrial sector, was better than market expectations. Although
the economy decelerated in the months before September as we had expected, the recent recovery
and revisions in the series improved the growth outlook for the whole year. We now expect the
economy to grow 2.7% in 2013 (previously 2.0%). However, we continue to expect zero growth next
year due to tighter import controls, lower growth in Brazil and weaker harvest growth.
Still rising inflation.Consumer prices in Argentina rose 2.1% month over month in September (vs.
1.93% in September 2012), according to a private-sector survey published by a congressional
commission, bringing annual inflation to 25.4% in September from 25.2% in August. We expect
inflation to continue to accelerate and to reach 28% in 2013 and 35% in 2014, driven by a weaker
exchange rate in both the official and parallel markets.
Talks on debt issuesThere has been some talk that restructured bond holders and holdouts may negotiate an end
to the litigation against Argentina before the Supreme Court decides on whether or not it will
hear the case.There are few details about the proposal, and the Argentine governments position
remains unclear. While a successful agreement could open the countrys access to international
markets, there are still many lingering uncertainties.
Forecasts: Argentina
Economic Activity
Real GDP growth (Private Estimates) - % 3.1 -4.2 8.0 5.1 -0.2 2.7 0.0
Nominal GDP - USD bn 324.8 305.5 368.7 446.0 475.5 516.5 535.9
Population (millions) 39.7 40.1 40.5 40.9 41.3 41.7 42.0
Per Capita GDP - USD 8,171 7,611 9,100 10,904 11,518 12,398 12,748
Unemployment Rate - year avg 7.9 8.7 7.8 7.2 7.2 7.3 7.8
Inflation
CPI (Private Estimates) - % 20.3 14.9 26.4 22.8 25.6 28.0 35.0
Interest Rate
BADLAR - eop - % 19.75 10.00 11.25 17.19 15.44 21.00 25.00
Balance of Payments
ARS / USD - eop 3.45 3.80 3.98 4.30 4.92 6.10 8.24
Trade Balance - USD bn 12.6 16.9 11.6 10.0 12.7 10.0 8.0
Current Account - % GDP 2.1 3.6 0.8 -0.4 0.1 -0.5 -1.1
Foreign Direct Investment - % GDP 3.0 1.3 1.9 2.2 2.6 2.4 2.0
International Reserves - USD bn 46.4 48.0 52.2 46.4 43.3 34.3 27.3
Public Finances
Nominal Balance - % GDP 1.4 -0.6 0.2 -1.7 -2.6 -1.9 -1.9
Gross Public Debt - % GDP 44.9 48.2 44.6 40.1 41.5 38.7 37.0
200 8 2009 2010 2 014F 2013F2011 2 012
Source: Central Bank, IMF, INDEC, Haver and Ita.
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Commodities
We Expect an Additional Drop in Sugar Prices
Fundamentals explain just some of the gains in sugar prices, so we expect prices to drop further
ahead.
WTI discount to Brent crude will probably remain wide until early 2014, as logistical bottlenecks in
the Central U.S. show up again.
The Ita Commodity Index (ICI) was virtually
unchanged in October, falling just 0.4% during the
month. The breakdown by component shows small
changes in all sub-indexes: Agriculture (-1.8%),
Metals (0.5%) and Energy (0.0%). In terms of
products, the highlights were higher sugar prices and
lower WTI crude prices. The fiscal uncertainty in the
U.S. was resolved without a major impact on the
growth outlook. The activity pick-up in China wasconfirmed in 3Q13, but we (and the market
consensus) continue to see it as temporary. The
partial shutdown of the U.S. government delayed data
releases by several agencies some numbers were
made available later (and do not change the
scenario), while other relevant reports were not published.
Agricultural commodities were affected the most by the interruption of data releases by U.S.
government agencies. The absence of weekly reports from the Commodity Futures Trading
Commission (CFTC) affected all commodity categories. Grains, soybeans and beef were further
impacted by probl