economic situation report august 2013

7/30/2019 Economic Situation Report August 2013

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Economic Situation Report

EconomicSituationReport

August 2013

Investment Strategy

Adriana Rodrguez

[email protected]

Economic Situation Report

Economic Activity

The different national economic activity indexes continue to describe a very low

economic growth trend. The Monthly Economic Activity Index (IMAE) marks an inter-

annual growth of 2.68% as of June, which is the lowest rate since 2010, year of the

second worldwide recession.

May and June showed positive growth variations, well above the growth observed

during the first 3 months of the year. The best numbers are due to better Free Trade

Zone sales.

By eliminating the Free Trade Zone component from the IMAE, a 2.23% interannual

growth is obtained, showing a downward trend related to an internal demand that

has cooled throughout the year due to different factors.

Monthly Economic Activity Index

Interannual Variation

Source: Aldesa BCCR based data graph.

Manufacturing activity registered a 2.22% interannual growth for June and shows a

strong recovery, because the sector as such registered a 0.89% contraction in May.

IMAE Variation 12-month Average Variation


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Econmic Situation Report 2

The Manufacturing activity is split between regular regimen, active improvement

and Free Trade Zone System. The latter presents the best numbers with a 5.97%

interannual growth, which is mainly fed by improved sales in May and June.

The definitive system and active improvement shows a 0.30% and 6.75% drop in their

economic activity index, respectively.

For exports, foreign sales from regular systems are also the most affected. Free Trade

Zones shows an export volume of 0.59% for June, lower than the cumulative for the

same month of last year; while the regular system shows a 5.46% volume drop,

according to Procomer.

The Macro Economic Schedule Review by BCCR and the announcement of GDP

growth data and other national accounts for the first quarter of the year have

confirmed a deceleration that has already been perceived by analyst, consumers

and business people throughout the year.

Home Consumption

Quarter-to-Quarter Variation


It is interesting that Quarterly Growth levels for home consumptions are similar to

those registered during the 2009 crisis. This trend was explained by the unmeasured

Basic Lending Rate spike during 2012 that affected home finances, the increase

during the first months of the year for the costs of goods and public services, the

historical high cost of fuel, credit caps and the unfavorable scenario of expectations

regarding the path of the national economy.

Final Consumption Home Expenses


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Gross Domestic Product

Interannual cumulative variation GDP


Externally, we cannot exclude the incidence that lower foreign trade levels had on

national consumption.

BCCR revised a lower expected growth for the national economy for this year,

placing it at 3.0% from an estimated 4.0% at the beginning of the year. Expected

inflation was maintained at 5.0% and the expected credit for the private sector

went from 12.2% to 12.9%.

However, the lower economic growth has alarmingly affected, in our opinion, the

deficit from the public sector. Forecast for the fiscal deficit went from 4.8% to 5.0%

for this year, but will go from 5.0% to 5.8% in 2014; that when including the remaining

components from the Reduced Global Public Sector, results in a 6.6% deficit for the

following year and 5.8% for this year.

Updated QuarterGROSS DOMESTIC PRODUCT


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Interest Rates

The Basic Lending Rate (BLR) ranged from 6.65% to 6.55% in July, and in general did

not present any relevant changes that affected the highest level of liquidity that

prevails in the financial market in national currency, which allows a lower interest

rate environment.

Even though the BLR for the month showed a temporary increase that went from

6.55% to 6.60%, it was influenced more by the rounding of the calculation than by

changes in the collection rates from Basic Rate issuers.

A low economic growth implied a lower demand for financing, which minimized the

need for resources by the financial brokers and relieved the pressure to increase the

level of interest rates.

Also, the fact that the Government has external financing to solve its deficit has

given it power of negotiation, allowing it to sell internal debt bonds at favorable

prices in its biweekly auctions. In other words, the deficit has not generated a

restricting effect on the market thanks to the international sale of bonds for $1 Billion

made in March of this year.

Basic Lending Rate

Source: BCCR. Aldesa.


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Although interest rates in Colones have remained stable, interest rates in USD have

indeed recorded the consequences of higher rates, internationally.

Foreign and Domestic Bond yields in dollars have suffered an important adjustment

upward between May and July. This adjustment towards higher yields resulted from

higher yields from US Treasury Bonds and the following months are expected to

experience additional adjustments based on the expectations on how the Federal

Reserve will handle its monetary policies and the appointment of Ben Bernankes

successor to the Chair.

Inflation

The overall monthly price increase as of July was 3.59%, for an interannual total of

5.81% according INEC.

During the year, the higher increases have been registered for residential leasing

and services that between January and July present a 10.10% increase and an

interannual of 23.63%. Education and Alcohol and Tobacco are the other two items

that report increases for the year.

Consumer Price Index


Source: Aldesa INEC based data graph

At the end of July, 52% of the 292

goods in the Basic Basket

increased in price, 37%

decreased and 11% showed no

change according to INEC data.


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The goods and services category presented an interesting case in which tradable

items practically had a mere 0.69% interannual inflation, the lowest registered since

the 2009 crises. Inflation on goods and services for non-tradable items (consumed at

the place of origin) was 8.55%.

Similarly, the interannual increase on regulated goods and services was 14.26%,

while non-regulated suffered a 3.58% increase.

We consider that due to the low economic growth, the current situation will prevail,

in other words, only goods and services with prices depending directly or indirectly

on the regulators will experience growth, because for the rest, the demand is not as

strong and possibly will only experience pressure to increase until the end of the year

holidays without devaluation.

Exchange Rate

During July $330 million were traded on the wholesale currency market (MONEX).

This amount was slightly higher than the $307 million traded in June.

The BCCR acquired $26 Million of the total negotiated in July, which meant an 8%

market share; and the Public Non-Banking Sector purchased 45% and the remaining

were purchases from the private sector.

MONEX Average Exchange Rate


500

505

510

515

520

525

Aug/15 Feb/16 Aug/16 Feb/17 Aug/17

TC Promedio Int. CompraAve. ExRate Purchase Int.


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However, during the first two weeks of August a new series of foreign currency has

emerged and during the first two weeks of the month the BCCR acquired $83 million,

of the $187 million negotiated MONEX.

The current abundance of foreign currency in the wholesale market is inconsistent

with the international scenario in which currencies from emerging countries are

facing strong losses regarding the US Dollar, which is due to a considerable

adjustment towards higher interest rates in USD and going into a period of lower

monetary stimulus by the Federal Reserve of the United States.

Fiscal Deficit

July data on Central Government finances show a strong deterioration, resulting

mainly from salary expenses and interest on current debt.

The monthly operational shortage for July was 82 Billion, for a yearly total of 361

Billion, equivalent to 1.5% of the GDP expected for this year. Adding to the financial

load, the fiscal deficit reaches 738 Billion, 3% of GDP.

Central Government Deficit

7-month Aggregate

Source: Aldesa Ministry of Finance based data graph

-800,000

-700,000

-600,000

-500,000

-400,000

-300,000

-200,000

-100,000

0

Dficit Primario Dficit Financiero

2013 2012

Million of Colones

+ 28%

+ 30%

Primary Deficit Financial Deficit


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Both the operational or primary deficit as well as the financial deficit show an alarming

growth rate of 30% compared to the aggregated for the 7 months from the previous

year.

From the aggregated expense in the 7 months up to July, 38.1% corresponds to

remuneration, expense that increased 10.5% regarding the aggregated up to July of

2012. The other major expense components are transfers that equal 38.9% of the

expense and interest expenses that represent 14% of Government derogations.

Capital expenditure barely exceeded 6.0%, and the 6.4% average is for the two

previous years.

Facing this increase in debt, the Government has announced that it is working on a

new fiscal reform and the first draft is scheduled to be released as soon as September.

We consider that the luck that this fiscal reform will face on its way to Congress will be

the main event to be monitored during 2014, because Costa Ricas sovereign risk rating

depends on it. This is the current investment grade used by Moody and interest rate

stability for the year.

The Government is allowed an additional $1 billion in foreign debt for 2014, but will be

cut short due to the deficit size forecasted for 2014 by the Macro Economic Schedule

Review, which is 5.8% of the GDP. In addition, international interest rates have gone up

significantly since the last foreign debt bond sale in March of this year.


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Additional Information

Economic Activity Index by Sector



Activity Index for the Manufacturing and Construction Sector

Interannual variation


-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Industria manufacturera ConstruccinManufacturing Industry Construction

Dec-12 Jan-13 Feb-13 Mar-13 abr-13 May-13 Jun-13 Jul-13

Indirectly measured Financial Mediation Services

Transportation, Storage and Communication

Finance and Insurance Services

Other services Rendered to Companies

Mining and Quarry Material Exploitation

Commerce

Construction

HotelsRemaining Industries

Agriculture, Silviculture and FishingPower and Water

IMAE with IEAT, Cycle Trend

Manufacturing Industry

IMAE Cycle Trend


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Regulated and Unregulated Goods and Services

Interannual Price Variation


Expected inflation

BCCR Survey


5.8%

14.3%

3.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Jul-14 Jul-15 Jul-16 Jul-17

Inflacion Regulados Variacin Interanual Inflacion No Regulados

6.2%

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

Jul-14 Jul-15 Jul-16 Jul-1

Inflacin 12 Meses12-month inflation

Regulated Inflation Inter annual Variation Unregulated Inflation


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Secondary Market Yields

External Debt Instruments

Source: BNV. August 19th, 2013.

Internal Debt Instruments

Ministry of Finance

Fixed Rate Dollar Instruments


PriceBond Yield

Government $ Ex Rate

PriceBond Yield

Government $ Bonds


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Ministry of Finance

Fixed Rate Colones Instruments


Costa Rican Electrical Institute

Fixed Rate Dollar Instruments


PriceBond Yield

Costa Rican Institute of Electricity

PriceBond YieldGovernment Ex Rate

Coupon

economic situation report august 2013

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