economic situation report - august 2014

Economic Situation Report

Economic

Situation

Report

August 2014

Investment Strategy

Adriana Rodríguez

[email protected]


Economic Activity

The national economic activity grew at an inter-annual rate of 4.15% at the end of

the first half of the year according to the Monthly Economic Activity Index (IMAE)

from the Central Bank of Costa Rica (BCCR).

At the same time, the average variation rate marked an inter-annual growth of

4.30%, suggesting an inter-annual progress that exceeds 4% of GDP for the second

half of the year.

Although the inter-annual growth was a bit greater than expected, the data from

IMAE also indicates a monthly growth rate that has decelerated in the months prior

to June, which seem to describe an economy that has lost footing as the year

progresses.

Now, the data from June indicates an annualized monthly rate of 3.7%, the lowest

for the year since the economy started to become sluggish right before the

presidential elections.

Monthly Economic Activity

Inter-annual and Average Variation

Source: Aldesa graph based on BCCR data.

12-month Average Variation IMAE Variation

mailto:[email protected]


2

From the 13 sectors from the IMAE, all have indicated a positive growth, except for

the ‘hotel’ sector which recorded a rate of 0% during the month of June, this was

mainly due to the 2014 FIFA World Cup, which kept people at bay from hotels in

favor of home and restaurant activities.

With this said, at the inter-annual level, this sector has perceived an increase from

the number of tourist that visited the country. During the first quarter of the year,

foreign visitors increased by 5.8% according to BCCR.

“Indirectly measured financial services” and “Financial and Insurance Services”

continued recording the most relevant growth domestically, and in June started

showing an inter-annual growth of 11.2% and 9%, respectively.

According to BCCR, the best growth from the activities indicated above can

explain for the greatest capture of savings and credit placement, as well as

commissions from exchange rates and credit cards.

The construction sector also recorded positive progress (4.25%), which is explained

by the increase in public construction and the continuation of private construction

works. Both industries have favored the sectors that provide services to companies,

such as engineering and architecture among others, which mark a 4.8%. inter-

annual increase.

Accrued exports for July show an increase of 1.4% in regards to the accrued for the

same period during the previous year.

The growth of foreign sales coming from the regular regime have been steady at

4.4%, and comprise 52% of the total exports of the country.

These exports had a positive trend during the first 5 months of the year, but June and

July saw a loss in volume. The export of agricultural and industrial goods showed a

growth of 9.6% and 5%, respectively.

Exports from the Free Trade Zones have been stable, with a growth rate of 0.8%.

Sales from the Free Trade Zones fell during the months of January and December,

which is consistent with the economic pace of the USA, but managed to recover in

the following months.


3

In the United States, the economic growth from the second quarter reached a rate

of 4.2%, which was previously estimated at 4.0%.

Private investment in structures and equipment during the quarter grew to its best

rate in over two years (8.1%) at the time when corporate earnings before taxes, had

its best progress in over four years.

Consumer sales presented a growth progression of 3.1% and created 816 thousand

new positions, which took unemployment to 6.1%.

Albeit the best economic data, workforce engagement continues to border the

levels found back in the 1970s; an element that is fundamental for the Monetary

Policy of Federal Reserve, and in conjunction with increasing prices, it still does not

infer a risk.

Inflation

In July 58% of the 292 goods and services from the Basic Basket rose in price; 32%

showed a decline and 10% remained the same, according to INEC data.

The monthly price increase on goods and services from the Basic Basket was 0.91%

for July, which is second greatest monthly increase so far for the year, particularly

because April recorded a monthly increase of 1.14%. Therefore, the inter-annual

inflation was locked at 5.19% and 5.09% for the 7-month accrual.

As for the first half of 2013, the price increase for regulated goods and services

continues to pressure the macro-indicators from domestic price trends.

The increase on regulated goods and services for this year is 9.80%, which triples the

increase from the rest of the unregulated goods and services of the economy,

which as been 3.76%.

Split among the categories of tradables and non-tradables, prices have gone up

6.14% for the first group and 4.59% for the second.


4

Regulated and Un-Regulated Goods and Services

Monthly Variation

Source: Aldesa Graph con base a datos del INEC

According to the 12 groups in which INEC divides the Basic Food Basket, the three

divisions with the broadest increases for the year include ‘home rental and services’,

which have spiked to 9.88%; ‘transportation’ increased to 8.08%, and ‘education’

shot to 6.46%.

The Survey on Inflation Expectations from the BCCR saw an expected 6.50% inflation

for July after spiking to 6.90% in March.

After the 2014-2015 Macro-economic Program mid-year revision, the Central Bank

kept its 4% +/- 1% inflationary goal intact for July.

Even though the inflation goal was maintained, BCCR recognizes that ‘there is the

high probability that transitory deviations might exist regarding such goals,

particularly in the second half of this year and in the beginning of 2015’ (Macro-

Economic Program Revision, p.6).

According to BCCR, the main sources of deviations stem from the inertial effects of

the increase in exchange rates, including regulated goods and services, such as

water and power.

Un-Regulated Regulated

Mo

nth

ly V

ari

ati

on

Jan apr


5

Similarly, the BCCR cites the following reasons for not modifying its goal: 1. It is short-

term vision; 2. It allows the escalation on monetary aggregates above those

required by future pressures; 3. With the transitory deviation, another adjustment

would be required in the future.; 4. It delays the convergence towards inflation of

commercial partners.

Interest Rates

In August, the Basic Lending Rate (BLR) reached its highest point since March 2013,

which closed at 7.10%.

The BLR bottomed out in March at 6.45%. Ever since this month, the weekly

calculations have been on the rise; pressured on one side by the increase

adjustment made by the Central Bank to its Monetary Policy Rate (MPR) and to its

capturing rates offered in their Direct Central.

Although the MPR variation was the first ‘trigger’ for increasing interest rates on the

national currency, the financial intermediaries have recently been more active in

the search for funds in Colones, by offering interest rates that are steadily higher

when acquiring Colones, which meet the demand for credit in this currency.

Basic Lending Rate and Monetary Policy Rate

Basic Lending Rate (BLR) and Monetary Policy Rate (MPR)

Source: BCCR. Aldesa Graph.

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

ago-09 ago-10 ago-11 ago-12 ago-13 ago-14

TPM TBP


6

It has been the most significant inflation observed so far, and the fiscal deficit has

yet to exercise a palpable effect on interest rates. In the case of inflation, the

market stakeholders agree that it has been a ‘transitory’ bump in the road, but in

the case of the fiscal deficit, since external financing has been available, it has

allowed to contain the interest rates paid by the Ministry of Treasury.

According to BCCR, Private Banking, as a whole, transitioned from paying an

average rate of 7% for the first half of August to 7.3% in the second half of the

month. Capture for this sector represents 18% of the weekly BLR calculation.

The Public Banking Group sector states that the 57% is based on BLR calculation. The

150- to 210-day term savings went from 6.8% to 6.9%.

With the surge of capture rates in Colones and the expected 3.8% 12-month

investment devaluation, the premium in local currency has risen and placed at

1.45% after being in the red in February and March.

The 6-month deposit rates in USD paid by the State bank ended at 1.85% for August.

July saw the highest point for the year, where the sector average recorded 2.10%.

There is no foreign or domestic pressure on USD interest rates. Locally, an excess of

liquidity can be appreciated; internationally, it has returned to minimums since May

2013.

Investment Premium in CRC

Calculated based on BLR, expected devaluation and 6-month deposit in USD.

Source: Aldesa Trading.

1.45%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

ene-13 feb-13 mar-13 abr-13 may-13 jun-13 jul-13 ago-13 sep-13 oct-13 nov-13 dic-13 ene-14 feb-14 mar-14 abr-14 may-14 jun-14 jul-14 ago-14


7

Exchange Rates

The CRC-USD exchange rate has been very stable during the month of August.

The MONEX exchange rate weighted average for the month was ₡541.73 and the

variations regarding the average were minimum; as a matter of fact the standard

15-day deviation for the month averaged ₡0.95; and during the last week of the

month was set at ₡0.55, these levels haven’t been seen since December 2013, when

the exchange rate was sitting at the floor of the exchange rate band.

It is exactly in July with the changes from the purchasing trends in the current Non-

Banking Public Sector (NBPS), that we observe minimum daily adjustments made in

the value of USD.

Regarding the new scheme, we observe that right before the bi-weekly payroll in

August, the Central Bank of Costa Rica (BCCR) accelerated its purchases in MONEX

and therefore reduced any lag in the currencies sold to the Public Sector and those

purchased in MONEX.

As a matter of fact, right before the bi-weekly payroll, we observed an excess of US

Dollar sales at bank windows; nearing US$ 35 Million.

As notified by the BCCR, purchases or sales made in MONEX would be coordinated

based on the ‘seasonality’ observed at the windows.

During the month of August, we noted that the BCCR sold $107,6 Million to the

SPNB’s International Reserve, and purchased or ‘replaced’ US$106.7 million at

MONEX on August 28th.

The accrued devaluation in CRC Colones compared to USD was held at 7.6% for the

year. We consider that pressure on exchange rates will continue to be low for the

following months, which will come from foreign financing by the Ministry of Treasury,

although we don't expect any abrupt appreciations.


8

MONEX average exchange rate

Source: Aldesa Graph elaborated with BCCR data.

Fiscal Deficit

The Government operational deficit for July was ₡94 Billion (0.3% of GDP) for a total

monthly deficit of ₡ 155 Billion (0.6% of GDP).

The annual operational deficit ascended to ₡477 Billion (1.8% of GDP) and the total

deficit reached ₡855 Billion (3.1% of GDP). The inter-annual growth for both was 32%

and 15.9%, respectively. Tributary income growth was 7.5% and total expenditure

was 9.8%.

The placement of the last Foreign Debt Bond in the international markets, expiring in

2044, managed to stabilize local interest rate expectations from the stock market

(which was on the rise) and, coupled with a lower demand for credit from the

private sector has allowed minimizing the effects on interest rates within a rising fiscal

deficit.

However, pressure has been perceived on primary bond market interest rates during

the month of August, where bank issuers have been a bit more active in the search

for funds, that in conjunction with the deteriorated public finance perspective

among investors, can once again exercise pressure on interest rates.

₡500

₡510

₡520

₡530

₡540

₡550

₡560

₡570

ago-11 nov-11 feb-12 may-12 ago-12 nov-12 feb-13 may-13 ago-13 nov-13 feb-14 may-14 ago-14

TC Promedio Int. Compra

Annual Accrued

Devaluation 7.6%

Ave. ExRate Int.Purchase


9

Fiscal Deficit accrued as of February

Data accrued for JULY from each year, in Billions

Source: Aldesa Graph elaborated with Ministry of Finance data.

Additional Information

Economic Activity Index by Sectors

Inter-annual Variation


2.2%

del PIB

2.1%

del PIB

1.9%

del PIB

-₡900

-₡800

-₡700

-₡600

-₡500

-₡400

-₡300

-₡200

-₡100

₡0

2014 2013 2012

Mile

s d

e m

illo

ne

s d

e c

olo

ne

s

DÉFICIT PRIMARIO DÉFICIT TOTAL

sep-13 oct-13 nov-13 dic-13 ene-14 feb-14 mar-14 abr-14 may-14 jun-14

Sector % % % % % % % % % %

Servicios de Intermediación Fin. Indirectos 10.01% 10.70% 11.65% 11.48% 11.59% 12.54% 12.67% 11.89% 11.14% 11.23%

Servicios Financieros y Seguros 7.94% 8.17% 8.42% 8.61% 8.96% 9.40% 9.36% 8.97% 8.86% 8.99%

Transporte, Almacenamiento y Comunicaciones 5.05% 5.86% 6.92% 7.75% 8.17% 8.27% 8.18% 8.11% 8.14% 8.23%

Agricultura, silvicultura y pesca 1.18% 1.67% 2.25% 3.00% 3.98% 5.06% 6.07% 6.76% 6.99% 6.78%

Otros Servicios Prestados a Empresas 6.65% 6.49% 6.22% 6.31% 6.35% 6.28% 5.97% 5.25% 4.68% 4.81%

Comercio 3.48% 3.53% 3.60% 3.69% 3.85% 3.98% 4.10% 4.32% 4.51% 4.57%

Construcción 1.51% 1.38% 1.44% 1.83% 2.58% 3.24% 3.66% 3.92% 4.01% 4.25%

IMAE con IEAT, Tendencia Ciclo 5.05% 4.86% 4.24% 3.61% 3.56% 3.97% 4.36% 4.50% 4.38% 4.15%

Hoteles 3.98% 4.11% 4.31% 4.56% 4.69% 4.61% 4.49% 4.37% 4.04% 3.57%

Extracción de Minas y Canteras 2.24% 2.10% 2.02% 1.99% 2.03% 2.15% 2.31% 2.53% 2.82% 3.08%

Resto de Industrias 3.32% 3.30% 3.28% 3.26% 3.20% 3.17% 3.15% 3.12% 3.09% 3.07%

Electricidad y Agua 0.69% 0.56% 0.51% 0.42% 0.49% 1.22% 1.98% 2.02% 1.92% 1.80%

Industria manufacturera 9.93% 8.85% 5.92% 3.01% 1.92% 2.39% 3.06% 3.16% 2.58% 1.80%

IMAE TENDENCIA CICLO 5.05% 4.86% 4.24% 3.61% 3.56% 3.97% 4.36% 4.50% 4.38% 4.15%

TOTAL DEFICIT PRIMARY DEFICIT

BIL

LIO

NS O

F C

RC

CO

LON

ES

2.2% of GDP

2.1% of GDP

1.9% of GDP

IMAE CYCLE TREND

Indirectly measured Financial Mediation Services

Transportation, Storage and Communication

Finance and Insurance Services

Construction

Hotels

Agriculture, Silviculture and Fishing

Power and Water

IMAE with IEAT, Cycle Trend

Manufacturing Industry

Mining and Quarry Material Exploitation

Remaining Industries

Trade

Other Services Rendered to Companies

Dec-13 Jan-14 apr-14


10

Activity Index for the Manufacturing and Construction Sector

Inter-annual Variation


12-month Expected Inflation

BCCR expectation survey


Manufacturing Industry Construction

Inflation 12-month expected Inflation


11

Secondary Market Yields

Foreign Debt Instruments

Source: BNV. August 29th, 2014

Domestic Debt Instrument

Ministry of Finance

Fixed Rate Instruments in USD


Título Precio Rendimiento

01/08/2020 129.16% 4.35%

26/01/2023 95.77% 4.87%

30/04/2025 93.85% 5.13%

30/04/2043 87.50% 6.31%

04/04/2044 105.00% 6.62%

Bde$ Gobierno

Título Precio Rendimiento

19/11/2014 100.39% 0.75%

20/05/2015 102.22% 1.49%

27/05/2015 104.72% 1.15%

25/11/2015 103.39% 1.80%

25/05/2016 107.38% 2.52%

24/05/2017 100.47% 3.50%

22/11/2017 100.79% 3.65%

30/05/2018 103.86% 3.94%

27/05/2020 99.83% 4.86%

15/06/2020 120.53% 4.91%

25/05/2022 102.00% 5.20%

26/11/2025 95.75% 5.57%

26/05/2027 100.25% 5.95%

25/05/2033 87.45% 6.20%

Tp$ Gobierno

Price Bond Yield

Government $ Bonds

Price Bond Yield

Government $ Ex Rate


12

Ministry of Finance

Fixed Rate Instruments in CRC Colones


Título Cupón Precio Rendimiento

24/09/2014 7.80% 100.15% 5.33%

28/01/2015 8.51% 101.10% 5.73%

24/06/2015 9.66% 102.59% 6.33%

23/09/2015 10.58% 104.00% 6.61%

23/03/2016 8.74% 102.55% 6.98%

22/06/2016 10.58% 105.48% 7.28%

28/09/2016 13.00% 111.27% 7.06%

21/12/2016 6.67% 98.32% 7.47%

22/03/2017 7.59% 99.59% 7.77%

28/06/2017 9.89% 104.55% 8.05%

27/09/2017 11.04% 107.90% 8.08%

24/01/2018 8.74% 101.00% 8.39%

28/03/2018 11.13% 107.70% 8.58%

26/09/2018 7.82% 97.03% 8.70%

27/03/2019 9.20% 100.49% 9.06%

25/03/2020 7.59% 92.90% 9.25%

23/12/2020 8.97% 97.27% 9.55%

22/09/2021 9.66% 99.59% 9.74%

29/06/2022 9.43% 98.02% 9.79%

21/12/2022 11.50% 109.31% 9.83%

28/06/2023 10.12% 100.69% 10.00%

20/03/2024 10.12% 100.41% 10.05%

28/06/2028 8.51% 85.56% 10.51%

26/09/2029 10.58% 98.74% 10.75%

21/09/2033 8.51% 87.49% 9.99%

Tp Gobierno

Price Bond Yield

Government Ex Rate

Coupon

economic situation report - august 2014

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