economic situation report march 2014

Economic Situation Report


March 2014

Investment Strategy

Adriana Rodríguez

[email protected]


Economic Activity

The Monthly Economic Activity Index (IMAE) showed positive but limited growth

during January (0.13% annualized), which was explained mainly by the reduced

productive activity from the manufacturing sector.

Inter-annually, the expansion rate for January was 3.1%, which represents a

noticeable slowdown from the 5% inter-annual growth observed in September.

This deceleration as well as the subsequent economic activity slowdown indicated

by the IMAE indicator during 2013 is related to the export rhythm of the Free Trade

Zones.

As a matter of fact, the Free Trade Zone deceleration has caused the IMAE

measured without the Free Trade Zones for January to be greater that the IMAE with

Free Trade Zones, as observed between July 2012 and May 2013.

Monthly Economic Activity

Inter-annual and Average Variation

Source: Aldesa graph based on BCCR data.

3.08%

0.0%

2.0%

4.0%

6.0%

8.0%

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Variación IMAE Variación promedio 12 meses 12-month Average Variation IMAE Variation


2

The Free Trade Zone Sector suffered a downward trend in its monthly exports,

significantly and especially in November and December. This downward trend was

related to the decreased US production affected by their unusually bitter winter

season, which meant the temporary suspension of production and transportation in

the East and Central regions of the US.

However, exports from the Free Trade Zones in February increased by $45 million, for

a monthly total of $487 million. The accrued amounts for the Free Trade Zones for the

first two months of the year were 1.2% less than that accrued for the first two months

of 2013.

Based on Aldesa’s own estimates, we hope that the export rhythm for the Free Trade

Zones will improve throughout the year, as well as continuing with a positive trend

shown by the exports from the Regular or Definitive Regime.

Regarding the latter, the economic activity level measured by the IMAE from the

Central Bank of Costa Rica (BCCR), as well as exports performed by them presents

an upward trend since August of last year.

Exports from the Definitive Regime in February (exports outside of the Free Trade

Zones that also include traditional exports) reached $435 million, its highest level yet

since May 2013. Accrual for the first two months of the year registered 2.6% higher

than that for the same period in 2013.

At the aggregated level, exports to the European Union and South America in

February presented higher positive variations (27% and 30%, respectively), these

destinations also added to improved monthly exports to North America and Asia.

Similarly, the BCCR recently disclosed the final data on Gross Domestic Product

(GDP) for the last quarter of 2013, which closed the year with a 3.54% growth for the

last portion of the period. This growth was due to the strong progress of goods and

service exports and a stable investment.

As a matter of fact, Direct Foreign Investment for the last quarter of the year was the

highest on record with $929 million recorded for the last quarter of the year, and an

annual total of $2,682 million ($2,288 million in 2012).


3

BCCR’s expectations for Direct Foreign Investment for the Macro Economic Program

in 2013 was $2,069 million, this number was revised in June and reached $2,460

million.

Inflation

Price growth for goods and services in the Basic Basket was 0.62%, for an inter-

annual inflation of 3.2%, and 2.04% accrual for the quarter (2.46% at March 2013).

The monthly price increase did not exceed February’s registered price (0.66%), even

though the high spike in the exchange rate fed the expectations of an increase in

goods and services for the Basic Basket, which included imported supplies.

Inflation expectations for the following 12 months went from 5.8% to 6.1% between

January and February, and the expectations for inflation for the following 6 months

went from 1.9% in January to 3.8% in February.

Consumer Price Index

Inter-annual variation

Source: Aldesa graph based on INEC data

At the closing of March, the accrued inflation for the Quarter was 2.04% (2.5% for March 2013).

Regulated Inflation IPC Interannual Variation Un-Regulated Variation


4

Interest Rates

The Basic Lending Rate (BLR) went from 6.45% to 6.60%, calculated towards the last

week of the month, and reaching its highest point since August 2013.

From the four groups that comprise the BLR, only the Group from the State Banks

presented an increase in its capturing rates, which went from 6.05% to 6.35%,

enabling all averages from paid rates to jump from 6.45% to 6.60%.

Capturing rates from Private Banks remained at 6.73%, Co-operatives at 7.72% and

Mutual Funds at 6%.

On March 13th the Central Bank increased its Monetary Policy Rate (MPR) from 3.75%

to 4.75% as a response to the accelerated depreciation of the Costa Rican Colon

before the US Dollar; this obligated the Central Bank to sell a total of $226 million in

March and $104 million in February.

The increase in the Monetary Policy Rate by the BCCR was followed by an increase

in their “Direct Central” capturing rates, which forced banks to compete against

these higher rates in order to attract resources.

On the other hand, stock market yields for investment instruments in domestic

currency presented an additional increase for the month, especially visible for fixed

rate bonds with terms greater than 4-years.

Basic Lending Rate and Monetary Policy Rate

Source: BCCR. Aldesa.

BLR MPR


5

We consider that interest rates in domestic currency will be less pressured to rise

once the resources come in for the next allocation of foreign debt bonds in the

international markets.

However, the actions of the Central Bank upon the increase of the exchange rate

(increasing the MPR) implies a higher “floor” for interest rate levels and a higher cost

of money, which will be reflected in the cost of credits at a moment when there is a

higher attractiveness feel among consumers.

Short-term interest rates in US Dollars in international markets suffered a slight

adjustment in March, when the markets didn’t heed to the message sent by the US

Federal Reserve regarding a possible first increase in its Monetary Policy Rate for

2015.

However, at the local level there persists a high liquidity level in US Dollars that

implies lower interest rates for savings in that particular currency; while certain

investment instruments denominated in US Dollars show interest rates that are

relatively higher, but are subjected directly to the risk of a reduced rating in the

sovereign debt by Moody’s.

Exchange Rate

The Colon-Dollar exchange rate suffered an extremely volatile trend during the

month of March. This volatility was greatest during the first two weeks of the month. It

was measured by its standard 15-day variation, as well as from the daily exchanges

for the Colon from the Dollar price.

In the foreign currency wholesale market (MONEX), the exchange rate suffered

movements that ranged between ₡520.00 and ₡580.25, and reached its lowest

value towards mid-march, when it was traded at MONEX at ₡520 and its daily

average closed at ₡540.79.

Traded amounts at MONEX exceeded 49% for February. March experienced trades

of $588 million, for a daily average of $29 million. The daily average for February was

$19 million, for a monthly total of $380 million.


6

Amounts traded at the bank windows tended to stabilize during the last half of

March. The daily average traded at the windows for the first half of the month was

$139 million, and $118 million for the second half. Daily average for windows for all of

2013 was $120 million.

MONEX Average Exchange Rate


With the entry of foreign currencies presumed by the latest allocation of $1 billion in

new foreign debt bonds for 2044, we expect that the purchases from the Non-

Banking Public Sector (SPNB) to diminish, and therefore relieving the exchange rate

market pressure and allowing the exchange rate to rise once again mainly during

the second half of the year.

500

510

520

530

540

550

560

570

580

Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14

TC Promedio Int. Compra

Yearly accrued devaluation 9.2%

Ave. ExRate Int.Purchase


7

MONEX traded amounts and exchange rates

The Average Exchange Rate at the Monthly Closing


Fiscal Deficit

The Government operational monthly deficit for February was ₡120 billion (0.4% of

GDP), and with the financial load for the month, the unbalance was ₡131 billion

(0.5% of GDP).

For the annual accrual, the fiscal deficit ascends to ₡326 billion (1.2% billion) for the

first two months of the year. The accrual is 8% above that registered for the same

period in 2013 (₡302 billion).

Total earnings improved by 5.9% regarding total earnings for the first two months of

the year, with total expenditure increasing by 6.7%.

This expenditure showed a 9.1% growth for remunerations and 12.4% for transfers. At

the earnings level, those perceived under the profit and utilities concept grew by

23%, and 19% for the exportations concept.

$345.54 $380.69

$588.06 ₡515.99

₡550.35

₡549.70

$495 $500 $505 $510 $515 $520 $525 $530 $535 $540 $545 $550 $555

$0

$100

$200

$300

$400

$500

$600

$700

ENERO FEBRERO MARZO Mill

one

s d

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SD D

óla

res Monto Negociado MONEX Tipo de Cambio

Tipo

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mb

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ON

EX M

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of U

SD$

MONEX traded amounts Exchange Rate

Excha

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Rate

M

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losing


8

Fiscal Deficit accrued as of February

Data accrued for February from each year, in Billions

Source: Aldesa graph based on Ministry of Finance data.

Additional Information

Economic Activity Index by Sector Inter-annual variation


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

Hotels Remaining Industries

Agriculture, Silviculture and Fishing

Power and Water

IMAE with IEAT, Cycle Trend

Manufacturing Industry

IMAE CYCLE TREND

Billi

on

s o

f C

RC

Co

lon

es

FINANCIAL SUP/DEFICIT

aug-13 dec-13 jan-14 apr-13


9

Activity Index for the Manufacturing and Construction Sector Inter-annual Variation


12-month Expected Inflation BCCR expectations survey


12-month inflation

Manufacturing Industry Construction

Jan Jan Jan Jan Jan Jan Jan Jan


10

Secondary Market Yields

Foreign Debt Instruments

Source: BNV. March 27, 2014.

Domestic Debt Instruments

Ministry of Finance

Rate Instruments in US Dollars


Price Bond Yield Government $ Ex Rate

Price Bond Yield Government $ Bonds


11

Ministry of Finance Fixed Rate Instruments in CRC Colones


Price Bond Yield Government Ex Rate

Coupon

economic situation report march 2014

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