Regional recovery off to a slow start - Capital Economics
Latin America Economics

Regional recovery off to a slow start

Latin America Chart Book
Written by William Jackson

The number of new daily coronavirus cases in the region has continued to rise, with only Chile among the major economies appearing to get its outbreak under control. Restrictions have been lifted much more slowly in the region than elsewhere in the emerging world, and activity has been slower to recover as a result. The possibility of strict localised containment measures – as happened recently in cities such as Santiago, Buenos Aires and Bogota – will continue to cloud the outlook. And, in any case, there will be a long-lasting drag from citizens’ precautionary behaviour. As a result, the recovery in Latin America as a whole will probably be the weakest of any region in the world.

  • The number of new daily coronavirus cases in the region has continued to rise, with only Chile among the major economies appearing to get its outbreak under control. Restrictions have been lifted much more slowly in the region than elsewhere in the emerging world, and activity has been slower to recover as a result. The possibility of strict localised containment measures – as happened recently in cities such as Santiago, Buenos Aires and Bogota – will continue to cloud the outlook. And, in any case, there will be a long-lasting drag from citizens’ precautionary behaviour. As a result, the recovery in Latin America as a whole will probably be the weakest of any region in the world.
  • In Brazil, the peak-to-trough fall in output has been a bit smaller than we had anticipated. Surveys have picked up sharply in June and July, but other indicators suggest that the recovery is still very slow. Low inflation means that there should be scope for a final 25bp cut in the central bank’s easing cycle when Copom next meets in August.
  • While Mexico’s export-led industrial sector began to rebound in June, domestic demand still appears to be very weak. And with inflation unlikely to be a major concern, we think that Banxico will continue its easing cycle with a further 100bp of rate cuts this year.
  • Argentina’s economic recovery appears to be faltering due to a fresh surge in coronavirus cases. That is putting pressure on the public finances, which are in dire straits. The government’s weak debt dynamics means a restructuring deal, if finalised, is unlikely to provide sufficient debt relief over the medium term.
  • The pick-up in Colombia’s economy is slow going. Indeed, there are early signs that the recovery in activity tailed off this month due to renewed restrictions in the capital city. And the recent rise in virus cases suggests that those restrictions may remain in place for some time.
  • Chile’s economic recovery is yet to get off the ground as the government has maintained its severe lockdown in order to stamp out the virus. A bill to allow withdrawals of up to 10% of pension savings could help to bolster a recovery, albeit with longer-term fiscal costs. Elsewhere, Peru’s economy is starting to recover but from a very low base.
  • In Ecuador, the spreads on sovereign dollar bonds have narrowed amid a rise in oil prices and hopes for a debt restructuring deal. But even if a deal is agreed, we’re not convinced that what is on offer would restore debt sustainability over the medium term. Meanwhile, Venezuela’s humanitarian crisis is being exacerbated by the coronavirus. Uruguay has managed to control its virus outbreak relatively well and its economic recovery appears to be one of the strongest in the region.
  • In Financial Markets, equities and currencies have generally continued to recover lost ground in the past month and, despite the bleak economic outlook for the region, we think this trend will continue.

Coronavirus

  • The region has continued to struggle with a rapid rise in coronavirus cases (1). The surge in the number of new daily reported infections in Brazil looks particularly alarming, though new cases are also rising across most of the region (2). On a per capita basis, Chile has had the worst outbreak in the region (3).
  • The good news is that the prolonged stringent lockdown in Chile seems to have resulted in a decline in cases – it is seeing the fastest decline in new per capita cases of any major EM (4). If this trend continues, the drag from cautious household behaviour may fade more quickly in Chile than elsewhere in the region.
  • Elsewhere, containment measures have generally become less stringent compared to their peak during this crisis (5). But the continued spread of the virus in the region means governments have been unwilling to lift restrictions as quickly as in other EMs (6). As a result, the economic recovery in Latin America has lagged those elsewhere in the emerging world – a trend we expect to continue over the coming quarter.
  • Chart 1: Daily New Infections By
    Region (000s, 7d Avg.)

Chart 2: New Daily Coronavirus Cases (7d Avg.)

Chart 3: Confirmed Coronavirus Cases
(per mn Population)

Chart 4: Change in New Daily Cases Per Million People (7d Avg.)

Chart 5: Change in Oxford University Government Response Stringency Index from Peak

Chart 6: Oxford University Government Response Stringency Index (Avg., Inverted)

Sources: Refinitiv, Oxford University, CE


Brazil

  • Brazil’s coronavirus crisis has deepened, with the number of new cases still extremely high and not yet peaking. There is little sign that the authorities will tighten containment measures in major urban areas though. Otherwise, headlines have been dominated by the government’s decision to try to push changes to the tax system, suggesting that the reform agenda isn’t dead in the water.
  • In terms of the latest economic developments, the peak-to-trough fall in output appears to have been a bit smaller than in the rest of the region (7). At a sectoral level, ICT has held up well, but transport has suffered heavily (8). There’s mixed evidence on the pace of the economic recovery more recently. Surveys point to a relatively swift rebound (9), but our Mobility Tracker tells an altogether more downbeat story (10). We think the latter is probably a better gauge – it tallies with the import figures for June and early July.
  • Inflation remains weak – the July mid-month reading showed that headline rate stood at just 2.1% y/y (11). The recent spike in food inflation is starting to unwind and core inflation is subdued. Against this backdrop, we think the central bank will cut the Selic rate by a further 25bp to 2.00% next month (what it is calling a ‘residual’ cut). Interest rates are likely to follow a lower path than investors are currently pricing in (12).

Chart 7: Economic Output* (%-Change Feb-May, SA)

Chart 8: Economic Output by Sector
(%-Change Feb-May, SA)

Chart 9: FGV Expectations Indices & GDP

Chart 10: CE Brazil Mobility Tacker (% Difference from Jan.-6th Feb. Median Level, 7-day Moving Avg.)

Chart 11: Consumer Prices (% y/y)

Chart 12: Selic Interest Rate (%)

Sources: Refinitiv, Apple, Google, Moovit, FGV, WB, Bloomberg, CE


Mexico

  • The record 17.3% q/q collapse in Mexico’s GDP in Q2 was largely driven by a 23.6% q/q slump in secondary (industrial) sector production (13). The drop in output came in April and May; the GDP data imply that industrial production rebounded by about 18% m/m in June. However, that still leaves it around 15% below its February level (14).
  • It’s a similar message from the June trade data as manufacturing exports bounced back, particularly autos, though remained weak by past standards. Imports were weaker still (15), implying that domestic demand has been slow to recover. Our Mobility Tracker suggests that domestic activity has stayed soft in July (16).
  • Weak activity has done little to prevent inflation from rising to 3.6% in the first half of July. We think that higher fuel inflation will continue to push up the headline rate, but the lagged impact of Mexico’s large output gap should keep it within Banxico’s 2-4% target range in the coming months (17). That will allow the central bank to lower its policy rate by an additional 100bp, to 4.00%, this year. And with inflation and activity set to remain soft, we think the policy rate will stay lower for longer than investors expect (18).

Chart 13: Real GDP by Sector (% q/q SA)

Chart 14: Industrial Production Level*
(SA, Feb. 2020 = 100)

Chart 15: Goods Exports & Imports ($bn)

Chart 16: CE Mexico Mobility Tracker (% Difference from Jan.-6th Feb. Median Level, 7-day Moving Avg.)

Chart 17: Consumer Prices (% y/y)

Chart 18: Bank of Mexico Policy Rate (%)

Sources: Refinitiv, Bloomberg, Google, Apple, Moovit Capital Economics


Argentina

  • Argentine economic activity rebounded by 10% m/m in May but, given the sharp falls in March and April, it was still about 20% below its February level (19). Coronavirus cases have since escalated (20), prompting policymakers to tighten restrictions in Buenos Aires in early July. This appears to be weighing on activity, as the recovery in our Argentina Mobility Tracker has stalled in recent weeks (21).
  • Weak activity is dragging down the public sector revenues, while spending is growing as policymakers seek to alleviate the health and economic crisis (22). That has blown a hole in the public finances, and we think that the government will run large primary deficits in the coming years. Otherwise, the large spread between the official and unofficial exchange rates suggests the peso is increasingly overvalued (23).
  • Dire public finances, and a necessary adjustment in the peso, means Argentina’s (FX-dominated) public debt dynamics are very weak. Against that backdrop, we don’t think that the government’s latest restructuring offer, which only includes small nominal haircuts, would do enough to put the public debt-to-GDP ratio on a sustainable path (which the IMF defines as falling to 60%) (24). So if a restructuring deal is finalised, there is a significant risk that another round of debt talks will be required further down the line.

Chart 19: Economic Activity (SA, Feb. 2020 = 100)

Chart 20: New Daily Coronavirus Cases (7d Avg.)

Chart 21: CE Argentina Mobility Tracker (% Difference from Jan.-6th Feb. Median Level, 7-day Moving Avg.)

Chart 22: Public Sector Primary Expenditure & Revenues (% y/y)

Chart 23: Spread between Unofficial and Official Peso Vs. US Dollar (%, 3-day Moving Average)

Chart 24: Public Debt (% GDP)

Sources: Refinitiv, CEIC, Google, Apple, Moovit, Capital Economics


Colombia

  • Colombia’s economic recovery has gotten off to a slow start. Admittedly, the ISE activity indicator (which has a good relationship with the official GDP figures) expanded by 5.2% m/m in May (25), and industrial production and retail sales both recovered a bit of ground (26). But output was still around 17.5% below its pre-crisis level. Capital goods imports remain depressed and point to an investment downturn in Q2 on a par with 2009 and 2016 (27).
  • Our Mobility Trackers show that Colombian activity continued to recover over June but stalled in July (28). This appears to be a result of the re-imposed strict lockdown in Bogota. High levels of new virus cases (29) mean containment measures could be kept in place for longer, which would further depress activity.
  • Fiscal support has been limited but there is room for the central bank to act. Headline inflation has fallen sharply, from 2.9% in May to 2.2% in June, and we expect it to remain around 2.0% over the next year. Weak growth and low inflation should provide scope for further interest rate cuts. We’ve pencilled in three more 25bp cuts in the policy rate, to 1.75% (30), which is more easing than investors are pricing in.

Chart 25: ISE Activity Indicator

Chart 26: Industrial Production & Retail Sales (% y/y)

Chart 27: Investment in Machinery & Equipment & Capital Goods Imports (% y/y)

Chart 28: CE Colombia Mobility Tracker (% Difference from Jan.-6th Feb. Median Level, 7-day Moving Avg.)

Chart 29: Colombia Daily New Coronavirus Cases (7d Avg.)

Chart 30: Consumer Prices & Policy Interest Rate

Sources: Refinitiv, DANE, Apple, Davivienda, Google, Apple, Moovit, CE


Chile

  • The Chilean government’s decision to extend lockdown measures in major urban areas to curb the spread of the virus seems to be working. The number of new cases of the coronavirus has started to decline (31). But this has come at a heavy economic cost – Chile was one of the few EMs where activity continued to weaken in May (32). And high-frequency data suggest that the recovery has still yet to take hold (33).
  • If the virus numbers continue to decline, containment measures are likely to be lifted, supporting activity. Consumer spending may also be supported in the near term by the recent bill allowing withdrawals of 10% of pension savings. But the nature in which this bill was passed adds to the sense that government social welfare spending will be higher in the future. That, and the widening of the budget deficit this year (34), could push the public debt-to-GDP ratio up by around 20%-pts over the next five years (35).
  • Meanwhile, a bill to permit the central bank to purchase sovereign debt recently passed a vote by the senate, paving the way for the central bank to start a QE-style programme. Longer-term bond yields, which have fallen since the start of the year, are likely to come down further (36). We also think that weak growth and inflation will allow the central bank to lower interest rates again by 25bp, taking the rate to 0.25%.

Chart 31: Chile Daily New Coronavirus Cases (7d Avg.)

Chart 32: Imacec Economic Activity Index (SA)

Chart 33: CE Chile Mobility Tracker (% Diff. from Jan-Feb., 7-day moving average)

Chart 34: Gov’t Monthly Budget Bal.
(% of Monthly GDP, s.a)

Chart 35: General Govt. Debt (% GDP)

Chart 36: Chile Local Curr. Sov. Bond Yield Curve (%)

Sources: Refinitiv, INE, Apple, Google, Moovit, Capital Economics


Peru

  • Peru’s economy suffered one of the largest peak-to-trough falls of any EM in April, and the recovery so far has been weak. Indeed, the statistics office’s economic activity indicator (a good proxy for GDP) showed that activity was still about 35% below its pre-crisis peak in May (37). Most sectors improved in May but, with the exceptions of agriculture, and financial and government services, they remained very weak (38).
  • Our Mobility Trackers suggest that the recovery continued in June and July, but only gradually (39). We assume that the government will continue to lift containment measures, but with the new virus cases still running high (40), households are likely to remain cautious. That said, we still expect the recovery in Peru to be quicker than in most other parts of the region, thanks to a large fiscal stimulus package.
  • Monetary policy is doing its part too. The policy rate has been cut to 0.25%, and with inflation likely to remain low, we expect further easing (41). We have pencilled in an additional 15bp cut in the policy rate to 0.10%)this year. Unconventional monetary tools, such as a QE programme, are becoming more likely too as the spread between long and short-term sovereign bond yields is still relatively high (42).

Chart 37: INEI Economic Activity Index
(SA, Feb. 2020 = 100)

Chart 38: Economic Activity by Production (% y/y)

Chart 39: CE Peru Mobility Tracker (% Difference from Jan.-6th Feb. Median Level, 7-day Moving Avg.)

Chart 40: Daily New Coronavirus Cases (7d Avg.)

Chart 41: Consumer Prices & Policy Interest Rate

Chart 42: Peru 10Y – 2Y Local Currency Sovereign Bond
Yield Spread (pp)

Sources: INEI, Oxford University, Google, BBC, CE


Ecuador, Venezuela & Uruguay

  • The Ecuadorian government reached a provisional debt restructuring deal with major creditors on $17.4bn worth of sovereign dollar bonds this month. Along with positive words from the IMF and higher oil prices, this has helped to narrow the spread of Ecuadorian sovereign dollar bonds over US Treasuries (43). If finalised, the deal would ease near-term financing constraints, but we are sceptical that it would prevent Ecuador’s debt-to-GDP ratio from rising further out (44).
  • Elsewhere, Venezuela’s humanitarian crisis is being exacerbated by the coronavirus. Despite the recent recovery in oil prices, weak oil production means that exports are unlikely to average much more than $500mn a month this year (45). And real GDP will fall to a level last seen in the early 1960s this year (46).
  • Finally, Uruguay appears to have managed its coronavirus outbreak well and has the lowest infection rate in the region on a per-capita basis (47). This appears to have helped Uruguay stage the most convincing recovery in the region since the end of April. One downside is high inflation, at 10.4% in June (48) and price pressures are likely to remain elevated.

Chart 43: Ecuador JP Morgan EMBI Spread
& Brent Crude Oil Price

Chart 44: Ecuador: General Govt. Debt
(% GDP, IMF Definition)

Chart 45: Venezuela Total Exports (US$ Bn)

Chart 46: Venezuela Real GDP
(Bn Bolivar, 1997 Prices)

Chart 47: Confirmed Coronavirus Cases
(per mn Population)

Chart 48: Uruguay Consumer Prices (% y/y)

Sources: Refinitiv, Bloomberg, BCV, Capital Economics


Financial Markets

  • Most Latin American currencies strengthened against the dollar this month (49), particularly the Chilean peso which has been boosted by higher copper prices. That said, Latin American currencies have continued to fare worse than those of Asian and EMEA countries (50).
  • While equities continued to rally this month, they have still underperformed their EM and DM counterparts on a year-to-date basis (51). At a country level, Argentina and Brazil’s stock markets have fared the best this month (52). Looking ahead, the underperformance of the region’s equities should help them to outperform their Asian peers over the coming months as global risk appetite continues to strengthen.
  • Sovereign dollar bond spreads over US Treasuries have generally narrowed this month but remain wider than they were prior to the virus outbreak (53). And while spreads on investment grade corporate dollar bonds have narrowed dramatically across the region since their peak in March, they remain wide relative to other EMs (54).

Chart 49: Exchange Rate vs. US Dollar (% Change)

Chart 50: CE Equal-Weighted EM Currency Indices By Region (1st Jan 2020 = 100)

Chart 51: MSCI Equity Indices
(Local Currency Terms, Jan-20 =100)

Chart 52: MSCI Equity Indices (Local Curr., % MTD)

Chart 53: Change in EMBI Dollar Bond
Spread Over Treasuries (bp)

Chart 54: ICE BoA Investment Grade EM Corporate
Bond Plus Spreads (bp)

Sources: Refinitiv, Bloomberg, BOA, Capital Economics


Background Data

Chart 55: Current Price GDP ($bn 2019,
Mkt. Exch. Rates)

Chart 56: GDP Per Capita (US$, 2019, Mkt Exch. Rates)

Chart 57: Real GDP Growth (% y/y, 2019)

Chart 58: Consumer Prices (% y/y, 2019)

Chart 59: General Gov’t Gross Debt (% GDP,
IMF Definition, 2019)

Chart 60: Gov’t Budget Balance (% GDP, 2019)

Sources: IMF, Refinitiv, Capital Economics

Key Historic Data

Table 1: Key Historic Data

Share of World

GDP (% y/y)

Inflation (%)

2014

2015

2016

2017

2018

2019

2014

2015

2016

2017

2018

2019

Brazil

2.4

0.5

-3.6

-3.3

1.3

1.3

1.1

6.3

9.0

8.7

3.4

3.7

3.7

Mexico

1.9

2.8

3.3

2.9

2.1

2.2

-0.3

4.0

2.7

2.8

6.0

4.9

3.6

Argentina

0.6

-2.5

2.7

-2.1

2.8

-2.6

-2.1

35.0

25.0

41.0

25.7

34.3

53.5

Colombia

0.6

4.5

3.0

2.1

1.4

2.5

3.3

2.9

5.0

7.5

4.3

3.2

3.5

Chile

0.4

1.8

2.3

1.7

1.2

3.9

1.1

4.7

4.3

3.8

2.2

2.3

2.3

Peru

0.3

2.4

3.3

4.1

2.5

4.0

2.2

3.2

3.5

3.6

2.8

1.3

2.1

Venezuela

0.2

-3.9

-6.2

-17.0

-15.7

-19.6

-40.0

62.2

121.7

254.9

438.1

65,374

19,906

Ecuador

0.1

3.8

0.1

-1.2

2.4

1.3

0.1

3.6

4.0

1.7

0.4

-0.2

0.3

Uruguay

0.1

3.2

0.4

1.7

2.6

1.6

0.2

8.9

8.7

9.6

6.2

7.6

7.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Latin America1

6.5

1.4

0.3

-0.3

1.9

1.6

0.6

4.9

5.9

5.9

4.2

3.7

3.4

Current Account Balance (% of GDP)

Budget Balance (% of GDP)

2014

2015

2016

2017

2018

2019

2014

2015

2016

2017

2018

2019

Brazil

-4.1

-3.0

-1.3

-0.7

-2.2

-2.7

-6.0

-10.3

-9.0

-7.8

-7.1

-6.0

Mexico

-1.9

-2.7

-2.3

-1.8

-1.9

-0.2

-4.5

-4.0

-2.8

-1.1

-2.2

-2.3

Argentina

-1.6

-2.7

-2.7

-4.8

-5.2

-0.8

-4.3

-6.0

-6.7

-6.7

-5.5

-3.9

Colombia

-5.2

-6.3

-4.3

-3.3

-3.9

-4.3

-1.8

-3.4

-2.3

-2.7

-2.6

-2.4

Chile

-2.0

-2.4

-2.0

-2.3

-3.6

-3.9

-1.5

-2.1

-2.7

-2.8

-1.7

-2.8

Peru

-4.5

-5.0

-2.6

-1.3

-1.7

-1.5

-0.2

-1.9

-2.3

-3.0

-2.3

-1.6

Venezuela

2.3

-5.6

-0.4

6.1

8.7

9.8

-15.6

-10.7

-10.8

-16.6

-31.3

-10.0

Ecuador

-0.7

-2.2

1.1

-0.1

-1.2

-0.1

-5.2

-6.0

-7.3

-4.5

-1.2

-2.8

Uruguay

-3.1

-0.9

-0.1

0.7

0.1

0.7

-2.8

-2.2

-3.1

-2.7

-2.0

-2.9

Sources: IMF, Capital Economics. 1) Regional GDP growth excludes Venezuela, inflation excludes Venezuela & Argentina.


William Jackson, Chief Emerging Markets Economist, william.jackson@capitaleconomics.com
Quinn Markwith, Latin America Economist, quinn.markwith@captialeconomics.com
Nikhil Sanghani, Assistant Economist, nikhil.sanghani@capitaleconomics.com