Colombia’s pensions, external surpluses & Mexican oil - Capital Economics
Latin America Economics

Colombia’s pensions, external surpluses & Mexican oil

Latin America Economics Weekly
Written by Quinn Markwith
Colombia may be about to follow Chile and Peru in allowing citizens to tap into their pension savings, which would help to shore up near-term consumer spending. But Colombia has less scope than its Andean peers to shoulder the potential long-term fiscal costs of the plan. Otherwise, improving external positions in Brazil and Mexico should limit downside risks to their currencies, but it also demonstrates the weakness of domestic demand in both countries. Finally, touted reforms to Mexico’s energy sector suggest that Pemex’s structural issues will not be resolved anytime soon.

Colombia next in line for early pension access

The bill sent to Colombia’s congress this week that would allow citizens to tap up to 10% of their pension savings is similar to those recently passed in Chile and Peru. We analysed the implications of such a policy for Chile’s economy in an Update this week. And the conclusions also apply to Colombia. In the near term, withdrawals should help to lift the economic recovery through higher consumer spending. If the Chilean example is anything to go by, uptake of the policy is likely to be high.

However, there are likely to be longer-term fiscal costs. A reduction in pension savings now will place greater pressure on the government to top-up pension incomes in the future. This comes at a time when there will be many other demands on the public purse. A draft of the 2021 budget also sent to congress this week suggests that fiscal policy will remain loose next year.

Moreover, unlike Chile (and Peru), Colombia is facing these higher fiscal costs with more worrying debt dynamics. (See here.) That makes fiscal austerity more likely further down the line – which would hold back growth. And the government may also turn to financial repression policies to reduce borrowing costs. (See our EM Update.)

Brazil’s & Mexico’s surpluses: good and bad news

Data published this week highlighted that external positions have improved dramatically in Brazil and Mexico as a result of the crisis.

Brazil’s current account was in surplus in June for the third consecutive month. In dollar terms, it was one of the highest figures since the commodities boom in the mid-2000s. Meanwhile, Mexico’s goods trade surplus jumped to $4.6bn in June, the largest on record (by some distance). In both cases, exports have played a role in driving the improvement in external positions. Having dropped sharply in April and May, Mexico’s exports rebounded last month which largely reflected a delayed revival in its manufacturing sector. And Brazil’s exports have held up well throughout the crisis. But weak imports have also been an important factor in both countries.

The good news is that this improvement in external positions should limit downside risks to both currencies. Indeed, it’s notable that while EM currencies have come under pressure this week, the real has been steady and the Mexican peso hasn’t underperformed in the same way that it did during market stress in March and April. But, equally, this is partly a result of the sheer weakness of domestic demand and the slow recovery in both countries.

Mexico: rolling back oil reforms?

After tackling pensions last week, the energy sector was next on Mexican President López Obrador’s reform agenda. He proposed holding a referendum to prevent private oil extraction in Mexico, which has only been permitted in the past few years. The vote would probably be in 2022, so has little bearing on the current issues at the state-owned oil company, Pemex (which reported another chunky loss in Q2).

In the meantime, it’s clear that the President won’t allow additional private investment into Pemex over the coming years. But the government also doesn’t have the willingness to provide the substantial funding required to kick-start the firm’s structurally weak oil production. The upshot is that Pemex’s issues are here to stay, which will keep its finances in a terrible shape for the foreseeable future.

The week ahead

The raft of inflation data for July is likely to show that headline rates were largely unchanged. We’ve pencilled in a 10% m/m rise in Brazilian industrial production in June, which would still leave output well below its February peak. Finally, we think Brazil’s central bank will cut the Selic rate by a further 25bp, to 2.00%, on Wednesday.


Data Previews

Brazil Interest Rate Announcement (Aug.) Wed. 5th Aug.

Forecasts

Time (BST/EDT)

Previous

Consensus

Capital Economics

Selic rate

2.25%

2.00%

2.00%

One last rate cut

We think that Brazil’s central bank will lower the Selic rate by a further 25bp, to 2.00%, marking the last cut in its easing cycle.

Having cut the Selic rate by a cumulative 200bp during the crisis, it’s clear that the easing cycle is nearing an end. The statement accompanying the previous Copom meeting flagged that there might just be scope for one more cut (what Copom is calling a ‘residual’ cut).

Since that meeting, the economic data have been a little better than might have been expected. Set against that, inflation is well below target – and proving to be weaker than had been expected. (See here.) On balance, we think the weakness of inflation will give Copom room for one more 25bp rate cut.

We expect that the recovery in Brazil’s economy will be weak from here on. In turn, the large output gap should keep inflation low and allow the Selic rate to be left at 2.00% through this year and next.

Investors are pricing in an 80% probability of a cut at next week’s meeting but also that the Selic rate will start drifting up in 2021. (See Chart 1.)

Chart 1: Brazil Selic Rate (%)

Sources: Bloomberg, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Time (EDT)

Previous*

Median*

CE Forecasts*

3rd Aug

Chl

IMACEC Index (Jun)

(13.30)

(08.30)

-3.4%(-15.3%)

Brz

Markit Manufacturing PMI (Jul)

(14.00)

(09.00)

51.6

Mex

Markit Manufacturing PMI (Jul)

(15.30)

(10:30)

38.6

Mex

IMEF Non-Manufacturing Index (Jul)

(18.00)

(13.00)

42.5

Mex

IMEF Manufacturing Index (Jul)

(18.00)

(13.00)

42.0

Brz

Trade Balance (Jul, USD)

(19.00)

(14.00)

7,463m

4th Aug

Brz

Industrial Production (Jun)

(13.00)

(08.00)

+7.0%(-21.9%)

+10.0%(-12.0%)

5th Aug

Brz

Interest Rate Announcement

2.25%

2.00%

2.00%

Brz

Markit Services PMI (Jul)

(14.00)

(09.00)

35.9

Uru

CPI (Jul)

(18.00)

(13.00)

0.0%(+10.4%)

+0.5%(+10.1%)

Arg

Industrial Production (Jun)

(20.00)

(15.00)

(-26.7%)

6th Aug

Col

CPI (Jul)

(01.00)

(21.00) †

-0.4%(+2.2%)

+0.1%(+2.1%)

Brz

Unemployment Rate (Jun)

(13.00)

(08.00)

12.9%

13.3%

Ecu

CPI (Jul)

(15.00)

(10.00)

-0.6%(+0.1%)

0.0%(+0.1%)

7th Aug

Mex

CPI (Jul)

(12.00)

(07.00)

+0.6%(+3.3%)

+0.4%(+3.4%)

Brz

IPCA Inflation (Jul)

(13.00)

(08.00)

+0.3%(+2.1%)

+0.2%(+2.1%)

Chl

CPI (Jul)

(13.00)

(08.00)

-0.1%(+2.6%)

+0.1%(+2.5%)

Chl

Trade Balance (Jul, USD)

(13.30)

(08.30)

1,391m

Also expected during this period:

7th – 15th

Ecu

Trade Balance (Jun, USD)

274.5m

Selected future data releases and events

11th Aug

Mex

Industrial Production (Jun)

(12.00)

(07.00)

-1.8%(-30.7%)

Uru

Industrial Production (Jun)

(18.00)

(15.00)

(-19.6%)

12th Aug

Brz

Retail Sales (Jun)

(13.00)

(08.00)

13.9%(-7.2%)

13th Aug

Col

Retail Sales (Jun)

(16.00)

(11.00)

(-26.8%)

Col

Trade Balance (Jun, USD)

(16.00)

(11.00)

-451m

Mex

Interest Rate Announcement

(19.00)

(14.00)

5.00%

Arg

CPI (Jul)

(20.00)

(15.00)

+2.2%(+42.8%)

Col

Industrial Production

(20.00)

(15.00)

(-22.8%)

14th Aug

Per

Interest Rate Announcement

(00.00)

(19.00)

0.25%

Brz

Economic Activity (Jun)

(13.00)

(08.00)

+1.3%(-14.2%)

Col

GDP (Q2, q/q(y/y))

(17.00)

(12.00)

-2.4%(+1.1%)

Also expected during this period:

10th – 12th

Per

Trade Balance (Jun, USD)

-212m

12th -21st

Arg

Budget Balance (Jun, ARS)

-253.7bn

*m/m(y/y) unless otherwise stated; † = previous day

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

Table 1: GDP & Consumer Prices (% y/y)

Share of

World1

2009-18

Ave.

GDP

Consumer Prices

2019

2020f

2021f

2022f

2019

2020f

2021f

2022f

Brazil

2.5

1.3

1.1

-7.0

2.5

2.5

3.7

2.5

2.5

2.8

Mexico

1.8

2.2

-0.3

-10.5

6.0

2.5

3.6

3.3

3.8

3.5

Argentina

0.6

1.0

-2.2

-10.0

5.0

1.0

53.5

42.5

38.0

35.0

Colombia

0.6

3.5

3.3

-7.5

5.0

2.0

3.5

2.8

3.0

2.8

Chile

0.3

3.1

1.1

-7.0

8.5

3.0

2.3

2.8

2.5

2.8

Peru

0.3

4.4

2.2

-13.5

15.0

6.0

2.1

1.5

2.0

2.5

Venezuela

-5.6

-40.0

-25.0

-10.0

10.0

19,906

20,500

3,200

1,000

Ecuador

0.1

2.9

0.1

-10.0

3.0

2.0

0.0

0.0

0.5

1.0

Uruguay

0.1

3.5

0.2

-4.0

3.5

2.0

7.9

11.0

9.5

8.0

Latin America2

6.5

2.0

0.6

-8.7

4.9

2.5

3.4

2.7

2.9

3.0

Sources: Refinitiv, Capital Economics. 1) % of GDP, 2019, PPP terms. 2) GDP Excl. Venezuela; Consumer Prices Excl. Argentina & Venezuela.

Table 2: Central Bank Policy Rates (%)

Policy Rate

Latest

(31st Jul.)

Last Change

Next Change

Forecasts

End
2020

End

2021

Brazil

Selic Target

2.25

Down 75bp (Jun. ‘20)

Down 25bp (Aug. ’20)

2.00

2.00

Mexico

Overnight Rate

5.00

Down 50bp (Jun ‘20)

Down 50bp (Aug. ‘20)

4.00

4.00

Colombia

Intervention Rate

2.50

Down 25bp (Jun ‘20)

Down 25bp (Jul. ’20)

2.00

2.50

Chile

Overnight Rate

0.50

Down 50bp (Mar. ‘20)

Down 25bp (Q4 ‘20)

0.25

0.25

Peru

Reference Rate

0.25

Down 100bp (Apr. ‘20)

Down 15bp (Q3 ‘20)

0.10

0.10

Sources: Refinitiv, Capital Economics

Table 3: FX Rates vs. US Dollar & Equity Markets

Currency

Latest

(31st Jul.)

Forecasts

Stock Market

Latest

(31st Jul.)

Forecasts

End
2020

End

2021

End
2020

End

2021

Brazil

BRL

5.22

5.00

5.25

Bovespa

105,109

109,250

126,500

Mexico

MXN

22.2

21.5

20.5

Bolsa

37,137

42,000

46,800

Argentina

ARS

72.3

90.0

115.0

Merval

49,406

42,000

51,000

Colombia

COP

3,732

3,500

3,400

COLCAP

1,164

1,370

1,610

Chile

CLP

757

725

700

IPSA

3,978

4,350

5,050

Peru

PEN

3.51

3.20

3.10

S&P/BVL

17,614

21,200

24,100

Sources: Refinitiv, Capital Economics


Quinn Markwith, Latin America Economist, quinn.markwith@capitaleconomics.com