Comentario económico 3 de diciembre de 2019

Colombia – Digesting disruption

KEY MESSAGES
We provide our ‘first take’ on the recent social unrest
in Colombia and what it could mean for economic
growth, inflation and monetary and fiscal policy.
We reiterate our below-consensus-call of 3.0% and
2.8% economic growth for 2019 and 2020, even
though Q3 GDP data surprised to the upside.
We are revising up our 2019 and 2020 inflation
forecasts to 4.0% (from 3.9%) and 3.5% (from 3.3%),
and forecast inflation staying close to 4% in H1 2020.
We expect BanRep to make 25bp hikes at its Jan and
March 2020 meetings, thereby ending accommodative
monetary conditions.
On fiscal, we see a complex panorama that should
imply a wider-than-targeted deficit. We expect a one
notch downgrade by Fitch in H1 2020.

MARKET VIEW
Our strategy team has no recommendation on Colombia’s
local assets. The short-end of the IBR interest rate curve is in
line with their model, the long-end of the yield curve is slightly
above. The result suggests that a flattening position offers the
best return adjusted by risk. The COP is undervalued,
according to their models. Despite pockets of opportunity, they
remain sidelined as they don’t expect any risk-taking ahead of
year-end, uncertainty over social unrest has yet to dissipate
and their risk premium model (BNPSGRP Index on BBG)
implies that premium embedded on risk assets is still low.

Examining implications of recent social unrest:
Given the recent wave of social unrest in Latam, we
are not underestimating (i) how long the recent
protests in Colombia could last; (ii) their potential
economic impact; and (iii) what the policy response
might be.
Despite the considerable uncertainty about the social,
economic and policy situation in the country, we have
decided to react quickly by issuing our ‘first take’ on
recent events and what they could imply for economic
growth, inflation and monetary policy.
We start with one key assumption − that the social
unrest peaks in Q4 2019 and then eases in Q1 2020.
As a result, we see the main effects on growth
focused on these two quarters. In fact, after a better than-expected Q3, we are now comfortable (again)
with our below-consensus forecasts for 3.0% and
2.8% economic growth for 2019 and 2020.
BanRep dilemma: We now think the central bank
(BanRep) faces a predicament: it must choose
between lower-than-expected economic growth, or
higher inflation driven by lagged effects of the
Colombian peso’s (COP) recent depreciation.
Against this backdrop, we expect BanRep to decide to
call time on its accommodative monetary conditions.
Hence, we forecast two consecutive 25bp rate hikes
aimed at containing inflation expectations.

Growth outlook − still below consensus
The social unrest and protests in Colombia have now
lasted more than ten days, which does not bode well
either for consumption opportunities, supermarket
traffic and consumer confidence on the demand side,
nor production given that it has already affected two
of the most productive labour days for industry
(Tuesday and Friday).
Thus, despite better-than-expected growth in Q3
which had tilted the risks on our economic growth
outlook to the upside, we reiterate our belowconsensus call for 3.0% growth this year and 2.8% in
2020.

Inflation outlook revised up
The COP’s recent depreciation versus the USD has
been significant [2.9% since 21 November, 5.8% in
the last month], raising concerns about potential
pass-though effects to CPI inflation. Bear in mind that
this pass-through has recently been small with a
lagged effect. According to our updated analysis,
pass-through tends to have statistically significant
effects on inflation after 3-4 months, approaching
0.05pp after three months and 0.4pp effect in 12
months after the initial 1% shock on the exchange
rate.
Thus, on our assumption that the recent FX shock is
short-lived, we have revised up our inflation outlook
to the upside to 4.0% (from 3.9%) for 2019 and to
3.5% (from 3.3%) for 2020. Our new estimates also
assume that previous upside pressures emanating
from non-core prices (ie, food prices) are likely to be
more persistent this time.
These forecast adjustments may not be significant in
terms of magnitude, but they are subject to upside
risks associated with both the scope and duration of
FX depreciation. For example, as a gauge for CPI
inflation’s sensitivity to COP performance, a close-to forwards dynamics should imply annual inflation
peaking at 4.1% in Q1 (COP forward at 3,547) and
then follow a gradual downtrend towards an end 2020 level of 3.8% (COP forward at 3,619). As we
have mentioned, the situation remains fluid.

Monetary policy − BanRep to turn more hawkish
Life is not getting any easier for BanRep. So far it has
presented a rather neutral tone, advocating the prospects
of an unchanged policy rate for longer. However, given
that observed inflation is already near 4% (upper level of
BanRep’s target range), coupled with new pressures from
the COP’s recent depreciation against the USD, and we
think BanRep may finally adopt a hawkish rhetoric tone.
We expect the central bank to (i) flag its concern about
the COP’s recent depreciation; (ii) possibly revise up its
medium-term inflation expectations; and (iii) given the
risks to the country’s financial stability, potentially
normalize monetary conditions (currently slightly
accommodative).
We therefore expect two 25bp rate hikes to be delivered
in the first two meetings of 2020 (January and March),
and the policy rate to end 2020 at 4.75% (up from
4.25%).

Fiscal situation complex
Even before the social protests and the Government’s
policy reaction, the government’s fiscal targets looked a
stretch. Our previous view was that overly optimistic 2020
macro assumptions (eg, GDP growth close to 4%)
implied further spending cuts and likely asset sales to
meet the 2.3% deficit target (fiscal rule). Moreover, the
political capital (already eroded) of the current
administration, along with the absence of a coalition in
Congress, implies a slim chance of new fiscal reform
being approved by the current administration − hence
reiterating the medium- and long-term fiscal challenges
facing Colombia. As for the new Financing Law, and
despite the tight schedule for approval, our Base case is
for a new law to be in place by year-end.
Further, recently fiscal measures (ie, VAT rebate for the
poorest 20% of the population, equating to nearly
COP2.2trn) have adversely affected our view on public
revenue for 2020. We therefore see a complex situation
in terms of meeting the 2.3% of GDP deficit (fiscal rule)
and forecast a 2.5% deficit instead. We now see a strong
likelihood that Fitch will downgrade its sovereign credit
rating on Colombia from BBB to BBB- in H1 2020.

La debilidad del USD reduce la presión en LatAm
Tras los nuevos mínimos registrados por BRL, CLP y COP, la semana comenzó con una mejora de la demanda
impulsada por un PMI de China que superó las previsiones. Los datos siguen reduciendo los riesgos de una
desaceleración mundial más pronunciada y limitan en cierta medida el ajuste de las materias primas. El frente
local también ofreció algunas noticias favorables, ya que las protestas en Colombia parecen estar disminuyendo
en cierta medida, mientras que en Brasil y Chile la intervención del banco central está impulsando las divisas. En
todo caso, no consideramos que se den las condiciones para un repunte sostenido de las divisas LatAm y, por el
contrario, esperamos que tanto las condiciones externas como las locales continúen presionando para que se
mantenga la débil tendencia observada durante los últimos meses, dadas las restricciones de liquidez (exceso de
suscripción en las subastas de repos en Estados Unidos como síntoma) y las tendencias generales de fin de año.

El ruido de la protesta colombiana se desvanece
El COP también mostró una ligera apreciación al final de la sesión del lunes (cerca del 0,2% hacia el USDCOP
3509) que se vio respaldada por una disminución de las protestas y por la probabilidad de aprobación de la Ley de
Financiamiento que se está debatiendo en el Congreso. En los próximos días podríamos ver algunos avances
adicionales del COP, ya que la divisa deja atrás el ruido de las protestas y el mercado descuenta una mayor
probabilidad de aprobación de la Ley de Financiamiento. De hecho, el mercado ha estado flirteando con la
posibilidad de un resultado negativo en este frente a causa de la tensión social en el país. Aunque nuestro caso
base sigue siendo la aprobación de la ley, reconocemos la posibilidad de ver un proyecto de ley diluido (con
respecto a la versión actual), ya que el gobierno ha introducido algún gasto social destinado a reducir el enfado de
la ciudadanía.