Macroeconomic Research Department

LATAM MACRO REPORTAugust 01st, 2016

LATAM MACRO REPORT

Economic downturn, added to a more favorable external scenario, will allow

monetary policy to be more flexible than we expected

Economic activity in the region has been disappointing at the beginning of this year. This scenario,

in conjunction with: (i) the expected normalization of interest rates in the USA; (ii) the recent

weakness of the dollar due to frustration with growth in the USA and the difficulty Trump has faced

in implementing his political agenda, have contributed to a slowing in inflation in Latin American

countries. With the exceptions of Peru and Mexico, which still suffer from the effects of supply

shocks (in the case of Peru) and exchange rate pass-through and increase in fuel prices (in

Mexico’s case). We believe that this combination of weak activity and slowing in the inflation rate

will allow loosen monetary conditions in the countries of the region.

• Argentina: The economy continues on an upward trend after the sharp contraction of last year.

Persistently high levels of inflation have led the Central Bank to raise interest rates. However,

we expect inflation to slow in the coming months, thereby allowing for an easing of monetary

policy in the second half. (p. 2)

• Chile: We revised our GDP growth forecast for 2017 to 1.8%. However, we forecast the growth

rate to accelerate to 2.5% in 2018. After cutting interest rates in recent months in response to

weak activity, we expect the Central Bank to keep interest rates at 2.5% until the end of 2017.

The names of presidential candidates will start to become clear with the upcoming primaries

scheduled for 2 July. (p. 4)

• Colombia: More acute slowing of inflation and economic activity caused BanRep (Colombian

Central Bank) to accelerate the pace of interest rate cuts at its April meeting. Activity indicators

have confirmed the scenario of slowing growth in the first yearly quarter. Nevertheless, the

decompression of consumer inflation still falls short of the pace expected by BanRep. (p. 6)

• Mexico: The more conciliatory position of the United States government in relation to NAFTA

and some improvement in the foreign scenario have led us to raise our growth projections from

1.5% to 1.8% in 2017. The consequent improvement in the perception of risk should reduce

pressure on inflation, allowing Banxico (Mexican Central Bank) to interrupt the cycle of high

interest rates sooner than we predicted. Current indicators continue to show solid growth, with

emphasis on the recovery of the country’s foreign sales. (p. 8)

• Peru: We have reduced our GDP growth estimate from 3.7% to 3.4% in 2017. Inflation has

been unexpectedly increasing, driven by temporary factors, particularly food prices, which are a

result of the heavy rains that hit the country in May. We expect that, after the cut in April,

interest rates will remain at 4.0% until the end of 2017. (p. 10)

May, 2017

2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018

Argentina 2.5 -2.3 2.8 3.0 26.9 41.0 20.0 14.0 33.00 24.75 19.00 11.00 12.9 15.9 17.8 19.8

Brazil -3.8 -3.6 0.3 2.5 10.7 6.3 4.2 4.5 14.25 13.75 9.00 9.25 3.90 3.26 3.30 3.55

Chile 2.3 1.5 2.1 2.5 4.4 2.7 3.0 3.0 3.50 3.50 3.00 3.00 709 671 670 675

Colombia 3.1 2.0 2.8 3.5 6.8 5.8 3.9 3.5 5.75 7.50 5.75 5.50 3174 3001 3060 3000

Mexico 2.5 2.3 1.5 2.0 2.3 3.2 4.4 3.5 3.25 5.75 7.00 6.00 17.2 20.7 21.5 21.0

Peru 3.3 3.9 3.7 4.3 4.4 3.2 2.8 2.5 3.75 4.25 4.25 4.25 3.41 3.36 3.40 3.50

GDP Growth (%) CPI Inflation (%) Policy Rate (%)FX - year end

(LC / USD)

Forecast: Bradesco

LATAM MACRO REPORT

8.98.0

9.0

4.1

-5.9

10.1

6.0

-1.0

2.4

-2.5

2.6

-2.3

2.5 3.0

-8

-4

0

4

8

12

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Real GDP Growth: Actual data and Bradesco forecasts (%)

Sources: CEIC, Bradesco

26.25

22

24

26

28

30

32

34

36

38

40

dez

-15

jan

-16

fev

-16

ma

r-16

abr-

16

ma

i-16

jun

-16

jul-

16

ago

-16

set-

16

ou

t-16

no

v-1

6

dez

-16

jan

-17

fev

-17

ma

r-17

abr-

17

ma

i-17

Monetary Policy Rate (%)

Source: Central Bank of Argentina

12

8

3.5

17

12

6.5

0

10

20

30

40

50

jun

-13

de

z-13

jun

-14

de

z-14

jun

-15

de

z-15

jun

-16

de

z-16

jun

-17

de

z-17

jun

-18

de

z-18

jun

-19

de

z-19

Inflation (%)

Buenos Aires Inflation

Inflation targets

Source: Bloomberg, Central Bank of Argentina, Bradesco

The country's economy remains in recovery. While

the February data came under expectations, the March

figures show some improvement in the performance of

economic activity. The monthly indicator of economic

activity grew by 1.9% m/m in March, suggesting a

GDP growth of 0.6% q/q in the first quarter of this year.

Growth should accelerate, showing some recovery in

consumption, which last year was affected by the

increases in the prices of public services reflecting the

withdrawal of subsidies for rates. We have slightly

reduced our estimated GDP growth this year from

2.8% to 2.5%.

The foreign scenario remains favorable. The global

economy seems to be gaining traction at the beginning

of the year. The expectation is still a gradual rise in

American interest rates. In addition, the trade balance

has accumulated a surplus of USD 877 million in the

last 12 months, reflecting the exports growth.

Inflation has been persistent, but we still expect a

slowdown in the coming months. Inflation has fallen

less than expected, with monthly variations above

2.0% m/m in the last two months. The inflation

accumulated over the past 12 months is falling and

mainly reflects the withdrawal of the effect of energy

price adjustments. What is more, the appreciation of

the real exchange rate should help contain the

inflationary pressures ahead. The plentiful grain

harvest should also help contain food prices. We

expect a slowdown in inflation in the coming months,

reaching 21% at the end of 2017.

The Central Bank surprised the market by

increasing interest rates in mid-April. This has been

the first change in interest rates since November. At

the following meetings, the Central Bank opted to keep

interest rates on hold, but reiterated that it is ready to

act if necessary. As we believe that inflation should

decline, albeit at a slower pace than previously

anticipated, we expect the Central Bank to keep

interest rates unchanged in the months ahead. That

would happen before starting a cycle of reduced

interest rates in the second half of the year. With this in

mind, we reviewed our estimate for the monetary policy

rate from 19.0% to 22.0% by the end of 2017.

• The economy continues on an upward trend after the sharp contraction of last year.

• Persistently high levels of inflation have led the Central Bank to raise interest rates.

• We expect inflation to slow in the coming months, enabling an easing of monetary policy

throughout the second half.

The economy is still in recovery; we

forecast GDP growth of

2.5% in 2017.

Argentina

The Central Bank raised interest

rates.

Inflation should decelerate in the

coming months.

LATAM MACRO REPORT

3.3

1.7 1.8

-1.1-0.4

-1.4 -1.5-2.4

-3.2

-4.4-5.0

-4.2

-3.2

-2.2

-8

-6

-4

-2

0

2

4

6

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Primary Balance (% of GDP)

Source: IMF, Treasury, Bradesco

government targets

3

The adjustment of fiscal accounts remains a

challenge. The Government’s goal is gradually

reducing the primary deficit over the next four years,

reaching 2.2% of GDP in 2019. The fulfillment of this

year's fiscal target (a deficit of 4.2% in GDP) should be

helped by extraordinary collection with the

regularization of assets held outside the country.

Moreover, the resumption of economic growth should

lead to an increase in tax collection. On the

expenditure side, the withdrawal of energy subsidies

should also help in the adjustment.

The elections for Congress in October will be

important for the perspectives of the country. Half

of the House and a third of the Senate will be in

dispute. The main issue will be the support for the

Macri administration, which is currently in a minority in

both chambers. Currently, our base scenario is that the

elections will not have a clear winner, with only minor

changes taking place in the composition of Congress.

A victory for Macri’s Cambiaremos coalition should

lead to a more ambitious agenda of economic reforms,

enabling faster national growth in the coming years,

increasing the chances of political continuity in the

presidential election of 2019. On the other hand, a

victory for the opposition would make reforms difficult

and increase the uncertainty regarding the continuity of

economic policy.

New fiscal targets point to a gradual

adjustment of public finances.

LATAM MACRO REPORT

The activity data at the beginning of the year was

disappointing. The mining sector was strongly

affected by a strike at the country's largest copper

mine. Production in the sector shrank 13.6% y/y in the

first quarter. GDP growth slowed down to 0.2% q/q in

the first quarter from 0.5% in the previous quarter.

Though consumption rose from 0.2% to 1.2%.

The poor performance at the beginning of the year

led us to reduce our estimate for GDP growth in

2017 from 2.1% to 1.8%. We believe, however, that

the economy should accelerate in the coming quarters,

reflecting the decline in interest rates and the increase

in investments in response to higher copper prices.

Thus, we have kept our 2018 GDP growth estimate at

2.5%.

The external scenario also seems more favorable.

Despite the recent setback, international copper prices,

which represent about half of the country’s total

exports, remain about 12% above the average price in

2016. Furthermore, the expectation of a gradual

normalization of the United States’ monetary policy has

favored emerging countries’ currencies. In this respect,

we expect the Chilean currency to remain without

significant changes until the end of the year, after

having depreciated since the start of the year.

Inflation remains favorable. The favorable

exchange rate also contributes to lower inflationary

pressures. In April, the consumer inflation rose 2.7%

y/y, the same variation observed in the two previous

surveys. The core indicators were even more favorable

increasing 2.2% . Inflation should remain near the

target. Inflation expectations remain anchored, with the

median forecasts at 2.9% in 2017 and 3.0% in 2018.

This low-inflation environment, with very slow

economic activity, supports the monetary easing

carried out by the Central Bank.

• We reduced our GDP growth forecast for 2017 to 1.8%. However, we still expect the growth to

accelerate to 2.5% in 2018.

• After the recent interest rates cuts i in response to a weaker economic activity, we expect

Central Bank to keep rates at 2.5%.

• The names of presidential candidates is starting to become clear ahead of the upcoming

primaries on July 2.

Economic activity continues to

disappoint.

Chile

Inflation remains

around the target.

9.9

-2.3

4.4

1.0

6.1

4.8

2.7

-4

-2

0

2

4

6

8

10

ma

r-0

7

set-

07

ma

r-0

8

set-

08

ma

r-0

9

set-

09

ma

r-1

0

set-

10

ma

r-1

1

set-

11

ma

r-1

2

set-

12

ma

r-1

3

set-

13

ma

r-1

4

set-

14

ma

r-1

5

set-

15

ma

r-1

6

set-

16

ma

r-1

7

Consumer Inflation (% YoY)

Source: Bloomberg

target band

1.01.6

-5.9-6

-4

-2

0

2

4

6

8

10

ma

r-1

0

set-

10

ma

r-1

1

set-

11

ma

r-1

2

set-

12

ma

r-1

3

set-

13

ma

r-1

4

set-

14

ma

r-1

5

set-

15

ma

r-1

6

set-

16

ma

r-1

7

Economic Activity Index - IMACEC (12 months, % change)

Total Non-mining Mining

Source: Banco Central de Chile

LATAM MACRO REPORT

5

After announcing her candidacy,

Beatriz Sánchez won votes from

both opponents.

The Central Bank has decreased the interest rates

to 2.5%. With the current inflation near the target and

the modest pace of economic activity, the Central Bank

opted to cut the interest rates by 0.25 p.p. at meetings

held in April and May. The press release of the last

meeting states that future changes in monetary policy

will depend on the consequences of internal and

external macroeconomic conditions for inflationary

perspectives. In our view, this signals that the Central

Bank does not intend to promote further interest rate

adjustments in the short term. Based on that, we

expect interest rates to end the year at the current level

of 2.5%

The outlook for November’s elections starts to

become clearer with the approach of the primaries

that will be held on July 2. Ex-President Lagos has

abandoned the race for a position in the Government

coalition, Nova Maioria, which will probably have

Senator Alejandro Guiller as a candidate. Journalist

Beatriz Sánchez has agreed to contest the primaries

for the newly established Frente Amplio coalition. A

recent poll has shown the two best-positioned

candidates, former President Sebastian Piñera (from

the Chile Vamos coalition) and Alejandro Guillier, the

governing candidate, to have lost votes compared to

the previous poll, registering 24% and 19%

respectively. Beatriz Sánchez, on the other hand, has

advanced to 11% of voting intentions.

0

2

4

6

8

10

dez

-06

dez

-07

dez

-08

dez

-09

dez

-10

dez

-11

dez

-12

dez

-13

dez

-14

dez

-15

dez

-16

dez

-17

Monetary Policy Rate (%)

Sources: Bloomberg, Bradesco

P

After the recent cuts, we expect the

Central Bank to keep the interest

rates at 2.5%.

1820

24

29

27

2927

24

5

15

21

26

28

2523

19

57

5 54 32 4 4 4 22

4

22

11

0

10

20

30

40

Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17

Presidential Election Survey (%)

Sebastian Piñera Alejandro GuillierRicardo Lagos Escobar Manuel José OssandónBeatriz Sánchez

Source: GFK Adimark

LATAM MACRO REPORT

At the last monetary policy meeting, the Central

Bank of Colombia (BanRep) decided to step up the

pace of interest rate cuts (from 0.25 to 0.50

percentage points). This confirmed our expectation

that, after the signals given at the meeting in March,

when the BanRep highlighted the deceleration of

economic activity and inflation, BanRep would

accelerate the pace of cuts.

On that occasion, one of the committee members

voted for a 0.50 percentage point reduction. However,

in March most members of the committee opted for a

cut of 0.25 percentage points. As the inflation and the

economic activity data showed a higher than expected

slowdown, the committee decided to increase the pace

of cuts to 50 bps, in April’s meeting.

The results from the first-quarter GDP have

confirmed the decrease in economic activity since

the end of last year. GDP grew by 1.1% y/y, which is

the equivalent to a 0.9% q/q contraction. This weak

GDP growth reflects the shrinking of domestic

consumption, as well as low industrial output.

While showing slight improvement in March, retail

sales (excluding fuel) suffered a 3% q/q contraction

in the first quarter of 2017. This reduction in

consumption could be explained by falling purchasing

power due to higher inflation. Furthermore, the recent

rise in Value Added Tax (VAT) on some consumer

goods may also have contributed. Similarly, industrial

production has also been slowing in the first quarter of

this year, with an accumulated fall of 2% q/q. This

deceleration remains mainly influenced by poor output

in the oil industry.

The effect of this scenario of slowing economic

activity starts to affect the behavior of consumer

inflation. When coupled with strong decompression in

food prices, this has made the inflation rate decrease

from 9.0% y/y , in July 2016, to 4.6% in April. During

this period, food prices went down from 15.7% to 2.5%,

contributing with 3,7p.p. to the reduction in headline

inflation. Other prices have shown greater resilience,

given the slowdown in core inflation was lower in the

period, from 7% y/y to 5.4%, which suggests greater

inertia among these items.

• A more intense decrease in inflation and economic activity made BanRep intensify the pace of

interest rate cuts to 0.5 percentage points at the last meeting in April.

• Economic activity indicators have confirmed a scenario of slowing GDP growth in the first

quarter.

• After a few months of sharp rise, consumer inflation starts to slow down, but at a slower pace

than expected by BanRep.

Acute slowing of economic activity

in the first quarter of 2017.

Owing to the sharp fall in inflation and

economic activity, BanRep

accelerated interest rate cuts in April.

Colombia

11.50%

5.25%

7.25%

6.00%

10.00%

3.00%

5.25%

3.25%

4.50%

7.75%7.00%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Ma

r-0

1N

ov

-01

Ju

l-0

2M

ar-

03

No

v-0

3J

ul-

04

Ma

r-0

5N

ov

-05

Ju

l-0

6M

ar-

07

No

v-0

7J

ul-

08

Ma

r-0

9N

ov

-09

Ju

l-1

0M

ar-

11

No

v-1

1J

ul-

12

Ma

r-1

3N

ov

-13

Ju

l-1

4M

ar-

15

No

v-1

5J

ul-

16

Mar-

17

Interest rate

Source: Bloomberg

3.0%

8.0%7.3%

-0.9%

8.3%

1.4%

7.0%

1.8%

3.6%2.5%

0.7%

-2%

0%

2%

4%

6%

8%

10%

Feb

-05

No

v-0

5

Au

g-0

6

May

-07

Feb

-08

No

v-0

8

Au

g-0

9

May

-10

Feb

-11

No

v-1

1

Au

g-1

2

May

-13

Feb

-14

No

v-1

4

Au

g-1

5

May

-16

Feb

-17

Colombia Economic Activity Index

Source: Bloomberg

LATAM MACRO REPORT

8.1%

5.6%

7.8% 7.9%

1.8%

4.0%

1.8%

4.4%

9.0%

4.7%5.0%

3.5%

5.8%

3.3%

2.3%

7.0%

5.4%

0%

2%

4%

6%

8%

10%

Jul-

01

Ap

r-02

Jan

-03

Oct

-03

Jul-

04

Ap

r-05

Jan

-06

Oct

-06

Jul-

07

Ap

r-08

Jan

-09

Oct

-09

Jul-

10

Ap

r-11

Jan

-12

Oct

-12

Jul-

13

Ap

r-14

Jan

-15

Oct

-15

Jul-

16

Ap

r-17

Consumer price index (YoY % change)

Cheio

Núcleo

Source: Bloomberg

Decompression of food prices mostly

explains the reduction in inflation.

However, it is worth highlighting that part of this

resilience reflects the pass through effect of the rise in

the Valued Added Tax (VAT) in February 2017 and an

increase in gasoline prices, which have restricted the

decompression in core inflation.

Another factor that has contributed to the

deceleration of prices is lower volatility in the

exchange rate. This is because the devaluation of the

Colombian peso from the end of 2014 - reflecting the

fall in oil prices - affected the prices of imported

products and consequently domestic prices in 2015

and 2016. However, as the exchange rate has

stabilized since mid-2016, it has ceased to contribute

to the increase inflation.

We expect some moderation in the pace of

slowdown in food prices with the end of the favorable

base effect. Notwithstanding, the outlook for 2018

should still be favorable due to the good agricultural

harvest this year, and given the low probability of a

climatic events detrimental to national agricultural

production.

This set of favorable factors has caused inflation

expectations to migrate closer to BanRep’s average

inflation target. Inflation expectations for the next 12

months are already at 3.65%, within BanRep’s

tolerance range (between 4% and 2%). Likewise, the

expectation for 2018 went from 4.24% in July 2016 to

3.50% in April. Such convergence of expectations

concerning the target leaves BanRep more at ease to

continue loosening monetary policy, which reinforces

our expectation of continuing cuts in the base interest

rate. Thus, we expect four more cuts of 25 basis

points, taking the rate to 5.50%.

Core Inflation is still showing some

resilience.

Inflation expectations are already within the

range of its target.

5.7%

4.1%

5.8%

3.2%

3.6%

2.8% 3.1%

4.6%

5.6%

3.7%

2.5%

3.5%

4.5%

5.5%

6.5%

7.5%

Ju

n-0

4

Ma

y-0

5

Ap

r-0

6

Ma

r-0

7

Fe

b-0

8

Ja

n-0

9

De

c-0

9

No

v-1

0

Oc

t-1

1

Se

p-1

2

Au

g-1

3

Ju

l-1

4

Ju

n-1

5

Ma

y-1

6

Ap

r-1

7

Ce

nte

nas

Market expectation to next 12 months

Source: Banrep

6.6%

11.5%

4.2%

7.2%

4.7%7.0%

14.2%

-0.5%

6.6%

0.7%

7.7%

5.7%

15.7%

8.5%

5.2%

-2.0%

2.0%

6.0%

10.0%

14.0%

18.0%

Dec-0

1

Jan

-03

Feb

-04

Mar-

05

Ap

r-06

May-0

7

Ju

n-0

8

Ju

l-09

Au

g-1

0

Sep

-11

Oct-

12

No

v-1

3

Dec-1

4

Jan

-16

Feb

-17

CPI Food index (YoY % Change)

Source: Bloomberg

LATAM MACRO REPORT

18.28

19.88

18.32

20.81

21.95

19.67

18.70

18.0

18.5

19.0

19.5

20.0

20.5

21.0

21.5

22.0

22.5

Sep

-16

Oct-

16

No

v-1

6

Dec-1

6

Jan

-17

Ma

r-1

7

Ap

r-17

May-1

7

MXN/US$

Source: Bloomberg

3.93

3.30

2.36

1.49

1.66

1.18

1.68

2.18

2.68

3.18

3.68

4.18

Feb

-15

Ap

r-15

Ju

n-1

5

Au

g-1

5

Oct-

15

Dec-1

5

Feb

-16

Ap

r-16

Ju

n-1

6

Au

g-1

6

Oct-

16

Dec-1

6

Feb

-17

Ap

r-17

Market Forecast for 2017 GDP Growth

Source: Banxico

Since Donald Trump’s victory, the perspectives for

Mexico's GDP growth have weakened significantly.

Partly because of the anti-immigration rhetoric and

partly due to Trump’s protectionist position during his

presidential campaign.

It is worth remarking that the effects of possible

changes in the US trade policy are important for

Mexico. The United States is Mexico’s main trading

partner, receiving more than 80% of Mexican exports.

In addition, they provide a significant part of the foreign

investment received by Mexico, which is largely

directed to sectors that benefit from free trade with the

United States.

With regard to immigration policy, a tougher position

concerning the flow of people between the two

countries would directly affect remittances from

Mexicans living in the United States. Because of this,

the market expectations for GDP growth decreased

from 2.36% in September 2016 to 1.49% in January.

However, the expected slowdown in the Mexican

economy has not materialized: so far no effective

measure that affects remittances of Mexican workers in

the United States has been approved. This is despite

some of Trump’s recent statements against NAFTA,

suggesting he could cancel the trade agreement.

Our basic assumption is that there will be a

renegotiation of NAFTA’s terms only from August,

and at a slow pace. Hence, not much has actually

changed in the relationship between the U.S. and

Mexico. Moreover, major future changes have become

less likely, given (i) the more conciliatory position of the

U.S. Secretary of Commerce Wilbur Ross, who

suggests a renegotiation beneficial to all NAFTA

members and (ii) that any changes in NAFTA should

be approved by the U.S. Congress. Trump has been

facing difficulties in mobilizing his party to approve his

campaign proposals. These combined factors have

resulted in a significant improvement in the perception

of risk for the country, contributing to the appreciation

of the Mexican peso and, consequently, relieving the

pressure on the current inflation and on the

expectations. As a result, the Central Bank of Mexico

has the opportunity to stop the interest rate cycle

sooner than we expected.

• A more conciliatory position of the U.S. Government regarding NAFTA and improvements in the

external scenario have made us raise our growth projections.

• Improvements in the perception of risk should reduce pressure on inflation, allowing Banxico to

interrupt the tightening cycle sooner than we thought.

• Current indicators continue to show solid growth, with emphasis on the recovery of the

country’s exports.

Facing a more favorable foreign

scenario, an improvement in GDP

growth is expected in 2017.

Mexico

Similarly, improvement in the

country’s risk perception should lead

Banxico to interrupt the tightening

cycle sooner than we thought.

LATAM MACRO REPORT

100

112.4119.7

159.7

80

100

120

140

160

180

200

Mar-

16

Ap

r-16

May-1

6

Ju

n-1

6

Ju

l-16

Au

g-1

6

Sep

-16

Oct-

16

No

v-1

6

Dec-1

6

Jan

-17

Fe

b-1

7

Mar-

17

Exports to destination(March/16=100)

America

US

Europa

Asia

Source: INEGI

9

The current economic data on the country still

shows a solid pace of growth at around 2% and has

recently drawn attention to the recovery of the

country's foreign sales.

Exports have been registering strong improvement

since March last year. In addition, net exports

contributed positively to the country’s GDP growth in

the last quarter of 2016. The rise in exports is largely

due to: (i) the improvement in external demand, with

the global economy growing at a strong pace since the

end of last year, (ii) the depreciation of the Mexican

peso in relation to its major trading partners, and (iii)

the growth of demand in the U.S.

Nevertheless, it is worth mentioning that the

improvement in exports did not focus solely on

sales to the USA, highlighting the sales growth to Asia

and Europe. Despite only representing 11% of

Mexico’s foreign sales, these two regions together

grew by 60% y/y and 20% respectively. In contrast,

sales to the U.S. have grown 12% on the same basis

of comparison. Among the products, the strong sales

performance of manufactured goods to Europe, Asia

and South America is particularly noteworthy. Vehicles,

spare parts and pieces increased 23%; machinery and

equipment rose 20%.

This better performance of exports has ended up

influencing the growth of Mexican industrial

activity, which should offset part of the slowdown in

domestic activity in the country. There is a current

slump in household consumption and in the services

sector due to: (i) the reduction in disposable income

(caused by high inflation) and (ii) the lagging effects of

tightening monetary conditions.

We do not expect this positive outlook for external

demand to remain for the remainder of 2017. The

positive effect of the depreciation of the currency due

to the country’s exports is likely to diminish, since (as

mentioned previously) the Mexican peso has

strengthened and also regained much of the

depreciation incurred since Trump’s victory. The

prospective outlook for U.S. industrial activity also

tends to lose some momentum along the year. This is

consistent with our growth expectation of 1.9% for U.S.

GDP in 2017. To sum up, due to this set of factors,

we have reviewed our growth expectation for the

country from 1.5% to 1.8% in 2017.

Improvements in Mexican exports was

boosted by sales to Asia and Europe.

Incorporating the more favorable

external scenario, we have revised our

2017 GDP growth expectation from

1.5% to 1.8%.

5.3

-0.6

0.1

1.4

4.3

3.0

5.0

3.1

1.4

-4.7

5.1

4.0 4.0

1.4

2.32.6

2.31.8 2.0

-7.0

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

*

2018

*

GDP growth

Source: FMI, Bradesco

LATAM MACRO REPORT

Over the past few months the country has been

affected by heavy rains due to El Niño Costeiro (the

coastal variety), which reflects the temperature

increase in Pacific coastal waters¹. The hardest-hit

region was the North coast of Peru and that caused a

significant impact on the region's infrastructure,

causing the collapse of bridges and blocking of roads

by landslides. However, the last ENFEN² Commission

report, released last May 11, foresees that the effects

will continue to fade away. Therefore, further severe

rains are not expected going forward.

We have reduced our GDP growth estimate in 2017

from 3.7% to 3.4%. This revision reflects the effects of

this phenomenon and the weaker activity data at the

beginning of the year. In fact, GDP growth slowed to

2.1% in the first quarter, compared with growth of 3.0%

in the previous quarter. Consumption, in turn, has

shown a more intense dip, by moving from 3.1% y/y in

the last quarter of 2016 to 2.2% in the first quarter of

this year. As regards supply side, mining sector growth

also slowed to 4.1% after the strong expansion of

10.7% recorded in the previous quarter. Furthermore,

substantial investments in infrastructure were

paralyzed after allegations of corruption emerged. In

particular, the awarding of the Gasoduto do Sul

[Southern Pipeline] concession was revoked. A new

tender process is only expected in 2018. For the

second half, we expect some acceleration in

consumption, reflecting the reduction in the rate of

value-added tax that will take effect in July.

Heavy rains and the difficulty of transportation led

to a sharp rise in inflation. Consumer inflation rose

by 1.3% between February and March, pushed up by

food prices (whose weighting in the total index reaches

38%), which advanced 2.1%. Among foodstuffs, we

highlight the price rises on vegetables (+ 17.4% m/m)

and fruit (+ 7.6%), which together contributed 0.45

percentage points to the rise in inflation during that

period.

• We reduced our estimated 2017 GDP growth from 3.7% to 3.4%.

• Inflation surprises to the upside, driven by higher food prices reflecting the strong rains that

affected the country in the last few months.

• We expect that, after April’s cut, interest rate cuts will remain at 4.0% until the end of the year.

Peru

Despite the weaker data at the

beginning of the year, we expect

activity to recover in the coming

quarters.

6.3

7.5

8.59.1

1.0

8.5

6.56.0 5.8

2.4

3.33.9

3.44.0

0

2

4

6

8

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* 2017* 2018*

GDP Growth (%)

Source: CEIC (*) Bradesco forecasts

3.3

1.9

0

2

4

6

8

10

12

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

GDP and GDP ex-mining (12 month, % change)

GDP

GDP ex-mining

Source: CEIC, Bradesco

Even excluding the mining sector, we

see a slowdown in the economy.

_______________________

¹ Unlike the El Niño phenomenon, which has global effects, El Niño

Costeiro only has an impact on the regional climate.

² The Multisectoral Committee for the National Study of the El Niño

Phenomenon (ENFEN) is an arm of the Peruvian Government

responsible for studies of the ocean and the atmosphere, with the aim of

proposing measures to reduce the impact of El Niño.

LATAM MACRO REPORT

11

Inflation begins to retreat after the

food price shock.

However, the April data showed the beginning of the

reversal of those pressures, with a 0.7% m/m fall in

food prices, leading the full rate to register a 0.3%

deflation during the period.

In the face of slowing activity in the short term, and

the worsening expectations for GDP performance,

the Central Bank decided at its last meeting to

reduce the interest rate from 4.25% to 4.00%.

Interest rates had been stable at 4.25% since February

2016. The recent acceleration of current inflation and

market expectations did not suggest a loosening of

monetary policy at this point. Nevertheless, the Central

Bank had already, at their previous meeting,

manifested concern about the performance of

economic activity and judged the current inflationary

pressures to be temporary. In the face of such a

position, the vast majority of the market expected

interest rates to be reduced at the June meeting, when

the reversal of a substantial part of food price rises

would already have been noticed. Nonetheless, that

decision was anticipated. The meeting press release

said that the Central Bank would monitor the evolution

of inflation and its causes, in order to carry out further

adjustments in monetary policy, leaving a bias towards

lower interest.

We expect interest rates to remain stable. Although

our scenario considers a deceleration of inflation in the

coming months, we do not foresee further reductions of

interest rates in the short term. That is because we

believe inflation will remain close to the limit of the

target and that inflation expectations are slightly above

the target for this year (3.2%, according to the latest

survey), which should lead to a more cautious stance

by the monetary authority. However, we emphasize

that, should there be further frustration with

economic activity, the Central Bank may adopt new

monetary easing.

0

1

2

3

4

5

6

7

8

9

jan

-11

abr-

11

jul-

11

ou

t-11

jan

-12

abr-

12

jul-

12

ou

t-12

jan

-13

abr-

13

jul-

13

ou

t-13

jan

-14

abr-

14

jul-

14

ou

t-14

jan

-15

abr-

15

jul-

15

ou

t-15

jan

-16

abr-

16

jul-

16

ou

t-16

jan

-17

abr-

17

Consumer Inflation (% YoY)

Headline Food

Source: CEIC

target band

LATAM MACRO REPORT

12

Staff

Fernando Honorato Barbosa – Chief Economist

Economists: Ana Maria Bonomi Barufi / Andréa Bastos Damico / Ariana Stephanie Zerbinatti / Constantin Jancso / Daniela Cunha de

Lima / Ellen Regina Steter / Estevão Augusto Oller Scripilliti / Fabiana D’Atri / Igor Velecico / Leandro Câmara Negrão /

Marcio Aldred Gregory / Myriã Tatiany Neves Bast / Priscila Pacheco Trigo / Regina Helena Couto Silva /

Thomas Henrique Schreurs Pires

Internships: Alexandre Stiubiener Himmestein / Bruno Sanchez Honório / Christian Frederico M. Moraes / Fabio Rafael Otheguy

Fernandes / Felipe Alves Fêo Emery de Carvalho / Mariana Silva de Freitas / Rafael Martins Murrer

DEPEC – BRADESCO shall not be liable for any actions/decisions that may be taken based on the information provided in this publications andprojections thereof. All data and opinions contained in these information bulletins is thoroughly checked and drafted by fully qualified professionals;however, it shall not be used, under any circumstance, as the basis, support, guidance or standard for any document, valuations, judgments ordecision taking, whether of a formal or informal nature. Therefore, we emphasize that all consequences and liability for using any data or analysiscontained in this publication is undertaken exclusively by the user, and BRADESCO shall be exempt from all liability for any actions resulting fromthe usage thereof. We stress that access to this information implies acceptance in full of this term of responsibility and usage. The reproduction ofthe content in this report (in whole or in part) is strictly forbidden except if authorized by BRADESCO or if the sources (the name of the authors,publication and BRADESCO) are strictly mentioned.