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24 August 2018
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Emerging Markets Economics Daily


Latin America CONTRIBUTORS
Argentina: Economic activity fell 1.3% mom (seasonally adjusted, (see inside for contributor names)
non-annualized) in June; consumer confidence was
unchanged in August versus July, as per UTDT
Ecuador: The government published the multiyear fiscal projections
linked to its economic program; we find the government’s
fiscal consolidation strategy more fragile than before,
based on the drivers behind it
Mexico: Consumer prices rose more than the market expected in
the first half of August; second quarter real GDP and
balance of payments figures are due today

Europe, Middle East and Africa


Russia: The central bank (CBR) put to a halt its regular FX
purchases on behalf of the Ministry of Finance from 23
August until end September; in our view, the decision is
very positive for the prospects of the rouble strengthening
in the next month
South South African financial assets were under pressure
Africa: yesterday on fears of potential sanctions from the United
States

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This report represents the views of the Investment Strategy Department of Credit Suisse and has not been prepared in
accordance with the legal requirements designed to promote the independence of investment research. It is not a product of
the Credit Suisse Research Department and the view of the Investment Strategy Department may differ materially from the
views of the Credit Suisse Research Department and other divisions at Credit Suisse, even if it references published research
recommendations. Credit Suisse has a number of policies in place to promote the independence of Credit Suisse’s Research
Departments from Credit Suisse’s Investment Strategy and other departments and to manage conflicts of interest, including
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Investment Strategists contained in this report.
24 August 2018

Latin America
Argentina
PUBLISHED REPORTS
Casey Reckman
Economic activity fell 1.3% mom (seasonally adjusted, non- 212 325 5570
annualized) in June. This was the third consecutive month of sequential casey.reckman@credit-suisse.com
contraction as well as the fourth out of the last five. Our seasonal adjustment Alberto J. Rojas
of the original data suggests that the primary sectors actually expanded 4.9% 52 55 5283 8975
mom in June following a 6.0% mom decline in May and a 27.4% mom drop in alberto.rojas@credit-suisse.com
April largely driven by the impact of the severe draught on the agricultural
sector. On the other hand, the industrial sectors fell 2.2% mom in June while
the services sectors retrenched at a 3.0% mom pace, indicating that financial
market turmoil also took a toll on the economy in June. In annual terms,
economic activity fell 6.7% in June, weaker than the median market
expectation of a 5.0% contraction. This result implies that real GDP fell 4.2%
yoy in the second quarter and 0.2% yoy during the first half of 2018.
Meanwhile, consumer confidence was unchanged in August versus
July, as per DiTella University’s survey. This followed a slight uptick last
month, which was the first increase since January. The headline index held
steady at 36.3 this month as improvements in consumers’ perception of their
personal situation (2.1%) and of the macroeconomic situation (1.0% mom)
offset a further deterioration in their assessment of their ability to purchase
durable goods (-5.9% mom). Consumers’ perception of present conditions
also worsened by another 3.5% mom in August, while sentiment about future
expectations rose 1.4% mom. Consumer confidence was stronger in the City
of Buenos Aires in August compared to July, virtually unchanged in Greater
Buenos Aires and weaker in the interior of the country.

Ecuador
NEWS COMMENTARY
Juan Lorenzo Maldonado
The government published the multiyear fiscal projections linked to its 212 325 4245
economic program; this year’s fiscal deficit target is 4.1% of GDP, and juanlorenzo.maldonado@credit-suisse.com
the 2021 global target is 0.7% of GDP. The primary balance is expected to
reach a surplus of 0.7% of GDP by 2020 and a surplus of 1.5% of GDP in
2021. Interestingly, the bulk of the convergence is expected to happen on the
back of higher oil revenues, which are expected to climb from 2.1% of GDP this
year to 3.5% of GDP in 2021. Tax collections are expected to remain stable at
14.6% of GDP, while transfers are expected to climb to 1.5% of GDP from
0.3% of GDP at present. On the expenditures side, total spending is expected
to fall to 23.1% of GDP by 2021 from 24.1% of GDP this year. Capital
expenditures are set to decline to 5.8% of GDP in 2019 from 6.7% of GDP in
2018, and stay at that level through 2021. Current spending, on the other hand,
is expected to increase to 18.2% of GDP next year from 17.5% of GDP this
year, and then converge back to 17.4% of GDP by 2021. We welcome the fact
that the government has published its official fiscal projections for upcoming
years. These projections, however, show that the bulk of the fiscal consolidation
strategy actually depends on higher oil revenues and higher revenues via
transfers, rather than from the spending cuts recently announced.

Emerging Markets Economics Daily 2


24 August 2018

The government expects oil production to increase to 700,000 barrels


per day (bpd) by 2021, from 517,000 bpd at present (according to
central bank data through June). It projects that at an oil price of $51 per
barrel, $6bn in extra export revenues will materialize through 2021. It also
expects investments in the mining sector of $3.2bn over this period, which will
help generate around $2bn in export revenues.
The presentation published in the Finance Ministry’s website mentions
the need to strengthen the Central Bank’s international reserve
position. It mentions that in order to do so, the government will pay back
current bonds held by the Central Bank in, at the most, a five year period upon
maturity, and that it will swap public bank shares given to the Central Bank as
payment in May 2017, for debt securities. In their view, this will strengthen
international reserves. We disagree. To our understanding, the only way the
government can strengthen Central Bank reserves is if it pays back the debt
held by the Bank with resources that originated in the rest of the world and
entered its coffers through the balance of payments. If the government pays its
debt to the Central Bank with resources generated domestically, like deposits
or savings obtained from better tax collections or spending under-execution
which increase treasury deposits at the Central Bank, the result would be a
shrinking of the balance sheet without an impact on reserves (please see our
report Ecuador: The music stopped). Swapping public bank shares with debt
securities, on the other hand, would only accomplish a domestic asset re-
composition in the Central Bank’s balance sheet, without an impact on
international reserves.
We find the government’s fiscal consolidation strategy more fragile
than before, based on the drivers behind it. Only time will show if oil
production actually starts to increase and reaches the levels expected by the
government. Thus, we prefer to keep cautious assumptions on this front until
we see evidence of this happening. At this point, we do not know what
revenues are being considered inside the ‘transfers’ items, which are expected
to provide 1.2% of GDP in new revenues through 2021 according to official
projections. Asset sales, concessions, and PPP’s could be a source of upside
surprise on the revenue front, but we also prefer not to make them part of our
baseline as they have continuously disappointed in the past. On the spending
front, we do not know if further compression in capex after 2019 is because
there is no more room to cut, or because the government wants to keep a
certain level of investment to sustain economic activity. Finally, we should note
that, on the current spending front, an extra effort of over $1bn per year is
likely going unnoticed, as it washes off with the resumption of central
government transfers to the social security starting next year.

Emerging Markets Economics Daily 3


24 August 2018

Mexico
NEWS COMMENTARY
Alonso Cervera
Consumer prices rose more than the market expected in the first half 52 55 5283 3845
of August. Headline inflation was 0.34% in the first half of July, compared to alonso.cervera@credit-suisse.com
market estimates of 0.27% and just under our estimate of 0.37%. Core Alberto J. Rojas
inflation was 0.18% compared to our consensus-matching estimate of 0.15%. 52 55 5283 8975
In annual terms, headline inflation was 4.8%, unchanged versus July, while alberto.rojas@credit-suisse.com
core inflation was 3.6%, also unchanged versus July. For the full month of
August, we anticipate annual headline and core inflation to be 4.8% and 3.6%
respectively. In the first half of August, core inflation was higher than we had
anticipated due to larger than expected increases in education prices. At the
non-core level, however, we overestimated the increase in agricultural prices,
as the actual print of 0.9% was clearly below our estimate of 1.6%. Most
other sub-indices were largely in line with our expectations. For the third
quarter, we project that annual headline inflation will average 4.9%, which is
clearly above the central bank’s prevailing forecast of 4.3%; for the fourth
quarter, average annual inflation will likely be about one percentage point
above the central bank’s forecast. We think that the central bank will make
significant upward revisions to its forecasts in its upcoming quarterly inflation
report due on 29 August.
The government will release the full supply-side real GDP report for
the second quarter today at 9:00am EST. A preliminary government
estimate in late July showed real GDP contracting 0.1% qoq (non-annualized,
seasonally adjusted) in the second quarter, below median market expectations
of 0.3% qoq growth and our estimate of a 0.2% qoq increase. According to
the preliminary report, the sequential contraction was explained by declines in
primary GDP (-2.1% qoq) and industrial GDP (-0.3% qoq), which more than
offset growth of 0.3% in services GDP. In annual terms, preliminary estimates
showed that the original real GDP series increased 2.7% in the second
quarter, below median market expectations of a 2.8% increase and above our
estimate of 2.2% growth.
Finally, the central bank will release balance of payment figures for the
second quarter today at 10:00am EST. As a reference, current account
balance posted a deficit of $6.9bn in the first quarter, wider than median
market expectations of a $4.7bn deficit. The capital and financial account
jointly posted $7.9bn surplus in the first quarter, more than fully covering the
current account deficit, with notable net inflows in FDI ($7.0bn) and portfolio
flows ($7.1bn). On a four-quarter rolling basis the current account deficit
narrowed to $15.9bn (1.3% of GDP) in the first quarter, from $19.4bn (1.7%
of GDP) at year-end 2017. We remain unconcerned about Mexico’s external
imbalances, and note that the recent record inflows of workers’ remittances
will likely be supportive of a moderate current account deficit of under 2.0% of
GDP this year, most of which will likely be financed by net foreign direct
investment flows.

Emerging Markets Economics Daily 4


24 August 2018

Europe, Middle East and Africa


Russia
NEWS COMMENTARY
Alexey Pogorelov
The central bank (CBR) put to a halt its regular FX purchases on behalf 44 20 7883 0396
of the Ministry of Finance from 23 August until end September. In our alexey.pogorelov@credit-suisse.com
view, the decision is very positive for the prospects of the rouble strengthening.
In the text below we sum up the logic behind our view and implications of this
decision for other areas:
1. This measure provides direct support to the FX market of $5.5-6.0bn in
September and $2.5bn in August, the amounts that the CBR were
supposed to buy otherwise through its regular FX purchases.
2. Our estimate of the balance of payments flows in September now looks
much better (Figure 1). The sum of the projected current account surplus,
FX debt redemptions and zero FX purchases by the CBR would be positive
now, at around $5.3bn in September, instead of -$1.3bn (if the CBR were
to keep its regular FX purchases intact).
3. There might be an additional positive impact on the rouble, as the market
not only expected the CBR to hold its regular FX purchases intact in
September but also thought it would increase its daily intervention volumes
in order to catch up with monthly targets.
4. The measure will make the rouble more sensitive to oil prices in
September from which it decoupled this year, not only because of
sanctions but also because of the budget rule related FX purchases by the
CBR.
5. The CBR’s decision to put to a halt its regular FX purchases in the open
market does not mean the Ministry of Finance would not be able to
convert RUB into foreign currency. It will get foreign currency but at the
expense of the CBR’s share in Russia’s total FX reserves. The stock of
FX reserves would not change until end September, but the Ministry of
Finance’s share in total reserves will increase (by $6.0bn in September
and $2.5bn in August) and the share of the CBR will drop by the same
amount.
6. The decision should improve marginally the dollar liquidity in the banking
sector in September.
7. The decision should be positive for the prospects of keeping the monetary
policy unchanged. If the CBR were to lose control over the rouble, it could
as well lose control over inflation and inflation expectations, and will have
to hike the policy rate.
8. It’s not clear yet what the CBR will do with its regular FX purchases after
September, what would be its catch-up strategy. Obviously, there is no
pressure on the CBR’s FX reserves, so, in our view, it can extend the
catch-up period (during which it will be buying marginally more FX to offset
for a pause taken in September and August) for one year, or move the
catch-up period to the strongest period for the current account (from
seasonal point of view), to 1Q 2019. I think both measures would work
fine, but the final decision will also depend on the market conditions.

Emerging Markets Economics Daily 5


24 August 2018

Figure 1. Russia: Projected balance of payments flow in 2018 following the CBR’s decision to suspend its
regular FX purchases until the end of September
$ bn

Current Account Balance


FX Purchases
10 10
9.2 Net external debt repayment by 40 largest companies

5.3
5 5

3.5

1.9
0.9

0 0
-1.1 -1 -0.9

-2.9 -3.2
-3.6

-5 -5.6 -5

-10 -10

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimate in 2H

South Africa
NEWS COMMENTARY
Alexey Pogorelov
South African financial assets were under pressure yesterday on fears 44 20 7883 0396
of potential sanctions from the United States. In yesterday’s overnight alexey.pogorelov@credit-suisse.com
tweet, US President Trump asked US Secretary of State Pompeo “to closely
study the South Africa land and farm seizures and expropriations and the large
scale killing of farmers”. Investors have become more sensitive to these kinds
of comments, as apparently they may lead to real actions, like in the case of
Turkey, when Trump’s demand for the release of pastor Brunson turned into
the decision to raise import tariffs on metals from Turkey. However, we believe
at this stage investors should not overestimate the impact of Trump’s comment
on the financial markets, as they are most certainly targeted at US citizens,
whose support he’s trying to consolidate ahead of the US midterm elections.

Emerging Markets Economics Daily 6


24 August 2018

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Emerging Markets Economics Daily 7

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