Economic Situation Report - JUN 2013

7/28/2019 Economic Situation Report - JUN 2013

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Economic Situation Report

EconomicSituationReport

June 2013

Investment Strategy

Adriana Rodrguez

[email protected]

Economic Situation Report

Economic Activity

National economic activity grew at a rate of 4.3% at the end of March, closing the

first quarter with a slight upward trend. However, this was mostly due to free zone

activity, creating a significant gap between free zone related sectors and those

related to internal demand.

Although March numbers are better than February, growth is still relatively low

throughout all the sectors that comprise the Monthly Economic Activity Index (IMAE)

The Indirectly Measured Financial Services sector is at the top of the table with 7.05%

growth. Mining (5.9%) and Manufacturing Industry (5%) had the next best growth

rates.

Good Free Zone production performance was responsible for Manufacturing

Industry growth. Central Bank numbers to March show that Free Zone activity

expanded by 12.6%, while Regular activities (all non Free Zone) actually had a -3.2%

Interannual contraction.

Monthly Economic Activity Index

Interannual variation

Source: Aldesa graph based on BCCR data.

4.3%

IMAE Variation IMAE Variation


2/12

Economic Situation Report 2

Both the sub index for the Manufacturing Industry related to food, beverages and

tobacco products, and the Agricultural, Forestry and Fishers index itself (1.7%) are

trending between stagnation and contraction.

Producers blame this on increased transportation costs, electrical services, the

unfavorable climate, limited international markets, low international prices and a

stable exchange rate that does not let them mitigate part of their highest

production costs.

According to Procomer and Central Bank figures, to April, total exports had an

Interannual growth rate of 6.6%. Broken down by regime, Free Zones have exported

11% more and the Regular Regime 4% less.

Other economic growth indicators are currently showing certain losses, such as

loans to the private sector and different consumer confidence surveys.

Interannual growth for private sector loans reached 9.41% up to April while

December closed at 12% growth. This downward trend has been occurring over the

last year.

Credit growth is still more pronounced in foreign currency, both for private and

public banks and the lower demand for Colones is felt more strongly by state banks.

Interest Rates

The Basic Lending Rate (BLR) decreased in May to 6.65% from 6.75% at the close of

April. In general, over the past year it has dropped from 9.20% to 6.65% for several

reasons.

First, there was a significant change in the methodology for calculating the basic

rate. Second, the Government acquired external financing instead of primarily

obtaining support from national resources. And third, economic activity is growing

at a more moderate rate than last year.


3/12


Real and Gross Basic Lending Rate

Source: BCCR. Prepared by Aldesa.

The significant drop in the BLR was due to an environment that expected increased

inflation, causing real interest rates to approach 0% or even to become negative, as

in the case of some short-term Government bonds.

Likewise, the colon investment premium for investors who upon expiration were

seeking to return their investments to dollars has declined from 5.94% in October

2012 to 2.4% at the end of March.

This occurs because as Colones rates have decreased, devaluation expectations

have remained relatively stable at around 2%.

In the Colones-bond market, interest rates have remained relatively stable for terms

longer than two years, while interest rates for shorter terms have fallen slightly. This

was also due to more Colones liquidity in current stock market operations.

In view of new external debt bond placements, the interest rate panorama will be

stable, since neither deficit financing nor the rhythm of economic activity exerts

pressure to increase rates in Colones.

Dollar interest rate behavior was interesting in May, resulting in better yields for mid

and long-term international bonds and better rates for short-term dollar certificates.

6.65%

0.00

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

May-14 May-15 May-16 May-17


4/12


Increased yield by international bonds limit additional increases in bond prices

traded on the internal market, with yields that must also relate to current external

debt bond levels.

Increases in reference yields during May were significant and spurred the first wave

in the sales of Latin American bonds in more than a year and a half. This has caused

a more than proportional increase in yields.

However, in the short term, on the national market the prevailing trend is the search

for dollars to satisfy dollar credit demand, and we have observed an increase in the

cost of dollar liquidity throughout the month.

Inflation

Inflation during the first five months of the year was 3.22%, compared to 5.28% last

year. This indicates moderation in the rhythm at which price increases were being

recorded over the last three months.

In May inflation returned to the Central Bank target range of 4% to 6%, after

remaining at 6% for the three months from February to April.

Although data on price trends reveal a considerable regulated component within

the inflation data and that it should be temporary, inflation expectations among

economic agents do not seem to follow that explanation and to the contrary

remain stable at 6.4%.

Inflation on regulated goods (those controlled by the State) showed the first reversal

since December reaching an interannual variation of 12.3% Prices for non-regulated

goods had interannual growth of 3.40%.

At the end of May, 45% of the 292

goods in the Basic Basket

increased in price, 42%

decreased and 13% showed no

change according to INEC data.


5/12


Consumer Price Index

Source: Aldesa graph based on INEC data.

Traded goods had a negative Interannual variation for the first time since November

2009, favored by the stable exchange rate and weak economic activity.

In other words, in the absence of rate adjustments on regulated goods and public

services, the general growth level in prices would be closer to the lower Central

Bank range than the higher range.

Lower inflation was generated by credibility in Central Bank actions and more

confidence in national currency as a fair value reserve. Both are requirements for

the Central Bank to be more effective in handling expected inflation through

monetary policy instruments to foster a more flexible exchange rate regime.

Exchange Rate

During May $389 million were traded on the wholesale currency market, Monex. This

amount was slightly higher than the $382 million traded in April

BCCR acquired $81 million of the total traded, a more active participation

compared to the $31 million bought by the Bank in April (8%).

5.28%

2%

4%

6%

8%

10%

12%

14%

16%

18%

May-12 May-13 May-14 May-15 May-16 May-17


6/12


The Public-Non Banking Sector (SPNB) bought 49%, dropping to $190 million from the

$231 million purchased in April.

In May private participation on this market was 30%, similar to the participation in

April.

MONEX Average Exchange Rate


There was significant bond expiration on May 29, when the Government paid $200

million to the market for the fixed rate bonds issued last year. This amount did not

exert atypical pressure on MONEX, and the majority of creditors did not decide to

colonize their dollars. The reason is that the premium for investing in Colones is

becoming less attractive every month.

Fiscal Deficit

April data on Central Government finances show a financial deficit of 88 billion, for

a 4-month cumulative amount of 439 billion, a 19.7% increase over the first quarter

of last year.

500

505

510

515

520

525

May/15 Nov/15 May/16 Nov/16 May/17

TC Promedio Int. CompraAve. ExRate Purchase Int.


7/12


The primary Government deficit without financial charges was 235 billion -- 17%

higher than the first quarter of 2012.

The primary deficit is 0.94% of GDP, while the total deficit reached 1.75% GDP,

according to Ministry of Finance data which considers a 10.6% growth in nominal

GDP.

Deficit of the Central Government

4-month Aggregate

Source: Aldesa graph based on Ministry of Finance data

On the primary market, Ministry of Finance bonds were sold under the conditions of

the issuer and in Colones obtaining 570 billion, 5% less than during the first 5 months

of last year.

Auctions of dollar-denominated bonds were radically affected by the placement of

external debt bonds, because the Government sold 95% less of these internal debt

bonds as compared to last year, because it has acquired sufficient dollars at better

rates than on the internal market.

In our opinion, the Ministry of Finance has resolved the financing of its cash flow for

the next few months. However, finishing out the year without increasing interest rates

-450,000

-400,000

-350,000

-300,000

-250,000

-200,000

-150,000

-100,000

-50,000

0

Dficit Primario Dficit Financiero

2013 2012

Million of Colones

+ 17%

+ 19.7%

Primary Deficit Financial Deficit


8/12


will be a significant challenge, since the money from Eurobonds will possibly run out

before then (according to the Ministry of Finance expiration schedule), making the

results of debt swaps quite important.

Additional Information

Economic Activity Index by Sector



Dec-12Jan-13 Feb-13

Mar-13

Manufacturing Industry

Construction

Indirectly measured Financial Mediation Services

Mining and Quarry Material Exploitation

Finance and Insurance Services

Other services Rendered to Companies

Commerce

Hotels

IMAE with IEAT, Cycle Trend

Agriculture, Silviculture and Fishing

Transportation, Storage and Communication

Power and Water

Remaining Industries

IMAE Cycle Trend


9/12


Activity Index for the Manufacturing and Construction Sector



Regulated and Unregulated Goods and Services

Interannual Price Variation


5.3%

12.3%

3.4%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

May-14 May-15 May-16 May-1

Inflacion Regulados Variacin Interanual Inflacion No Regulados

Manufacturing Industry Construction

Regulated Inflation Inter annual Variation Unregulated Inflation


10/12


Expected Inflation

BCCR Survey


Secondary Market Yields

External Debt Instruments

Source: BNV. May 28, 2013.

6.4%

5%

6%

7%

8%

Apr-14 Apr-15 Apr-16 Apr-17

Inflacin 12 Meses12-month inflation

PriceBond Yield

Government $ Bonds


11/12


Internal Debt Instruments

Ministry of Finance

Fixed Rate Dollar Instruments


PriceBond Yield

Government $ Ex Rate


12/12


Ministry of Finance

Fixed Rate Colones Instruments


Costa Rican Electrical Institute

Fixed Rate Dollar Instruments


PriceBond Yield

Government Ex Rate

Coupon

PriceBond Yield

Costa Rican Institute of Electricity

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Economic Situation Report - JUN 2013

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