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Economic Activity
The different national economic activity indexes continue to describe a very low economic growth trend. The Monthly Economic Activity Index (IMAE) marks an interannual growth of 2.68% as of June, which is the lowest rate since 2010, year of the second worldwide recession.
May and June showed positive growth variations, well above the growth observed August 2013 during the first 3 months of the year. The best numbers are due to better Free Trade Zone sales.
By eliminating the Free Trade Zone component from the IMAE, a 2.23% interannual growth is obtained, showing a downward trend related to an internal demand that has cooled throughout the year due to different factors.
IMAE Variation
Investment Strategy
Manufacturing activity registered a 2.22% interannual growth for June and shows a strong recovery, because the sector as such registered a 0.89% contraction in May.
The Manufacturing activity is split between regular regimen, active improvement and Free Trade Zone System. The latter presents the best numbers with a 5.97% interannual growth, which is mainly fed by improved sales in May and June.
The definitive system and active improvement shows a 0.30% and 6.75% drop in their economic activity index, respectively.
For exports, foreign sales from regular systems are also the most affected. Free Trade Zones shows an export volume of 0.59% for June, lower than the cumulative for the same month of last year; while the regular system shows a 5.46% volume drop, according to Procomer.
The Macro Economic Schedule Review by BCCR and the announcement of GDP growth data and other national accounts for the first quarter of the year have confirmed a deceleration that has already been perceived by analyst, consumers and business people throughout the year.
Home Consumption
Quarter-to-Quarter Variation
It is interesting that Quarterly Growth levels for home consumptions are similar to those registered during the 2009 crisis. This trend was explained by the unmeasured Basic Lending Rate spike during 2012 that affected home finances, the increase during the first months of the year for the costs of goods and public services, the historical high cost of fuel, credit caps and the unfavorable scenario of expectations regarding the path of the national economy.
Updated Quarter
Externally, we cannot exclude the incidence that lower foreign trade levels had on national consumption.
BCCR revised a lower expected growth for the national economy for this year, placing it at 3.0% from an estimated 4.0% at the beginning of the year. Expected inflation was maintained at 5.0% and the expected credit for the private sector went from 12.2% to 12.9%.
However, the lower economic growth has alarmingly affected, in our opinion, the deficit from the public sector. Forecast for the fiscal deficit went from 4.8% to 5.0% for this year, but will go from 5.0% to 5.8% in 2014; that when including the remaining components from the Reduced Global Public Sector, results in a 6.6% deficit for the following year and 5.8% for this year.
Interest Rates
The Basic Lending Rate (BLR) ranged from 6.65% to 6.55% in July, and in general did not present any relevant changes that affected the highest level of liquidity that prevails in the financial market in national currency, which allows a lower interest rate environment.
Even though the BLR for the month showed a temporary increase that went from 6.55% to 6.60%, it was influenced more by the rounding of the calculation than by changes in the collection rates from Basic Rate issuers.
A low economic growth implied a lower demand for financing, which minimized the need for resources by the financial brokers and relieved the pressure to increase the level of interest rates.
Also, the fact that the Government has external financing to solve its deficit has given it power of negotiation, allowing it to sell internal debt bonds at favorable prices in its biweekly auctions. In other words, the deficit has not generated a restricting effect on the market thanks to the international sale of bonds for $1 Billion made in March of this year.
Although interest rates in Colones have remained stable, interest rates in USD have indeed recorded the consequences of higher rates, internationally.
Foreign and Domestic Bond yields in dollars have suffered an important adjustment upward between May and July. This adjustment towards higher yields resulted from higher yields from US Treasury Bonds and the following months are expected to experience additional adjustments based on the expectations on how the Federal Reserve will handle its monetary policies and the appointment of Ben Bernankes successor to the Chair.
Inflation
At the end of July, 52% of the 292 goods in the Basic Basket increased in price, 37% decreased and 11% showed no change according to INEC data.
The overall monthly price increase as of July was 3.59%, for an interannual total of 5.81% according INEC.
During the year, the higher increases have been registered for residential leasing and services that between January and July present a 10.10% increase and an interannual of 23.63%. Education and Alcohol and Tobacco are the other two items that report increases for the year.
The goods and services category presented an interesting case in which tradable items practically had a mere 0.69% interannual inflation, the lowest registered since the 2009 crises. Inflation on goods and services for non-tradable items (consumed at the place of origin) was 8.55%.
Similarly, the interannual increase on regulated goods and services was 14.26%, while non-regulated suffered a 3.58% increase.
We consider that due to the low economic growth, the current situation will prevail, in other words, only goods and services with prices depending directly or indirectly on the regulators will experience growth, because for the rest, the demand is not as strong and possibly will only experience pressure to increase until the end of the year holidays without devaluation.
Exchange Rate
During July $330 million were traded on the wholesale currency market (MONEX). This amount was slightly higher than the $307 million traded in June. The BCCR acquired $26 Million of the total negotiated in July, which meant an 8% market share; and the Public Non-Banking Sector purchased 45% and the remaining were purchases from the private sector.
Feb/17
Aug/17
However, during the first two weeks of August a new series of foreign currency has emerged and during the first two weeks of the month the BCCR acquired $83 million, of the $187 million negotiated MONEX.
The current abundance of foreign currency in the wholesale market is inconsistent with the international scenario in which currencies from emerging countries are facing strong losses regarding the US Dollar, which is due to a considerable adjustment towards higher interest rates in USD and going into a period of lower monetary stimulus by the Federal Reserve of the United States.
Fiscal Deficit
July data on Central Government finances show a strong deterioration, resulting mainly from salary expenses and interest on current debt.
The monthly operational shortage for July was 82 Billion, for a yearly total of 361 Billion, equivalent to 1.5% of the GDP expected for this year. Adding to the financial load, the fiscal deficit reaches 738 Billion, 3% of GDP.
Dficit Primario Primary Deficit 0 Million of Colones -100,000 -200,000 -300,000 -400,000 -500,000 -600,000 -700,000 -800,000 2013 2012
+ 28%
+ 30%
Both the operational or primary deficit as well as the financial deficit show an alarming growth rate of 30% compared to the aggregated for the 7 months from the previous year.
From the aggregated expense in the 7 months up to July, 38.1% corresponds to remuneration, expense that increased 10.5% regarding the aggregated up to July of 2012. The other major expense components are transfers that equal 38.9% of the expense and interest expenses that represent 14% of Government derogations.
Capital expenditure barely exceeded 6.0%, and the 6.4% average is for the two previous years.
Facing this increase in debt, the Government has announced that it is working on a new fiscal reform and the first draft is scheduled to be released as soon as September.
We consider that the luck that this fiscal reform will face on its way to Congress will be the main event to be monitored during 2014, because Costa Ricas sovereign risk rating depends on it. This is the current investment grade used by Moody and interest rate stability for the year.
The Government is allowed an additional $1 billion in foreign debt for 2014, but will be cut short due to the deficit size forecasted for 2014 by the Macro Economic Schedule Review, which is 5.8% of the GDP. In addition, international interest rates have gone up significantly since the last foreign debt bond sale in March of this year.
Additional Information
Jan-13
Feb-13
Mar-13
abr-13
May-13
Jun-13
Jul-13
30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Jun-10
Construction Construccin
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
14.3%
5.8% 3.6%
Jul-15
Jul-16
Jul-17
Expected inflation
BCCR Survey
8.00% Inflacin 12 Meses 12-month inflation 7.50% 7.00% 6.50% 6.00% 5.50% 5.00% Jul-14 Jul-15 Jul-16 Jul-17
6.2%
10
Ministry of Finance
Fixed Rate Dollar Instruments
Government $ Ex Rate
Bond Price Yield
11
Ministry of Finance
Fixed Rate Colones Instruments
Government Ex Rate
Bond Coupon Price Yield
12