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Economic Situation Report
EconomicSituationReport
June 2013
Investment Strategy
Adriana Rodrguez
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
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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.
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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
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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.
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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
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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
Source: Aldesa graph based on BCCR data.
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.
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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
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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
Interannual variation
Source: Aldesa graph based on BCCR data.
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
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Activity Index for the Manufacturing and Construction Sector
Interannual variation
Source: Aldesa graph based on BCCR data.
Regulated and Unregulated Goods and Services
Interannual Price Variation
Source: Aldesa graph based on BCCR data.
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
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Expected Inflation
BCCR Survey
Source: Aldesa graph based on BCCR data.
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
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Internal Debt Instruments
Ministry of Finance
Fixed Rate Dollar Instruments
Source: BNV. May 28, 2013.
PriceBond Yield
Government $ Ex Rate
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Ministry of Finance
Fixed Rate Colones Instruments
Source: BNV. May 28, 2013.
Costa Rican Electrical Institute
Fixed Rate Dollar Instruments
Source: BNV. May 28, 2013.
PriceBond Yield
Government Ex Rate
Coupon
PriceBond Yield
Costa Rican Institute of Electricity