Economic Situation Report - April 2015

Economic Situation Report

Economic

Situation

Report

April 2015

Investment Strategy

Hernn Varela

[email protected]

Economic Situation Report

Economic Activity

The first data coming out of 2015 reveals that the Nations economy is losing

momentum. The Monthly Economic Activity Index (IMAE) showed that February had

a 2.22% growth in inter-annual terms. This number is below average compared to

2014.

The Agro and Fishing sector was the only sector - in inter-annual terms that has

shown a (- 2.2%) decline compared to last year; considering that this activity was

the one that was actually thriving. BCCRs forecast for January showed that this was

one of the pillars for growth in 2015, but if it doesnt recover it certainly has the

potential of actually threatening the expected growth.

The Manufacturing industry sector showed an inter-annual growth of 0.3%; this sector

has been affected by the shutdown of operations from Intel. However, this is only

contemplating the complete cessation of manufacturing operations by Intel

according to BCCRs Economic Situation monthly report for March.

Monthly Economic Activity Index

Inter-annual and Average Variation

Source: BCCR

0%

1%

2%

3%

4%

5%

nov-13 ene-14 mar-14 may-14 jul-14 sep-14 nov-14 ene-15

Va

ria

ci

n in

tera

nu

al (%

)

IMAEInteranual y Promedio de 12 meses

Tendencia ciclo Promedio de 12 meses

2,9%

3,5%

IMAE Inter-annual and 12-month Average

Cycle Trend 12-month Average

Inte

r-a

nn

ua

l V

aria

tio

n (

%)

jan-14 jan-15

Economic Situation Report April 2015

2

The Construction sector went up by 4.66% in January in inter-annual terms. Much of

this activity was due to private construction, although public works did show signs of

improvement for February after having a sluggish start.

In regards to employment, the On-going Employment Survey showed that by the

end of 2014, the unemployment rate was 9.7%; which represents a 1.35% increase

compared to the same date from the previous year. This result is consistent with a

lower number of the occupied workforce, and an increase in the 15-year old and

over population.

Regarding foreign trade, the commercial deficit continues to show a downward

trend. Data for February shows that the deficit was US$5.751 Billion, 10% lower in

inter-annual terms. This result is due to lower imports, which have been higher when

compared to exports.

Commercial Deficit, Exports and Imports

In US$ Billion

Source: BCCR

Foreign sales for the first two months of the year totaled US$1.490 Billion, which is

18.1% lower for the same period in 2014. This is strongly due to the shutdown of Intels

manufacturing plant. Now, according to the Offices of the Foreign Trade Promoter

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

0

2

4

6

8

10

12

14

16

18

20

may-12 sep-12 ene-13 may-13 sep-13 ene-14 may-14 sep-14 ene-15

Dfi

cit

co

me

rcia

l(E

n m

ile

s d

e m

illo

ne

s d

e U

S$)

Ex

po

rtac

ion

es

e im

po

rtac

ion

es

(En

mil

es

de

mil

lon

es

de

US

$)

Dficit comercial Exportaciones (fob) Importaciones (cif)Commercial Deficit

Ex

po

rts

& Im

po

rts

(in

US$ B

illio

ns)

jan-13 jan-14 jan-15

Exports (FOB) Imports (CIF)

Co

mm

erc

ial D

efic

it

(in

US$ B

illio

ns)


3

(Procomer), exports of computer components for February spiked down by 43.2%.

On the other hand, if these are excluded, then the rest of the special regime sales

increased by 32.2%, which implies growth for the export sector, once all the noise

generated by the shutdown of Intels manufacturing plant has subsided.

On the positive side, we can highlight the activity created by the medical device

industry, which according to BCCR would partially compensate the whole Intel

factor.

Special Regime Exports

12-month Accrued

Source: PROCOMER

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

5.000

5.500

dic-13 feb-14 abr-14 jun-14 ago-14 oct-14 dic-14 feb-15

Mill

on

es

de

US$

Componentes para computadora

Regimenes especiales sin componentes para computadorasSpecial Regime Without Computer Components

US$ B

illio

n

dec-13 apr-14 aug-14 dec-14

Computer Components


4

Inflation

The accrued price variation for Basic Basket goods and services was 0.02% for the

first quarter, compared to 2.04% for the same period last year. Therefore, the inter-

annual variation is approaching the lower limit of the Central Banks target range,

and would fall, at least temporarily, below 3%. When we compare this to developed

countries, that when it falls below a set target range it can cause a major problem

to the central banks, in our country it is actually quite the contrary; because it is

temporary and it is linked to the prices of raw materials. This situation has given a

certain degree of freedom to the Central bank to execute the two cutbacks made

to the Monetary Policy Rate.

The stability in the exchange rate and the strong decline by hydrocarbons are the

two main factors behind the decreasing indicator. This is reflected in the behavior

seen by the tradable goods groups, which in March fell by 1.1% in inter-annual

terms.

When we analyze the groups that form part of the Basic Basket, we can highlight

clothing, transportation, communication and shoes as the ones showing the lowest

prices. On the other hand, food, health services and education are spiking at rates

that are above the general index.

Price Index

Inter-annual Variation

Source: INEC

1%

2%

3%

4%

5%

6%

7%

dic-13 feb-14 abr-14 jun-14 ago-14 oct-14 dic-14 feb-15

Var

iaci

n

inte

ran

ual

(%

)

Al consumidor Inflacin subyacente

Rangometa

Inte

r-a

nn

ua

l V

ari

atio

n (

%)

dec-13

consumers Underlying inflation

apr-14 aug-14 dec-14

Target range


5

Interest Rates

The Basic Lending Rate (BLR) showed signs of decline. This decline was partly due to

two cutbacks executed by the BCCR on the Monetary Policy Rate (MPR), which is

locked at 4.5%.

Other contributing factors include the reduced demand for credit in Colones, which

in turn reduces the capturing need of public and private banks. February data

showed that credit in Colones were reduced by an annualized rate of 2.3%, while

credit in Dollars increased to almost 9%. This stability in the exchange rate has made

such credit once again attractive.

Therefore, the premium to invest in Colones is still quite positive and has reached

colon pre-devaluation levels from early 2014.

PREMIUM TO INVEST IN LOCAL CURRENCY

Differentials between USD Basic Lending Rate and Libor Rate using BCCR exchange rate

12-month forecast

Source: BCCR

Active rates in Colones remain fairly stable, while rates in USD are seeing a

downward trend in State as well as in private banks, resulting from the competition

from different institutions in placing this currency.

0

50

100

150

200

250

300

350

400

jun-13 sep-13 dic-13 mar-14 jun-14 sep-14 dic-14 mar-15

Pu

nto

s B

ase

Ba

se p

oin

ts

dec-13 dec-14


6

Exchange Rate

The BCCR Board of Directors decided to eliminate the exchange rate band at the

beginning of this year. So as of that moment, Monex the wholesale market, started

to see a push upwards in the exchange rate numbers. In order to alleviate this

pressure, the BCCR intervened to prevent an aggressive spike, but after a few days

the exchange rate started to decline. The Central Bank just acquired around $91M

under its Accrued Reserves Program. Acquisitions are greater if we add those that

were purchased in order to supply the Non-Banking Public Sector, so the BCCR has

therefore acquired over $300M.

So, the average exchange rate went from 539 at the moment when the regime

changed to 532, which resulted in the lowest number for the year.

Therefore the lower fuel costs, plus the resources coming from the Eurobonds, and

the reduced dollarization of the investment portfolios are a few of the factors why

the exchange rate suffered a lowering trend. But this is exactly why in order to

reduce this potential appreciation; the BCCR has in place an Accrued Reserves

Program of up to $800M.

Exchange Rate and Traded Amount

Amount in Thousands of USD and specific Exchange Rate

Source: BCCR

526,0

528,0

530,0

532,0

534,0

536,0

538,0

540,0

542,0

544,0

-

10.000

20.000

30.000

40.000

50.000

60.000

28 Nov2014

12 Dic2014

29 Dic2014

14 Ene2015

28 Ene2015

11 Feb2015

25 Feb2015

11 Mar2015

25 Mar2015

Co

lon

es

po

r U

S$

Mile

s d

e U

S$U

S$ T

ho

usa

nd

s

12 Dec

Co

lon

es

pe

r U

S$

29 Dec 14 Jan 28 Jan


7

The appreciation of the Colon against the US Dollar is due to the fact that the USD is

also appreciating compared to other currencies, especially the Euro, which also

implies that the Colon is indirectly appreciating against other currencies, which

could have an effect on mid-term export competitiveness.

Fiscal Deficit

The financial deficit of the Central Government accrued as of February went down by

11.3% compared to the same period of last year. This is due to a greater growth of

income versus expenditures. The government input came in at 582.373 Million, which

represents an increase of 10,8% in inter-annual terms. Tax income however, showed an

increased growth compared to the previous year, resulting from an improved flat tax

for fossil fuel that as of February has collected an estimated 45.851 million, 37% more

than in 2014.

Tax Income Structure

By Tax type, accrued as of February 2015

Source: Ministry of Treasury

Expenditures showed a 2.3% increase compared to that which was accrued for the first

couple of months in 2014. This outcome was strongly influenced by the downward spike

in remunerations, particularly those referring to social benefits that in February were 32%

less than the previous year.

40%

20%

18%

16%

6%

Ventas

Ingresos y utilidades

Otros tributarios

Combustibles

Consumo

Sales

Income & Earnings

Other Taxes

Fuels

Consumption


8

So, the government financial deficit in February reached over 288.870 Million (1% of

GDP); while the primary, which excludes debt payment, closed at 0.8%; in other words

around 216M. The outcome for the first two months of the year is quite positive,

however, expenditures continue to be less flexible, and therefore require a long-term

solution.

Recently, the Government announced its plan to increase income, but it seems that

the current climate is not the best to foster these types of measures. With the exception

of the incumbent political party, the majority are actually against approving projects

without first reviewing the expenditures involved.

In regards to the administration of the deficit and debt, the government recently

placed Eurobonds in the international market. Also, collections were improved and any

potential market contraction was reduced through a debt swap. So as indicated

above, the rates have a trend to go down.


9

Additional Information

Economic Activity Index by Sectors Inter-annual Variation

Source: BCCR

Credit to Private Sector Annualized Quarterly Balance Variation in CRC and USD

Source: BCCR

Mar-14 Jun-14 Set-14 Dic-14 Ene-14 Feb-14Otros Servicios Prestados a Empresas 5,1% 3,7% 3,8% 4,8% 5,0% 5,2%

Servicios de Intermediacin Financiera (Indirectos) 13,6% 11,6% 9,9% 7,5% 6,5% 5,0%

Transporte, Almacenamiento y Comunicaciones 7,6% 7,0% 6,5% 5,4% 5,2% 5,0%

Construccin 2,2% 2,7% 3,5% 4,8% 4,5% 4,7%

Servicios Financieros y Seguros 8,5% 7,1% 5,4% 4,9% 4,7% 4,4%

Extraccin de Minas y Canteras 1,8% 2,5% 3,3% 4,0% 4,1% 4,1%

Comercio 4,0% 4,3% 4,1% 3,9% 3,8% 3,8%

Hoteles 4,5% 4,1% 3,7% 3,2% 3,1% 3,1%

Resto de Sectores 3,0% 3,0% 3,0% 3,0% 3,0% 3,0%

Electricidad y Agua 1,7% 1,6% 1,1% 1,1% 1,5% 1,7%

Industria manufacturera 3,2% 2,9% 2,8% 1,7% 1,1% 0,3%

Agricultura, silvicultura y pesca 5,3% 4,9% 1,1% -1,2% -1,7% -2,2%

IMAE con IEAT, Tendencia Ciclo 4,0% 3,8% 3,2% 2,7% 2,5% 2,2%

-5%

0%

5%

10%

15%

20%

25%

30%

II-13 III-13 IV-13 I-14 II-14 III-14 IV-14 ene-feb

Var

. Tri

me

stra

les

An

ual

izad

as %

Moneda nacional Moneda extranjera

An

nu

alize

d Q

ua

rte

r V

ari

atio

n %

jan-feb

Local Currency Foreign Currency

Other Services rendered to Companies

Financial Brokerage Services (indirect)

Transportation, Storage & Communications

Construction

Financial and Insurance Services

Mining and Quarry Material Exploitation Trade

Hotels

Remaining Sectors

Electricity & Water

Manufacturing Industry

Agriculture, Silviculture & Fishing

IMAE with IEAT, Cycle Trend

Dec-14 Jan-14


10

Domestic Debt Curves

Ministry of Treasury Fixed Rate in Dollars (USD)

Source: National Stock Exchange.

Ministry of Treasury Fixed Rate in Colones (CRC)

Source: National Stock Exchange.

-1,0%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

0 2 4 6 8 10 12

Re

nd

imie

nto

Duracin

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

0 1 2 3 4 5 6 7 8 9 10

Re

nd

imie

nto

Duracin

Yie

ld

Duration

Yie

ld

Duration

Documents

Economic Situation Report - April 2015