Andean Region Fixed Income Weekly October 9 th, 2017

Transcription

1 Andean Region Fixed Income Weekly October 9 th, 2017 What s inside Colombia... P.2 Market View.... P.2 Colombia s Topic of the Week.... P.3 Indicative Prices... P.3 Peru... P.4 Market View.... P.4 Peru s Topic of the Week... P.5 Indicative Prices... P.6 COLOMBIA Market view Following a scenario of neutral repo rates, we consider that COLTES curve might flatten: currently, COLTES curve s is one of the steepest in the region if compared with countries with similar monetary policies. We consider that the most promising spreads to implement a flattening trade are the following: Coltes 2020 VS 2019, 2024 VS 2019, 2026 VS 2019 and 2030 VS 2020 Avianca Holdings. Bogotá Tribunal Rules Colombian Pilot Strike Illegal Topic of the week: Low CPI surprises local market. Consumer prices increased by 0.04% m/m, leading to a hike in yearly CPI to 3.97% from 3.87% in august. Behavior of food CPI will be the driver of Total CPI convergence in the coming months. In September, monthly food inflation printed 0.40%, reaching the fourth consecutive month of deflation and still showing a correction trend in line with low comparing base PERU Market View Sol depreciated 0.15% WoW at PEN continues to hover near 3.27 as traders still adjusting positioning after the surprising rate cut and political woes triggered by full cabinet resignation after government lost a confidence vote. In this scenario, Central Bank hasn t intervened since September 20 th. During the week, local bond curve showed a bull steepening with short end dropping 9 bps except Pen20 (only rose 2 bps) while long end dropped 1 bp. Pen32 is 11bps below interpolate yield since its issue (5.60% vs 5.71%) but 2 bps above Pen31 (5.60% vs 5.58%). Topic of the week Central Bank released the September Survey of Macroeconomic Perspectives for : higher CPI but still inside the CB target, lower GDP growth and stable FX: 12 months CPI expectations rose to 2.81% but remained on the target range (1-3%), GDP 3.8% to 3.6% while Sol is stable at 3.28 for President Pedro Pablo Kuczynski rose his approval rating 9% compared to last month from 22% to 31%, according to Datum pool. The result showed that population received the ministerial reshuffle well. The new Cabinet will submit its working plan to Congress on Thursday 12 th. Analysts expect a confidence vote. 1

2 Colombia COLOMBIA Market View COLTES curve appreciated on average 6 bp in the last week. In the last couple of days, COLTES curve appreciated, despite volatility in international market: political noise in Europe, crude price retracement and a hawkish FED. Appreciation movement might reside in local market: according to our calculations, government auctions will come to an end this month. Following MinFin s Mid-Term Fiscal Framework, total COLTES planned issuances for 2017 amount COP $39.7 T (US $13.5 B). COP $27.5T (US $9.32 B) is up to be issued in primary and non-competitive auctions. So far, auctions program has reached 94.2% (COP $25.9T); therefore, COLTES auctions for 2017 are finishing this month. Primary auctions are scheduled for October 17th and October 30th (CPI linked bonds) and October 20th (local currency denominated bonds - COLTES). Therefore, October 30th would mark the end of government auctions program and COLTES offer could be reduced (appreciating even more those references that are included in the program). More information, please send us a request. Coltes curve strategy. Central Bank kept rates at 5.25% for the first time since Jan/17, following ours and market expectations. Analyzing BRep statement and press conference, we consider that Central Bank would not make further adjustments to repo rates in coming months. Some key considerations are focused on prices, growth perspectives and BRep s Board of directors bias. Following a scenario of neutral repo rates, we consider that COLTES curve might flatten: currently, COLTES curve s is one of the steepest in the region if compared with countries with similar monetary policies; therefore, Central Bank rate stability might mean that there is limited room for further steepening and we recommend implementing flattening COLTES curve trades. We analyzed several points alongside Coltes curve and we consider that the most promising spreads are mentioned below: COLTES 2020 VS 2019, spread between those two bonds is reaching its maximum level: 30bp VS 12bp on average (since 2016). COLTES 2024 and 2019, current spread at 91 bp VS historical spread at 53 bp, 38 bp above average. COLTES 2026 VS 2019, spread between those two bonds is reaching its maximum level: 125bp VS 79bp on average (since 2016). COLTES 2030 and 2020, current spread at 104 bp VS historical spread at 86 bp, 18 bp above average. More information, please send us a request. Colom curve in US dollar depreciated on average 10p, in a movement that affected mainly mid-end portion of the curve : following that Colombia might not need to issue US denominated bonds in 2018 because 1). unexpected oil revenues, 2) fines to IT companies ($1.3B) and 3) an issuance maturing 2027 to fund next year requirements ($1.4B); we consider that a limited bond offer would mean that Colombia might not need to issue US denominated debt in 2018 (projected at US $2.5 B in the Fiscal Framework). Specifically, we recommend COLOM 2045: comparing Col 45 VS other sovereign bonds in the region with same maturity, Col/45 presents the highest return. Bancolombia, the board of directors approved an issue of subordinated bonds for US$1B. The issue will be an exclusive offer abroad in one or several lots. The bank will use the means of the issue for the acquisition of subordinated bonds already issued in 2010 and 2012 making a private exchange, giving an immediate purchase offer to the holders of these bonds, a dealerintermediated tender offer. Purchases total an amount of US$ 620M in BCOLO /26/2020 and US$ 227.5M in BCOLO /11/2022, the new issue will be in USD 10Y bonds. Avianca Holdings. Bogotá Tribunal Rules Colombian Pilot Strike Illegal: Avianca considered the strike illegal since pilots are blocking what it is classified as an essential public service. The carrier now has legal standing to fire the pilots if they do not return to work, although ACDAC may still appeal the decision. German Efromovich, Avianca SA chairman, said in local media that he sees a solution within weeks in the worst-case scenario. In addition, Avianca is hiring Colombian and foreign pilots to keep its service running. Fin. Min Cárdenas about repo rates and GDP. BRep s board wants to hold, think, and see a bit more results, but, at the same time, time is running and GDP is growing below potential and we need to reverse that, and the sooner we act the better. 2

3 Colombia Colombia s Topic of the Week. Low CPI surprises local market. Last week, CPI data for Colombian economy was released and it was a surprise for market players since the index printed below market average expected figure and even below the lowest expected rate: Consumer prices increased by 0.04% m/m, leading to a hike in yearly CPI to 3.97% from 3.87% in august. The reason behind a low CPI was associated to a higher than expected deflation in food CPI, that has a weight of 28.2% in the total basket. In this note we aim to give some details on September s CPI behavior as well as our perspectives for 2017 and Core CPI was 4.71% y/y, a figure that was within our expectations. Groups that printed more pressure on ex-food prices were housing at 0.35% m/m (30.1% of total basket) and education at 0.30% m/m (5.73% of total). On the other hand, sectors that contributed to a low CPI were leisure -0.31% m/m and communications at 0.04% m/m. Core CPI is still receiving impact of 2016 Tax reform which through indirect taxes increased prices of ex-food basket. Following these considerations, we expect core CPI to remain stable around 4.7% y/y in the last three months of Behavior of food CPI will be the driver of headline CPI convergence in the coming months. In September, monthly food inflation printed 0.40%, reaching the fourth consecutive month of deflation and still showing a correction trend in line with low comparing base: 2016 was characterized by high deflation rates in food basket between August and October. In particular, we expect food CPI to continue under negative figures until November/17. Lower than expected CPI will have a similar effect on CPI expectations. In AdCap we adjusted our projections for 2017 yearend inflation to 4.03% from 4.18%. In addition, we expect core CPI to lose pressures from Jan/18 on; altogether, an scenario of deeper convergence to CenBank s target is more likely and probabilities of the adoption of a more expansive policy increase. To conclude, an unexpected low CPI that will lead to lower yearend inflation, will lead to higher and even contractive levels of real interest rates, easing pressures for the Central Bank that could make, with more confidence, an additional rate cut in 2017 (that is repo rates at 5.0%). However, the later will highly depend on the future behavior of food CPI, as well as on the macro indices of the coming months. Indicative Prices Colombia 3

4 Peru PERU Market View Sol depreciated 0.15% WoW at PEN continues to hover near 3.27 as traders still adjusting positioning after the surprising rate cut and political woes triggered by full cabinet resignation after government lost a confidence vote. In this scenario, Central Bank hasn t intervened since September 20 th. During the week, local bond curve showed a bull steepening with short end dropping 9 bps except Pen20 (only rose 2 bps) while long end dropped 1 bp. Pen32 is 11bps below interpolate yield since its issue (5.60% vs 5.71%) but 2 bps above Pen31 (5.60% vs 5.58%). The short end rallied more than 140bps YTD: Pen bps, Pen bps; while mid end did it in 120 bps and long end around 100 bps. Pen 37 have lagged the rally with 96 bps. Regarding flows, local bond market have another week with low activity, except Thursday with PEN 845 MM where investors sold off PEN 363 MM of Pen 26. In the last quarter (from 7 July to 6 October), Pen 24 is the most traded bond with PEN 5 Bn while Pen 42 and Pen 55 traded only PEN 196 MM and PEN 128 MM, respectively. The dollar bond yield curve traded on the weak side during the week rising 6 bps on average, except Peru 19 that remained flat. Peru 33 rose 7 bps while Peru 25 did it in 4 bps. Also, US Treasury rose 4 bps during the week after employment data was weak and rumors about a more conservative candidate as New Fed President in the next year. Peruvian CDS 5 years dropped 5 bps. 4

5 Peru Peru s Topic of the Week The President Pedro Pablo Kuczynski rose his approval rating 9% compared to last month from 22% to 31%, according to Datum pool. The result showed that ministerial reshuffle was well-received by the population. The new Cabinet will submit its working plan to Congress on Thursday 12 th. Public investment rose 29%YoY in Septembers to PEN 2.92Bn (about USD 895MM) 29%YoY, surprising the already optimistic official projections (+24%YoY) and marks the second moth of continuous growth (+16.2%YoY in August). Public investment was executed as follows: local governments (PEN 1.36 Bn or about USD418 MM), followed by the National Government (PEN 1.04Bn or about USD318 MM) and regional governments (PEN 516 MM or about USD157 MM). Officials suggests a total increase of 7.5% in 2017, as well as positive results in 2018 (+17.5%), 2019 (+4%), 2020 (+4%) and 2021 (+3.5%).In the same line, officials also estimate a recovery in private investment fueled by the Government's fiscal stimulus, after 16 months of negative results. The government plans for growth are focusing on public investment in order to incentive private investment in the coming months and achieve an economic growth above 4%. Housing Minister Carlos Bruce announced an infrastructure program aims to provide drinking water to 100% of homes in urban areas and 84% of rural population by Government is going to invest PEN 7 Bn next year and PEN 50 Bn until 2021 in sanitation projects. Currently, 3.4 million people lack drinking water and 8.3 million people lack sewerage. In addition, Bruce also mentioned government will help to finance construction of 58,500 new homes next year. The Central Bank released September Survey of Macroeconomic Perspectives for CPI expectations at 12 months rose to 2.81% but remained on the target range (1-3%). During the year, CPI expectations were located above target range only in April (3.05%) as El Niño affected supply of certain food & beverage products. Also, Peru analysts cut 2018 GDP growth from 3.8% to 3.6% while Sol is stable at 3.28 for Business expectations accelerated in September, especially sector expectations at 3 months (from 57.8 to 60.7) and economy expectations at 3 months (from 56.3 to 60.1), showing a better outlook in the near term for the economy. 5

6 Peru Indicative Prices Perú 6

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