Latin American Scenario

Transcription

1 Latin American Scenario December 2018 External backdrop more challenging for Latin America Constantin Jancsó The currency crises that hit Turkey and Argentina (twice) over the course of 2018 resulted from the significant increase in risk aversion in global markets. This can be traced back to higher interest rates in the U.S., continuing trade tensions between the two largest global economies, disappointing growth figures in Europe, and concerns about China s ability to sustain economic growth (notwithstanding the government s stimulus policy), among other reasons. The economic outlook for Latin America has deteriorated due to these changes in the global environment, but also because the region will no longer have the stimulus generated by the combination of disinflation and falling interest rates. With inflation rates close to target, central banks have ended their rate-cutting cycle (except for Mexico, where monetary policy is being tightened for some time now due currency depreciation), and the debate is now slowly shifting to when hiking cycles will begin (already underway in Chile). The probability of a more pronounced global slowdown is the main risk factor for the Chilean and Peruvian economic outlooks. Both of these economies do not face any significant internal imbalances, but remain exposed to global trade flows because they are open and their terms of trade very sensitive to commodity prices. In this sense, their growth outlook appear to have worsened slightly due to falling metal prices, even if they may also benefit from lower oil prices. Latin American Scenario GDP Growth (%) Consumer Inflation (%) Mon. Policy Rate (%) Exchange rate - eop Argentina -1,8 2,9-3,0-0,8 41,0 24,8 50,3 32,4 24,75 28,75 65,00 45,00 15,85 18,59 42,00 55,00 Brazil -3,6 1,0 1,1 2,8 6,3 2,9 4,4 4,3 13,75 7,00 6,50 8,00 3,26 3,31 3,70 3,70 Chile 1,3 1,5 4,0 3,2 2,7 2,3 3,0 3,0 3,50 2,50 2,75 3, Colombia 2,0 1,8 2,8 3,5 5,8 4,1 3,3 3,3 7,50 4,75 4,25 5, Mexico 2,9 2,0 2,5 2,5 3,2 6,8 4,4 3,5 5,75 7,25 8,25 8,25 20,70 19,70 20,00 20,00 Peru 4,1 2,5 3,9 3,8 3,2 1,4 2,0 2,0 4,25 3,25 2,75 3,75 3,36 3,24 3,30 3,30 Source: Bradesco Argentina is also sensitive to the commodity cycle, but in addition, faces major fiscal and balance of payments imbalances. The country faced two currency crises, which drove inflation higher and forced the government to seek a new agreement with the IMF and abandon its gradual adjustment policy. The situation seems to have stabilized since the government adopted an extremely tight monetary regime in August (which caused interest rates to soar), but the country seems headed towards a harsh recession. In Brazil and Mexico, the focus is on the transition process of newly-elected governments. In the case of Brazil, its sound external accounts position puts the country in a more comfortable situation to implement its fiscal adjustment despite the more negative external backdrop, but progress on reforms is an important condition for sustainable recovery and growth. Mexico president López Obrador presides over an economy that shows balanced fundamentals (especially after the successful outcome of trade negotiations with the U.S.), but the decision to suspend the construction of Mexico City s new international airport, which had already received billions of dollars in investment, and the prospects that the new government will use public consultations to push through its projects have raised concerns over increased state intervention in the economy. Colombia appears to be well positioned to grow after adjusting its current transaction deficit and bringing inflation down to the target. But there are still challenges for its economic policy. The difficulties in obtaining congressional approval for tax reform could mean new budget constraints and if these are addressed through higher taxes, inflation 1

2 could rise again in In turn, this would make conducting monetary policy more challenging in 2019, noting that falling oil prices also have negative impacts on terms of trade and fiscal accounts. Exchange Rates (excluding Argentina - 1/1/2018 = 100) Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 BRL CLP COP MXN PEN Source: Bloomberg and Bradesco Consumer Inflation (12-month rate - %) 12% 10% 8% 6% 4% 2% 0% 50% 46,8% 45% 40% 35% 30% 4,9% 25% 4,6% 20% 3,3% 15% 2,9% 10% 1,8% 5% 0% Chile Colombia Mexico Peru Brazil Argentina (rha) Source: Central Bank of Chile, DANE, Bank of Mexico, BCRP, IBGE, INDEC and Bradesco 2

3 Policy Interest Rate % p.a. (excluding Argentina) 16,00 14,00 12,00 10,00 8,00 6,00 4,00 2,00 0,00 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 8,00 6,50 4,25 2,75 2,75 Brazil Chile Colombia Mexico Peru Source: BCB, Central Bank of Chile, Central Bank of Colombia, Bank of Mexico, BCRP and Bradesco GDP Growth (last 4 quarters %) 12,0% 10,0% 8,0% 6,0% 4,0% 2,0% 0,0% -2,0% -4,0% -6,0% -8,0% Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Argentina Brazil Chile Colombia Mexico Peru Source: INDEC, IBGE, INE, DANE, INEGI, BCRP and Bradesco 3

4 Argentina After a new currency crisis, Argentina abandoned its gradual approach to fiscal adjustment and adopted a strict monetary policy to contain inflation; The new set of measures seems to have stabilized the foreign exchange market, but it is too early to judge its success in containing inflation; The economic measures are very likely to push the country into a recession: we expect real GDP will decline 3% in 2018 and by another 0.8% in After a brief respite from the first agreement with the IMF in June, increased risk aversion in the international market brought the peso under major downward pressure again, leading the government to give up its gradual fiscal adjustment strategy and seek out a new deal in August. Under the newly implemented policy, the government promised to eliminate the primary deficit as early as To do so, it slashed public investment by half in real terms, accelerated the cuts to public utility subsidies, froze the hiring of government employees, and ordered an across-theboard cut of 20%, in real terms, in all other operating expenses and in the purchase of goods and services. But the harshest fiscal measured announced by the government was the introduction of an export tax: 4 pesos per dollar on exports of primary products (equivalent to 11-12% based on the current exchange rate), and 3 pesos per dollar on other exports (8-9%). In addition, Argentina suspended its inflation targeting system in an attempt to stabilize inflation and its currency, opting instead for a monetary targeting regime. The Central Bank initially committed to zero growth in the monetary base (in nominal terms), adjusted by seasonal factors only. The bank also promised to sell up to USD 150 million in international reserves per day if the exchange rate exceeds the upper bound of a new fluctuation band (known as the no-intervention zone), without sterilizing the monetary impact of these interventions. Under the new rules, the monetary authority could also purchase dollars if the exchange rate falls to below the lower bound of the band however, it has yet to commit to any specific amounts, or indicate whether the operation will be sterilized. The limits of the exchange rate band were originally set at ARS/USD 44 and ARS/USD 34, adjusted daily at a rate of 3% per month. These monetary measures are very harsh, and have already started producing results in October. If, on the one hand, Argentine Peso/USD and Intervention Range 50,00 45,00 44,00 40,00 41,30 35,00 34,00 30,00 25,00 20,00 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Note: The no-intervention zone went into force on October 1. Source: Bloomberg, BCRA, Bradesco Consumer inflation (%) 60 Forecasts Jan-15 Nov-15 Sep-16 Jul-17 May-18 Mar-19 Source: Indec, Bradesco 4

5 the interest rate set in the Central Bank s liquidity auctions spent practically the entire month above 70%, the dollar ended the month at near the lower bound of the foreign exchange band. As a sign that a turnaround in confidence has begun, there have been reports that foreign investment has begun to flow in to take advantage of the huge interest rate differential, suggesting that confidence in the Argentine currency is starting to recover. The Argentine economy suffered a sharp downturn. After a good first-quarter performance (GDP up 3.9% over the same period last year and 0.7% higher than 4Q17), growth was severely affected by drought and later by the currency crisis. Second-quarter data released by INDEC showed Argentina s GDP declining 4.2% year-over-year, and 4.0% on the margin. Even after a good first quarter, we believe that Argentina s GDP will shrink 3% in real terms in For 2019, even if we assumed that the economy were to start recovering on the margin in the second quarter (with a positive contribution from the agricultural sector after the drought of 2018 and the impacts from accelerated growth in Brazil), we forecast GDP to drop by 0.8%. The depreciation of the Argentine peso has been one of the determinants of inflation, which rose from 25% (annual) at the end of 2017 to over 30% in June and 47% in October. Despite the recession, the exchange rate pass-through and regulated price increases should cause consumer inflation to come in at 50% in 2018 and 25% in A recovery of confidence is also contingent upon whether the macroeconomic adjustments will continue after the elections scheduled for October 27, 2019 (if needed, a runoff will take place on November 24). President Macri has already signaled that he will seek re-election, and his chances of victory would probably depend on the economy being stable and showing signs of recovery. Among Peronists, allegations of corruption during Nestor s and Cristina Kirchner s administrations (episode known as the notebook scandal) may weigh on the former president s potential for election, paving the way for more moderate candidates for the party to come forward. Argentina: Interest Rates % 80,00 70,00 60,00 50,00 40,00 30,00 20,00 10,00 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Pases 7d: Monetary policy reference rate until May LELIQ rate: Current monetary policy reference rate. Endogenously determined by demand after the BCRA fixed the currency supply in October. BADLAR rate: For bank deposits of over ARS 1 million, days. Source: BCRA, Bradesco Pases 7d LELIQ BADLAR Supply and Aggregate Demand (year-over-year, %) T18 2T18 GDP 2,7-1,8 2,9 3,9-4,2 Imports 4,7 5,7 15,0 15,6 2,7 Aggregate Supply 3,1-0,3 5,4 6,4-2,8 Aggregate Demand 3,1-0,3 5,4 6,4-2,8 Private Consumption 3,7-1,0 3,5 4,3 0,3 Govt. Consumption 6,9 0,3 2,2-1,2-2,1 Exports -2,8 5,3 0,4 6,4-7,5 Investment 3,5-4,9 11,0 15,7 3,1 Detailed data as provided by INDEC. 5

6 Chile The Chilean economy had a solid year in 2018, driven primarily by household consumption and by investments in machinery and equipment; Consumer inflation moved towards the center of the target, prompting the Central Bank to raise its policy rate but signaling a very gradual tightening of monetary policy; The foreign environment remains the main risk factor for Chile. The Chilean economy continued to put in a solid performance over the past few months. In the year-to-date through the third quarter, GDP grew 4.2%, driven primarily by household consumption and by investments in machinery and equipment. Thus, we revised our GDP growth forecast for 2018, from 3.5% to 4.0%. The Central Bank of Chile revised its GDP growth forecast (excluding mining) upwards from 2.7% to 3.1% in 2018 and 3.2% in 2019, for reasons that included an increase in the labor force due to immigration. According to the government, approximately 700,000 immigrants entered the country between early 2015 and the end of last year. That is a large number for a country of 17.5 million people (according to a 2017 census). Indeed, Chile s Foreigner and Immigration Department estimates that the share of the foreign-born resident population rose from 2.3% to 5.9% in three years, while data from the last census indicated that 6.3% of the country s economically active population (PEA) consists of immigrants, most notably Peruvians, Haitians, Colombians and, more recently, Venezuelans. The importance of this immigration flow to Chile s growth potential and even productivity should not be underestimated. Peruvians are the largest group of resident immigrants (25%) and consist mainly of low-skilled workers, since less than 10% have a college degree. However, of the Venezuelans who live in Chile (13%) who make up a significant share of new arrivals, approximately 80% have completed university. After strong performance in the first half of 2018, we expect growth to moderate slightly after the third quarter. Fiscal stimulus should remain close to neutral, since the budget GDP (year-over-year %) 3T17 4T17 1T18 2T18 3T18 GDP 2,5 3,3 4,5 5,4 2,8 Mining 8,3 6,9 19,6 5,3-2,7 X-mining 2,0 3,0 3,5 5,5 3,2 Dom. demand 2,2 4,0 4,1 6,1 4,6 Consumption 2,5 3,1 3,4 4,2 3,5 Household 2,2 3,0 3,8 4,4 3,8 Government 3,7 3,4 1,9 3,5 2,3 Investment -0,9 2,7 3,0 7,0 7,1 Construction -5,9-1,7 1,9 3,8 4,4 Machin & Eq. 8,1 10,8 4,9 12,5 11,8 Exports 2,7 2,5 7,0 7,5 1,7 Imports 2,0 5,2 6,0 10,2 8,4 Source: Central Bank of Chile, Bradesco Chilean peso (CLP/USD) and copper prices (USD/ton - LME) (Copper prices in inverted axis) Dec-15 Aug-16 Apr-17 Dec-17 Aug-18 CLP Copper (inverted) Copper is the 3rd LME future. 6

7 proposal sent to Congress by President Piñera includes public spending increases of 3.2%, in line with our GDP growth forecast for An agreement between mining companies and unions has prevented another strike at Escondida the world s largest mine, which was shut down for 44 days in The mine is responsible for 25% of the copper produced in Chile. Inflation remained on its path towards the Central Bank s inflation target of 3%, after approaching the floor of the target early in the year. Until recently, the Central Bank s main concern was the risk that inflation could slip below the bottom of the target, pressured by falling food prices and the appreciation of the Chilean peso at the beginning of the year. This return to the center of the target has been driven by food prices, while core inflation has remained near the 2% threshold. Even so, the monetary authority signaled to the market in September that it could start raising interest rates, saying that changes in economic conditions have made maintaining the current monetary stimulus less necessary. And in fact, the BCCh raised its policy rate by 25 bps (to 2.75%) at its October meeting, arguing that reducing the monetary stimulus in a timely manner is consistent with a cautious and gradual approach to its monetary policy strategy. We forecast the policy rate to end the year at this level, and four new 25bps. hikes in 2019, to 3.75%. The U.S. protectionist agenda and trade tensions around the world remain a significant risk for Chile, not only when it comes to commodity prices (especially copper), but also because the country s economy is open and exposed to disturbances in international trade. Another important item in the agenda for the coming months is the tax reform proposal announced by the government at the end of August. The main aspects of the proposal that will be debated by Congress include changes in the taxation of dividends, increasing the deductibility of capital investments, new rules for the taxation of digital transactions, updating international taxation rules and the fight against tax evasion. Consumer Inflation (% p.a.) 6,00 5,00 4,00 3,00 2,00 1,00 0, Note: Core by exclusion (excludes fresh fruits and vegetables and fuel) Source: INE, Bradesco CPI Core Target Policy Rate and 10-year Market Interest (prefixed and indexed to inflation) 8,00 7,00 6,00 5,00 4,00 3,00 2,00 1,00 0,00 Jan-10 May-11 Sep-12 Jan-14 May-15 Sep-16 Jan-18 Source: BCCh, Bradeco TPM BCP 10Y (fixed) BCU 10Y (infl) 4,57 2,75 1,53 7

8 Colombia The government introduced a tax reform bill in Congress aimed at reducing the corporate tax burden and raising total revenue to allow it to meet its fiscal target; We expect growth to pick up slightly in 2019 to 3.5%, driven primarily by investment; However, a more significant decline in oil prices would have a negative impact on the terms of trade and result in lower growth and downward pressure on the peso. The first months of President Iván Duque s administration were marked by the political noise caused by allegations of corruption against former President Álvaro Uribe, who even announced his resignation from the Senate to defend himself, but later went back on his decision. Uribe, who was Duque s political godfather, remains one of the most influential leaders in Congress. This initial noise seems to have caused some delay in preparing the new government s first major legislative initiative: tax reform. Fulfilling a campaign promise, president Duque introduced a tax reform bill in Congress that will offer tax cuts to corporations. During the campaign, Duque s main criticism of the economic policy of his predecessor, Manoel Santos, was that the government overstretched public spending during the boom period amid rising oil prices, and that raising taxes to offset falling prices made Colombian companies less competitive. In general terms, the reform bill seeks to: (i) reduce corporate income tax rates, while increasing the VAT (value added tax) base; (ii) increase taxation on individuals in higher income or pension brackets and also on dividends. In addition to reducing the corporate tax burden, the government seeks to increase revenues by COP 14 trillion (approximately 1.5% of the GDP) to cover the ongoing increase in health and transportation expenditures foreseen in the 2019 budget. To that end, the executive branch is racing against the clock to try to get the bill passed before the end of the year. The purpose of the reform is to increase the private sector s competitiveness, but it could have negative short-term impacts on inflation and economic activity. Raising the VAT tax base has faced resistance in Congress, so getting the votes needed to pass the bill will be a challenge. Colombian Peso (COP/USD) and Brent Oil Price (USD/barrel) Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 COP Source: Bloomberg, Bradesco GDP (% per year) Oil (RHA - inverted) Q18 2Q18 3Q18 GDP Consumption Households Government Investment Exports Imports

9 The government is unlikely to meet its fiscal targets primary surplus of 0.5% of the GDP and nominal deficit of 2.4% of the GDP in 2019 without passing new revenueincreasing measures. On the other hand, failure to meet the fiscal target would put the Colombian credit rating at risk. The Venezuelan crisis is another relevant factor for the local economy. According to the U.N., Colombia has been the number one destination for Venezuelan refugees in recent years. Out of the 3 million Venezuelans who fled their home country since 2015, 1 million are in Colombia, with 3,000 more arriving on a daily basis. As a result, the country not only loses access to the Venezuelan market (historically its largest trading partner), but the humanitarian crisis surrounding the refugees puts a significant strain on public services. Colombian inflation seems to have stabilized at near the Central Bank s target, sustaining a long interest-rate cutting cycle. By 2019, accelerating growth and closing the output gap should lead to the beginning of a monetary policy tightening cycle. We expect economic growth to end the year at 2.8%, with consumer inflation at 3.3%. Our 2019 forecasts have growth at 3.5% and stable inflation at 3.3%. In this scenario, we believe that the Central Bank will raise its policy rate from the current 4.25% to 5.25% by the end of However, the fiscal reform could bring new inflationary pressures in 2019, as was the case in Depending on the secondary effects of a probable increase in taxes, the Central Bank could start the interest rate hike cycle sooner than expected. Fluctuations in the terms of trade and their effects on the country s external accounts are important determinants for this scenario. Colombia managed to reduce its current account deficit from 6.3% of the GDP in 2015 to 3.3% by the end of 2017 thanks to a combination of currency depreciation, lower growth and improved terms of trade in recent years. A less favorable environment for emerging assets and the experience of countries with higher foreign deficits in 2018 (such as Argentina, Turkey and South Africa) suggest that external accounts and terms of trade (mainly determined by the price of oil, in the case of Colombia) will be a major growth constraint. A scenario with lower oil prices will mean less economic expansion in 2019, in addition to pressure on the peso. Fiscal Balance and Targets (% of the GDP) 2,0 1,0 0,0-1,0-2,0-3,0-4,0-5, Fiscal targets are set by an independent Experts Committee, based on the structural fiscal target determined by law and the estimated GDP gap Source: Banrep, Bradesco Fiscal Targets Primary Nomina Structural Consumer Inflation (% p.a.) 10,00 8,00 6,00 4,00 2,00 0,00 Jan-13 Dec-13 Nov-14 Oct-15 Sep-16 Aug-17 Jul-18 The core most commonly used in Colombia is Basic Inflation, which corresponds to the CPI minus food. Source: DANE, Banrep, Bradesco CPI Core Target 9

10 Mexico The controversy surrounding the decision to suspend construction of the new airport in Mexico City and the use of public consultations to sanction economic policy decisions have generated discomfort among investors; The Bank of Mexico interrupted the monetary policy tightening cycle, but increased interest rates again at its last meeting, mainly due to the depreciation of the peso; Our current growth forecast stands at 2.5% for Andrés Manuel Lopez Obrador (better known by his initials, AMLO) was elected president of Mexico in July, just as the polls had predicted. He started his six-year term (with no reelection) on December 1. The coalition led by AMLO s Morena party won 69 seats in the Senate (54% of 128) and 306 in the House of Representatives (61% of 500). Despite having the majority in both houses, the new government will have to negotiate with other parties if it wants to approve constitutional amendments which require a two-thirds majority. In addition, any changes to the constitution need to be approved by more than half of the 32 governors, and AMLO s coalition will control only 6 states in However, that number may change over time as gubernatorial race are staggered and, during the six-year term, voters will elect one new governor in 2019, 15 in 2021, 5 in 2022, and 2 in Initially, the president-elect expressed a view on the oil industry that helped build confidence. During the campaign, Obrador had indicated that, if elected, he would review concession agreements in the oil sector signed after Mexico s energy reform was enacted. Since the election, his team claims that they have reviewed the contracts, and that they have found nothing wrong. In addition, AMLO had not only stated that he would honor all existing contracts, but asked for more investments from the private sector while meeting with industry leaders. In the months following the election, Mexican assets were also boosted by the successful outcome of negotiations with the U.S. and Canada to launch a revamped version of NAFTA, now known as USMCA. The gloomy outlook for these negotiations in the first half of the year and fears that the trade talks would have to start from scratch if they were not completed before the end of president Peña Nieto s term in office had been a negative factor to the Mexican peso. Mexican Peso (MXN/USD) and Brent Oil Price (USD/barrel) Jan-15 Aug-15 Mar-16 Oct-16 May-17 Dec-17 Jul-18 MXN Source: Bloomberg, Bradesco Brent (RHA - inverted) GDP and Aggregate Demand (% p.a.) T1 2018T2 2018T3 Aggregate Supply 2,9 3,2 2,5 4,0 na GDP 2,9 2,0 1,2 2,6 2,5 Primary Sector 3,5 3,1 3,1 1,5 2,2 Industry 0,4-0,3-0,9 1,3 1,1 Services 3,9 3,1 2,0 3,2 3,2 Imports 2,9 6,5 5,9 7,9 na Aggregate Demand 2,9 3,2 2,5 4,0 na Private consumpt. 3,8 3,0 2,6 3,0 na Govt. Consumpt 2,3 0,1 1,1 2,9 na Investment 1,1-1,5 1,4 3,9 na Private 2,0-0,5 0,7 3,5 na Public -3,4-6,6 6,2 6,3 na Exports 3,5 3,8 2,2 8,3 na Inventories 6,6-4,7 16,1-21,5 na Note: Usual presentation in Mexico. na not available Source: INEGI, Bradesco

11 More recently, the controversy surrounding the decision to suspend construction of the new airport in Mexico City airport has generated discomfort among investors. During the campaign, AMLO had promised to cancel the airport project which was already underway and redirect funds to social programs. After a period in which he seemingly took a neutral stance towards the project, his transition team organized a public consultation, where the proposal to build a new airport in Texcoco lost out to a plan to construct two new runways at Santa Lucia Air Base and integrate it with the current airport, which would also be renovated. Since then, the transition team has organized 10 public consultations to sanction other government projects. This use of public consultation, combined with a bill introduced by AMLO s party in the Senate to regulate some bank fees, have generated some discomfort among investors over greater government intervention in the economy. Despite election uncertainty and the renegotiation of NAFTA, the Mexican economy had a reasonable performance in 2018, supported mainly by consumer resilience. As usual, remittances from Mexican migrants in the United States helped maintain consumer spending. These remittances have received a boost from the strong growth of the U.S., and have generated an even greater impact due to the relatively depreciated exchange rate. The Bank of Mexico (Banxico) temporarily halted the interest rate-hike cycle in October, keeping the policy rate at 7.75% and arguing that the shocks that have affected the economy are dissipating and that underlying inflation has been gradually reduced. However, it went back to raising the rate at its following meeting (to 8%), claiming that a deteriorating external environment and the depreciation of the currency had a negative impact on the balance of risks. We forecast another hike in December, bringing the policy rate to 8.25%. As for 2019, there is still uncertainty over the fiscal impulse. On the one hand, public spending historically tends to fall in the first year of new administrations. On the other hand, AMLO was elected on a promise to strengthen social programs as of his first day in office. If the peso stabilizes at around MXN 20/USD, we believe that inflation will subside to 3.5% in 2019, allowing the Bank of Mexico to keep interest rates at 8.25%, in a scenario where growth is steady at 2.5%.. Consumer Inflation (% p.a.) 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 The core excludes fresh agricultural products, energy prices and rates set by the government. Source: INEGI, Bradesco Monetary Policy and 10-year Interest Rate 10,00 9,00 8,00 7,00 6,00 5,00 4,00 3,00 2,00 1,00 0,00 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Policy Rate Source: Bloomberg, Bradesco CPI Core Mbono 10Y 9,26 8,00 11

12 Peru The Peruvian economy continued to perform well, despite continuing political noise since former president Kuczynski resigned and vice-president Martin Vizcarra took office; Inflation moved back to the center of the 2% target, but we believe that Peru will be among the last countries in the region to start a monetary tightening cycle; We expect to see 3.8% growth for 2018, and a deteriorating foreign environment continues to be the main risk factor. The Peruvian economy continued to perform well despite the political noise, which has continued even after president Kuczynski resigned and vice-president Martin Vizcarra took office. Keiko Fujimori, party leader with the largest representation in Congress, has been placed under temporary custody as part of investigations into allegations of illegal campaign funding and money laundering. This scenario makes it more difficult to pass governmentsupported bills. However, since the main focus on the legislative agenda is political reform (and emerged victorious from the referendum), the impact on asset prices has been limited. The Peruvian economy grew 3.6% in the first nine months of The high prices of mineral commodities have helped sustain both investment and income growth. We expect Peru to end the year with growth of just under 4%, one of the best performances in the region. Inflation moved back within the target range (1% to 3% a year), and is slightly below the center of the target for October, driven down mainly by food prices. Core inflation, which in Peru excludes food and energy prices, has fluctuated between 2.0% and 2.5% per year since the beginning of It should be noted that the country has the lowest inflation target in the region at 2%. With prices well behaved, we believe that the Central Bank and Reserve of Peru (BCRP) will be among the last central banks in the region to start a monetary policy tightening cycle. A possible slowdown in world growth, with corresponding impacts on demand and commodity prices, continues to be the main risk factor for Peru. The increase in public spending on reconstruction after infrastructure damage caused by the coastal El Niño was an additional factor to maintain aggregate demand in 2018, but should gradually fade over the course of Peruvian Sol (PEN/USD) and Copper (USD/ton - LME) (Price of copper in inverted axis) 4,00 3,80 3,60 3,40 3,20 3,00 2,80 2,60 2,40 2,20 2,00 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 PEN (esq) Note: Peru has a floating exchange rate regime, but the Sol (PEN) has low volatility. Copper is the 3rd LME future. Source: Bloomberg, Bradesco Consumer Inflation (% p.a.) 5,0 4,0 3,0 2,0 1,0 Cobre (dir) 0,0 Jan-13 Nov-13 Sep-14 Jul-15 May-16 Mar-17 Jan The core excludes volatile foods or those subject to external shocks, fuel, regulated rates and public transportation. Source: BCRP, Bradesco CPI Core Target 12

13 Technical Staff Director of Economic Research and Studies Fernando Honorato Barbosa Economists Andréa Bastos Damico / Constantin Jancsó / Ellen Regina Steter / Estevão Augusto Oller Scripilliti / Fabiana D Atri / Igor Velecico / Leandro Câmara Negrão / Mariana Silva de Freitas / Myriã Tatiany Neves Bast / Priscila Pacheco Trigo / Rafael Martins Murrer / Robson Rodrigues Pereira/ Thiago Coraucci de Angelis / Thomas Henrique Schreurs Pires Interns Ana Beatriz Moreira dos Santos / Camila Medeiros Tanomaru / Daniel Funari Fouto / Felipe Yamamoto Ricardo da Silva / Isabel Cristina Oliveira / Lucas Maia Campos / Renan Bassoli Diniz / Thaís Rodrigues da Silva DEPEC BRADESCO is not responsible for any acts/decisions taken on the basis of the information available through its publications and projections. The information and opinions provided herein are carefully checked and prepared by fully qualified professionals, but should not be taken as a basis, support, guidance or standard for any document, assessment, judgment or decision of formal or informal nature, under any circumstances. Therefore, the user hereby undertakes sole responsibility for all consequences arising from the use of the data or analyses hereof, hereby exempting BRADESCO from all claims thereof. Upon accessing the information hereof, users hereby accept these terms of use and responsibility. Total or partial reproduction of this publication is strictly prohibited, except upon due authorization from Banco BRADESCO or full citation of the source (including the authors, the publication, and Banco BRADESCO). 13