Inicio Santander s Economic Report Research Second quarter 2016
WORLD ECONOMIC OUTLOOK > In US, better prospects for employment and activity, coupled with a rise in inflation, portend an imminent rise in interest rates by the Federal Reserve, and a second later this year or early next. > Europe and Japan will maintain a limited dynamism, a slow credit market expansion, and challenges for banking, particularly affected by negative interest rates. > China is a synonym of uncertainty. Although it grows (6.5% in 2016), bases its dynamism in indebtedness and public investments, which is not sustainable. In addition, there are pressures for a devaluation of the RMB and an upgrade of its banking system. > Brazil will continue submerged in an economic recession and the unemployment rate will increase, although lower inflationary pressures and lower primary deficit (1.8% of GDP) for this year are expected. It is still necessary to revive the policy of concessions and privatizations, and reform the oil industry production model. > Given the instability of Chinese copper demand, we adjusted downward our forecast for the average copper price to $ 2.14 lb. for 2016 and $ 2.20 lb. for 2017. > In the last month, oil price has experienced a sustained price increase, explained by a narrower market with a more constrained supply, and a more dynamic demand. Thus, we forecast an average price of $ 44 bbl. for 2016 and $ 51 bbl. for 2017. > In the second half of 2016, we expect to continue watching capital outflows from emerging to advanced economies. Research 2
ECONOMIC FIGURES Table 1 WORLD ECONOMIC OUTLOOK 2015 2016 2017 Santander CBCh Santander CBCh Copper ($/lb, aop) 2.49 2.14 2.15 2.20 2.25 Brent oil ($/bbl, aop) 54 44 45 51 52 Major trading partners GDP (% YoY) 3.3 3.0 2.8 3.3 3.2 Terms of trade (% YoY) -4.5-3.5-3.9-0.1 0.1 Source: Bloomberg, CBCh, IMF and Santander. Table 2 Table 3 DOMESTIC OUTLOOK 2015 2016 2017 Santander CBCh Santander CBCh GDP (% YoY) 2.1 1.6 1.25-2.0 1.8 2.0-3.0 Domestic demand (% YoY) 1.8 1.4 1.0 1.6 2.4 Inflation (%, eop) 4.4 3.5 3.6 3.2 3.0 Inflation (%, aop) 4.3 4.0 4.0 3.1 3.2 Unemployment rate (%, aop) 6.2 7.0 7.1 MPR (%, eop) 3.50 3.75 3.75 Exchange rate (CLP/$, eop) 707 690 715 Exchange rate (CLP/$, aop) 654 692 708 Current Account (% GDP) -2.0-2.0-2.2-1.7-2.1 GDP COMPONENTS (% YOY) 2015 2016 2017 Santander CBCh Santander CBCh Total consumption 2.2 1.6 2.1 1.9 2.4 Private consumption 1.5 1.2 1.6 Public consumption 5.8 4.0 3.2 Fixed capital investment -1.5 0.6-2.4 0.7 0.9 Construction 1.9 0.7-1.0 Machinery and equipment -8.2 0.4 3.8 Exports -1.9 0.5 1.3 2.1 2.1 Imports -2.8-0.3-1.6 1.5 2.2 Source: CBCh and Santander. Source: CBCh, NIS and Santander. Research 3
DOMESTIC OUTLOOK > GDP growth forecast rises from our last report (+0.5 pp), reaching 1.6% YoY in 2016. However, the prospects for 2017 remain at 1.8% YoY. > The positive surprise is explained by a better foreign trade performance. > However, the components of domestic demand have not changed significantly and we see a GDP growth at half their potential output. > The expansion of consumption will remain stable, due to an absent of an increase in debt to sustain another path. > The investment projects portfolio within five years was showing an uptick, who disappeared in the last quarter. 8 7 6 5 4 3 2 1 Graph 1: Private consumption, labor income and loans (% change, YoY) 16 14 12 10 8 6 4 2 120,000 100,000 80,000 60,000 40,000 20,000 Graph 2: Five-year investment portfolio 0 0 2013.I 2013.IV 2014.III 2015.II 2016.I 2016.IVe 2017.IIIe Private consumption Labor income Consumer loans (RHS) Source: CBCh, NIS and Santander. 0 2013.I 2013.III 2014.I 2014.III 2015.I 2015.III 2016.I Mining Infrastructure Energy Real estate Other Source: CGC and Santander Research 4
FOREIGN SECTOR AND FISCAL BALANCE > Exports evolution show a slight increase despite the depreciation of the exchange rate (0.5% YoY in 2016 and 2.1% YoY in 2017). This because the demand for our trading partners has been so damaged that the effect of the recent depreciation is not enough to compensate its reduction. > Imports will have a slight contraction in 2016 (-0.3% YoY) reverting it with an expansion in 2017 (1.5% YoY). > The current account balance will show a deficit of 2.0% of GDP in 2016 and of 1.7% of GDP in 2017. > The expansion of public spending in real terms would be 5.5% YoY in 2016 and 2.3% YoY in 2017. > Fiscal deficit will remain hefty: 4.1% of GDP in 2016 and 3.0% of GDP in 2017. Graph 3: Current account deficit (% GDP) Graph 4: Structural and effective fiscal balance (% GDP) -1.6 2015 2016e 2017e 0.0 Avg. 10-14 2015 2016e 2017e -0.5-1.7-1.0-1.5-1.8-2.0-2.5-3.0-1.9-3.5-4.0-4.5-2.0 Effective balance Structural balance Source: CBCh and Santander. Source: CBCh, M. Finance and Santander. Research 5
LABOR MARKET > The labor market should show a higher unemployment rate in the coming months (average 7.0% in 2016 and 7.1% in 2017). > Once unemployment affects most head of households, they and the secondary labor force will look for employment, causing an increase in labor force, and therefore in the unemployment rate. > The lower employment creation cycle is due to efficiency adjustments in businesses, added to the public sector that destroyed jobs in the last quarter. Graph 5: Labor market indicators (% change, YoY) Graph 6: Unemployment rate by gender (%) 2 8 8 1 7 7 0 6 6-1 5 mar-15 jun-15 sept-15 dec-15 mar-16 jun-16 sept-16 dec-16 Employment Labor force Unemployment (RHS) Source: NIS and Santander. 5 jan-15 apr-15 jul-15 oct-15 jan-16 Men Women Total Source: NIS and Santander. Research 6
ECONOMIC SECTORS Table 4 ECONOMIC SECTOR S GROWTH (% CHANGE, YOY) Avg. 10-15 2016 2017 Agriculture and forestry 1.3 5.0 4.3 Fishery 4.7-9.0 2.0 Mining 1.3-0.6 0.1 Manufacturing 2.7 0.4 0.8 Utilities 6.6 3.0 3.3 Construction 4.1 0.8 0.1 Wholesale and retail trade 7.1 1.4 1.7 Restaurants and hotels 4.6-1.0 1.4 Transport 6.2 1.3 1.5 Communications 8.0 5.9 6.5 Financial Services 7.1 2.9 3.2 Business Services 4.0 1.1 1.4 Dwelling Services 1.9 1.5 1.6 Personal Services 4.7 3.1 3.1 Public administration 3.0 3.5 2.9 GDP 4.1 1.6 1.8 > In general, services will show above-average product growth figures, except business services. > The most relevant areas of the real economy for production such as mining, manufacturing, construction and trade will have a limited performance. > Particularly, mining will shrink 0.6% YoY in 2016, while construction and trade will have a downward correction which will imply a lower job creation. > In contrast, sectors that will grew the most will be those with a lower incidence in GDP, such as agricultural and forestry, utilities, and communications. > In this context, it is essential to restore economic dynamism. To do this, it is fundamental to increase productivity, which already completes two consecutive years of declines. Source: CBCh and Santander. Research 7
INFLATION AND EXCHANGE RATE > We project an inflation of 3.5% YoY at December, but with an upward bias of 0.2 to 0.3 pp. This is mainly due to the likelihood of observing higher prices of food and fuel, and to a lesser extent by a somewhat less pronounced moderation in core inflation. > Meanwhile, in December 2017 we expect an inflation of 3.2% YoY. In this case the bias is different. Lower depreciation of the exchange rate with an unemployment rate that should be kept high, increase the gap of the product, giving rise to an inflation that can be located even under 3.0% YoY. > Given the economic situation, the exchange rate would reach an annual average of CLP$ 692 per dollar, ending the year at a level of CLP$ 690. > By 2017, the recovery in global activity, led by the US, and higher oil prices in a context where domestic activity does not present a significant acceleration, explain that the exchange rate will reach an average of CLP$ 708. Graph 7: Exchange rate and forecast (CLP/$) Graph 8: Inflation by component (% change, MoM) 800 750 700 650 600 550 500 450 400 350 300 dec-06 jun-08 dec-09 jun-11 dec-12 jun-14 dec-15 jun-17 Confidence interval (5%-95%) Exchange rate Source: Bloomberg and Santander 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0-0.1-0.2 jan-16 mar-16 may-16 jul-16 sept-16 nov-16 Core CPI Energy Food CPI Source: NIS and Santander. Research 8
INTEREST RATE > Inflation in Chile is giving and we hope it will re-enter the target range in July this year. This path leads to lower pressure on the Central Bank make an additional increase in the Monetary Policy Rate (MPR). > However, if the Fed makes between one and two increases in the interest rate this year, the exchange rate will depreciate, diminishing the inflation decline. > Against this backdrop, we expect the monetary authority reacts with a rise of 25 basis points in the MPR. > For 2017, we estimate that the monetary policy will remain unchanged. > Coherent with the MPR path, the yield curve in CLP is aligned for shorter maturities, exhibiting a slight difference in maturities over five years. Graph 9: MPR path and expectations (%) Graph 10: Yield curve in CLP (%) 5,0 5,0 4,8 4,6 4,4 4,0 4,2 4,0 3,8 3,0 3,6 3,4 3,2 3,0 2,0 1 2 3 4 5 6 7 8 9 10 mar-14 mar-15 mar-16 mar-17 mar-18 Maturity (years) MPR Implicit swaps rate Santander EOF EEE Yield Santander CBCh bonds Yield CBCh bonds Source: Bloomberg, CBCh and Santander. Source: CBCh and Santander. Research 9
Financial Division Felipe Bravo Gabriel Cestau Álvaro González Camilo Vio Chief Economist Economist Economist Economist This report has been prepared with the only purpose of providing information to the customers of Banco Santander Chile, and it reflects the views of the Research Area, but not necessarily that of Banco Santander Chile. The views expressed in this paper are those of the its authors and should not be attributed to the Bank, its Board of Directors, or its management. The purpose is to contribute to the national debate on this matter. It is not an application or an offer to purchase or sell any of the shares or securities mentioned in this paper. This information and that on which this information is based have been obtained from sources that appear to be reliable to us. However, this does not guarantee accuracy or completeness. Projections and estimates in this paper have been prepared by our team, supported by the best tools available. Nonetheless, this does not guarantee their realization. The views and statements contained in this report will not be necessarily updated and may be subject to change without notice. The outcome of any financial operation conducted based on the information contained in this paper is the sole responsibility of those who conduct such operation. Research
Santander s Economic Report Second quarter 2016 Estudios y Políticas Públicas Research