Scary Year Ahead
Q2 GDP expansion of 3% was pretty much in Iine with expectations, and showed slowdown to be modest, compared with the predicament of other Latin American economies. We expect 2.9% expansion for 2015, just over the Central Bank’s forecast of 2.8%. But the government is projecting 3.5% growth. That would imply H2 growth at 4.1%, which seems terribly difficult to achieve. But the government hopes that public investment in housing infrastructure and higher local investment will do the trick.
Construction has been a key economic contributor in recent years (though this has also slowed), with government’s social housing delivering most of the boost. Public works and commerce have also fared well. Low unemployment (at 8.8%) and soaring commercial outstanding loans have fueled demand, keeping commerce growing nicely. This will definitely weigh heavily upon the decision the Central Bank makes on interest rates this month.
This year and the next will be challenging, as economic recovery will be limited by slow-growing external demand, low commodity prices, lower liquidity and uncertainty in financial markets. The sooner the government accepts that rough times are ahead and that belts need to be tightened, the better.
The State Council has approved the sale of 57% of the energy company Isagen, but investors remain skeptical that the deal will come off. The sale period has now been extended by four months and 10 days, with fiscal management to be overseen by the comptroller general.
Though there could be further legal impediments, the Ministry of Finance insists that the government will go ahead with the sale, and that Suéz, Colbun and Brookfield are interested in investing. The government needs these funds more than ever: the fiscal situation next year seems dire, with the government faced with financing a soaring fiscal deficit. Yet funds from the sale are supposed to be used to create an autonomous patrimony to be administered by the new Financiera de Desarrollo Nacional, a development bank that will leverage capital to finance fourth generation transportation concessions.
How much longer will we enjoy the generally good labor market news? Not too much longer, we think. Risks, especially in 2016, are high. Large fiscal and external deficits, plus a weakening currency, are no recipe for strong growth. Unemployment may soon start ticking up. This is a further call for the government to energetically tackle fiscal issues.
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