LatAm Weekly – September 2-6

Argentina: Authorities announced capital controls It is important to recognize that between the primary elections on August 11th that the left-leaning candidate Alberto Fernandez won, and the first round of the presidential election on October 27th, the economic situation in Argentina is bound to deteriorate. We recently lowered our 2019 GDP forecast to -2.2% YoY from -1%. The recent measures of unilaterally extending maturities of short-term debt and imposing capital controls are just efforts to stabilize the FX and bond prices while preserving international reserves. Prior to the primary elections the level of reserves was slightly above US$65bn. The level of reserve at the end of August stands at US$54bn. In order to stabilize asset prices and macro variables, Fernandez must announce a fiscally-prudent plan as soon as he wins the election on October 27th. However, the economic situation could get more volatile if the election is not decided until the second round on November 24th. Stay tuned. Chile – BCCh delivers a 50bps cut and leaves door wide open for additional cut The 50bps-cut delivered by the central bank of Chile (BCCh) on September 3rd was widely expected. The BCCh lowered the policy rate to 2.00%. This is the second time the BCCh lowers the policy rate in the year, accumulating 100bps of cuts year-to-date. The press release included a discussion on global slowdown, weakness in domestic GDP growth and sticky inflation around 2%ish, below the 3% target. Importantly, the BCCh also signaled that additional rate cuts might be necessary depending on data. In our view, the BCCh will lean towards additional cuts if growth falls below the macro framework published in the Monetary Policy Report (IPOM) that projects 2019 GDP growth at 2.25-2.75% and 2020 GDP growth at 2.75-3.75% and/or if the BCCh believes inflation fails to converge to 3.0% in two-years from now. For now, we believe the conditions for additional cut are not met therefore we don’t forecast more rate cuts. However, if the economy continues to weaken or if inflation fails to start converging to the target then we will likely re-evaluate our view.