South Africa February CPIX registered at 9.4% yoy from 8.8% in January, in line with expectations but well above the 3%-6% inflation target range. The core CPI surprised on the upside with 8.9% yoy rise vs. 8.1% in January and 8.6% expected, in line with SARB Governor’s comments of signs of second round effects in the economy. He expressed “serious concerns” about the impact of oil prices and noted that consumers “need to tighten their belts.” With a higher expected peak in CPIX than in the previous forecast amid slowing growth prospects, the SARB’s task is further complicated. Focus shifts to PPI release on Thursday and electricity price talks in the run up to the April 10 SARB meeting.
Poland Retail sales rose by an impressive 23.8% yoy in February from 20.9% in January, well above expectations for 19.9%. The upside surprise was driven by food (15.5% yoy from 12.5%) and household goods sales (34.0% yoy from 21.1%), while motor vehicle sales slowed to 29.8% yoy from 42.0%. Upside inflation pressures, coupled with resilience in economic data, support the case for the third consecutive rate hike by the NBP today to bring rates to 5.75%.
Thailand The ruling People Power Party (PPP) decided on Tuesday to propose amending a key article in the constitution that allows a political party to be dissolved by the Constitution Court if party executives are linked to election fraud committed by election candidates. The move is seen as an attempt to avoid the dissolution of two coalition partners, and could pave the way for PPP to seek amnesty for the 111 banned Thai Rak Thai executives, including ex-PM Thaksin Shinawatra. With the coalition controlling 315 of the 480-seat House of Representatives, the amendment looks set to clear the Lower House in April despite the opposition Democrat Party’s (DP) outright rejection of the proposal. However, the bill could face significant public resistance in Bangkok (support base for DP). The legislative process could also be delayed by at least 180 days if the Senate votes to suspend the draft.
Indonesia A parliamentary committee and the government agreed on Tuesday to downgrade the budget deficit projection to 2.1%/GDP from 1.7% on Tuesday. The amendment came after FinMin Sri Mulyani warned earlier this week the fuel subsidy bill could rise by close to 200% if the oil price assumption in the budget is raised to $95 per barrel from $65. The revised deficit of IDR94.5 trillion is subject to a parliamentary vote, which is likely to be held in coming weeks. The additional funding is expected to come from higher domestic borrowing and privatization.
Singapore February industrial output came in slightly below market expectation at 10% yoy (consensus 10.8%), down from 12.8% in January. Biomedical output slowed significantly to 6.6% from 60.3%, which suggests limited upside to export growth in the near term. The slowdown was, however, partly offset by strong performance in the electronics sector. Production of electronics goods accelerated for the 3rd consecutive month to 12.3% yoy from 8% in January despite a weaker outlook on global electronics demand. Industrial output averaged 11.4% for the first two months of the year and should see the economy avoiding a second consecutive quarter of contraction in 1Q08.
Brazil The BRL underperformed various EM currencies and markets over the last few days. The S&P stabilized, VIX edged lower, and the CRB commodities index finally recovered somewhat, yet the USD remained firm and even strengthened modestly versus the BRL. Further strength in commodity prices and a central bank destined to lift rates will likely provide a near-term impetus for the USD/BRL to drift lower. In each of the next two Copom meetings, the central bank will likely push rates higher by 25bps with the next meeting scheduled for April 16. A large February current account deficit ($2.1 billion) relative to a consensus estimate of $2.2 billion was also seen by market participants as complicated for the currency – despite the small outperformance relative to the market estimate. Interestingly, the current account balance typically improves into the middle part of the year, so the reaction to the current account data was likely excessive. Tighter monetary policy, a drift upward in commodity prices and dissipation from an over-reaction to the current account balance will likely push USD/BRL toward 1.65 in the near term.
Chile The government announced that the recently approved gasoline tax cut legislation would go into effect this Tuesday. Gas prices will be reduced by approximately 52 pesos per liter and the measure will be effective for two years. The Finance Ministry has previously estimated that the measure will subtract anywhere from 0.4% -1.00% from headline inflation. However, a recent increase in natural gas imports from Argentina will offset the disinflationary impact from this measure. Moreover, it seems unlikely that the government will agree to reduce the VAT down to 18% from 19%, one of multiple tax cuts that had been planned. Net-net this gas tax reduction should have a minimal impact on headline inflation that is already at a whopping 8.1% and is expected to have increased on a yoy basis in March.
Argentina Several anecdotal stories in local papers report shortages of farm produce in cities around the country as farmers enter the 13th day of their strike in protest of increased export taxes. Meanwhile, the government has had to intervene on Monday as farmers blocked roads and prevented trucks carrying agricultural produce from advancing along major roadways. Although the government has been successful in peacefully breaking up roadblocks, concerns are mounting that the strikes will lead to decreased agricultural exports – a key support for ARS strength. Although USD/ARS has drifted above 3.16, active central bank intervention is likely to keep USD/ARS in the 3.13-3.18 range for now.
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