Global Economic Research July 23, 2010

Oscar Sánchez
1 (416) 862-3174
oscar_sanchez@scotiacapital.com

• Commodity price gains highlight change in perceptions of future economic performance

• Brazilian central bank moderates tightening after economic activity peaks
• Mexican expansion on track as export-led recovery spills over to domestic demand
• Puerto Rico to close FY2010 with a blast as economy performs a dramatic turnaround

Commodity price gains highlight change in perceptions of future economic performance

Global developments will become more balanced. This week’s business atmosphere displayed a better
tone contrasting with investors’ swinging risk averse attitudes prevalent before. Although data emanat-
ing from the US continues to leave a question mark in the air as to the extent of the loss of momentum,
with US Fed Chairman Ben Bernanke highlighting the uncertain scenario, Euro zone figures continued
to surprise on the upside supporting a significantly enhanced environment for capital markets. The
positive twist in confidence translated into almost uninterrupted climb in commodity prices throughout
the week. The CRB commodity index climbed to 267, a 1.8% weekly gain. The bellwether LME copper
price reached US$3.17 per pound at the time of writing, an eye-popping 21% weekly gain. Copper
prices are still well below the recent March 2010 US$3.6 peak, that preceded the sovereign debt crisis
in Europe. The WTI oil price also staged a comeback as it slowly but surely closed in towards the
US$80 level; currently quoting at US$79 per barrel. The favourable moves in key commodity prices
resulted in currency gains throughout the region. The Chilean peso appreciated by 2%, reaching 519.5
per US dollar, a level not observed since mid-April. The Mexican peso also strengthened although only
by 1% as did the Brazilian real. These currencies closed the week at 12.78 pesos and 1.79 reals per
US dollar, respectively. The Colombian peso also displayed gains, and quotes now at 1867.8, a 0.5%
weekly gain. The Peruvian nuevo-sol remained stable, closing the week still at 2.82 per USD as the
country’s central bank continues with its record international reserve accumulation. Peruvian foreign
reserves lead the region currently standing at over 30% of GDP.

Brazilian central bank moderates tightening after economic activity peaks

The Brazilian central bank decided this week in favour of a third consecutive rise in the benchmark
SELIC interest rate, this time by 50 basis points (bps) to 10.75%. According to the central bank’s an-
nouncement followed by the July 21st Copom meeting, the risks to the inflationary outlook have fallen
since the previous monetary policy board meeting as a result of the recent evolution of domestic and
external demand factors (the central bank announcement can be accessed at: http://www.bcb.gov.br/).
The monetary policy tightening decision surprised analysts as a 75 bps move was expected consistent
with the previous two interest rate increases. However, the central bank’s less urgent tone is consistent
with recent data which had been showing a slowdown in domestic demand pressures.

Economic activity in Brazil had been on an upward trend for a year and a half, having showed signs of
peaking as depicted by the index of economic activity published by the central bank. Seasonally ad-
justed figures of the index inked a 0% change during May, the first non-expansionary figure registered
since January 2009. Readings on inflationary pressures had also displayed somewhat tamer consumer
price pressures with inflation –as measured by the IPCA-15 index– falling 0.1% in the month through
the second week of July. Retail sales data had shown a softer uptick during May as well, although sec-
ond-quarter vehicle sales coming below previous quarter figures were conditioned by the expiration of
government incentives. Consistent with the picture of overall economic activity slowdown, industrial
output had already contracted in April, with the retrenchment extending through May. The slowdown in
Brazilian economic activity can be sourced at the lapsing fiscal stimulus that coincided with a shift in the
monetary policy stance, which provoked an increase in market interest rates prior to the initial rise in
the benchmark SELIC rate in April as market participants had already anticipated such a move. We

Latin America Weekly Outlook is available on www.scotiabank.com and Bloomberg at SCOE

Global Economic Research July 23, 2010

retain the belief that the economy is being propelled for- Latest inflation indicators for June also provide indirect
ward by extraordinarily elevated government spending support of a recent spring in domestic demand factors.
and bank credit flows, which continue to underpin the Within a context of subdued overall price pressures, an
favourable business outlook. Labour market data sup- upward trend in core-services inflation can be detected
port this perception as employment generation has not starting in May and continuing through the June figures
shown signs of stalling in contrast to the rise in the rate (this trend was further supported in this week’s CPI re-
of unemployment observed during the first-quarter. The port for the first two weeks of July). In our view this
pickup in the joblessness indicator was due mainly to a points to domestic demand pressures starting to finally
rise in labour participation –a natural result from the come into play. We thus expect the Mexican economy
economic recovery– and has now turned into a veritable to continue to gear back towards a sustainable recovery
retrenchment in the unemployment rate for June which path with spare capacity still conditioning the inflationary
fell all the way to 7%; a record low. The Brazilian econ- outlook.
omy expanded by more than 8.5% y/y in the first quar-
ter, and although we expect the loss in momentum to Puerto Rico to close FY2010 with a blast as econ-
omy performs a dramatic turnaround
continue in coming months, the persistent fiscal and
credit stimulus will still drive the expansion in GDP for
The Puerto Rican economy has experienced a dramatic
2010 to least 7%.
turnaround after three years of uninterrupted economic
decline. Consumer spending and manufacturing activity
Mexican economic expansion on track as export-led
are leading the way, underpinned by improving labour
recovery spills over to domestic demand
market conditions and an uptick in international trade.
The nascent recovery is being supported by an ambi-
Slowly but surely Mexico’s local demand is starting to
tious and aggressive fiscal plan implemented by the
climb out of the slump that resulted from last year’s re-
government of the Commonwealth backed by the fiscal
cession. Notwithstanding the stellar recovery in foreign
stabilization package instituted last year in the United
demand observed since the second-half of 2009 –which
States. Although the near term outlook for Puerto Rico
has led to a rebound in the manufacturing sector back to
will still be shaped by sizable disbursements from the
pre-crisis levels– activity in domestically oriented sec-
government’s fiscal stabilization plan that are pro-
tors has been lagging the country’s economic come-
grammed to amount to US$1.5 billion in the next six
back. In fact, while latest industrial output figures
months, recent evidence already supports a successful
(seasonally adjusted) already show the manufacturing
implementation of the fiscal impulse. Having bottomed
sector having returned within a whisker of the level ob-
out back in February, value added within the island, as
served at the top of the previous cycle in mid-2008, the
approximated by the economic activity index, increased
domestically oriented construction sector still lies close
by 0.8% q/q (not annualized and seasonally adjusted)
to 10% below that peak. This picture, however, has
so far in the second quarter with data up to May. Al-
been changing painstakingly with output in construction
though seasonally adjusted figures are not readily avail-
slowly creeping up by 2% so far in 2010. The incipient
able, an advance in retail sales of over 13% on a yearly
recovery in the building sector has manifested in invest-
basis during the first quarter was significant. The im-
ment figures as well, with edification expanding by over
provement in spending indicators has come on the back
2% so far this year, as the recovery in the seasonally
of persistent employment gains, as over 18,000 jobs
adjusted index has already retraced more than half the
have been created since January. Notwithstanding the
loss that resulted from the collapse in capital formation
surprising economic comeback, the most impressive
during 2009. Yearly comparisons of construction sector
performance has come out of the public sector balance,
performance can only track these developments with a
as government revenues for FY2010 resulted over 2%
lag as the change in the trend is only captured until the
larger than the previous year, having surpassed budg-
second quarter. Retail sales indicators follow a similar
eted estimates for the second fiscal year in a row; after
script as the higher frequency data, as seasonally ad-
at least four years of overestimations (fiscal years run
justed sales figures registered a 0.7% pickup during
July/June). These recently evidence developments con-
May, having expanded in four out of the five months
tinue to support our February 2010 estimation of a 2.5%
reported so far this year. This is in a way noteworthy as
economic expansion during FY2011, which would repre-
consumer confidence gauges have lagged the recovery
sent the first yearly expansion in five years.
with perceived future employment and income pros-
pects improving slowly. This scenario, however, is finally
being balanced given recently noted monthly increases
in bank credit flows to consumers which had been con-
tracting for over a year.

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 Global Economic Research July 23, 2010

INTERNATIONAL RESEARCH GROUP

Pablo F.G. Bréard, Head

1 (416) 862-3876
pablo_breard@scotiacapital.com

Tuuli McCully
1 (416) 863-2859
tuuli_mccully@scotiacapital.com

Estela Ramírez
1 (416) 862-3199
estela_ramirez@scotiacapital.com

Oscar Sánchez
1 (416) 862-3174
oscar_sanchez@scotiacapital.com

Scotia Economics
Scotia Plaza 40 King Street West, 63rd Floor
Toronto, Ontario Canada M5H 1H1
Tel: (416) 866-6253 Fax: (416) 866-2829
Email: scotia_economics@scotiacapital.com
This Report is prepared by Scotia Economics as a resource for the
clients of Scotiabank and Scotia Capital. While the information is from
sources believed reliable, neither the information nor the forecast shall
be taken as a representation for which The Bank of Nova Scotia or
Scotia Capital Inc. or any of their employees incur any responsibility.