201309 Economic Situation Report

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Economic Situation Report

EconomicSituationReport

September 2013

Investment Strategy

Adriana Rodrguez

[email protected]

Economic Situation Report

Economic Activity

The latest GDP (Gross Domestic Product) data announced at the end of September

for the period from April to June indicates better performance by the economy as

compared to the prior quarter derived from Free Zone exports.

Quarterly figures grew at an annual rate of 4.24% revealing a higher volume of

international trade, while household and Government consumption growth rates

decreased, as did investment and gross capital formation.

The rate of growth in exports accelerated throughout the year, particularly exported

goods as compared to exported services, according to BCCR data.

Procomer data also shows that Free Zone exports from April to June exceeded

accumulated exports between January and March by 12%. In fact, May and June

show the highest monthly income for the year for this regime.

Accumulated Annual Free Zone sales at the end of August increased by 2.8% while

the Normal Regime dropped 6.7%.

Gross Domestic Product

Interannual Accumulated Variation

Source: Aldesa graph based on BCCR data.

Lower prices and lower exports affected traditional exports, including coffee,

banana, beef and sugar. The accumulated value of exports to August is 13% less

than for the same period last year.

Annualized QuarterGROSS DOMESTIC PRODUCT


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Economic Situation Report 2

Free Zone exports equaled 54% of total national exports, while Definitive or Normal

Regime sales were at 44%. Inward processing arrangements account for the

remaining 2%, according to total accumulated figures to August.

Quarterly growth in household consumption is declining and is only comparable to

2009 figures. The different Consumer Confidence indexes show lack of satisfaction

and pessimism in their perception of the economic environment.

In our opinion, consumer disposable income has been hit hard in the last two years.

First because of the sudden increase in the Basic Lending Rate during 2012

combined with extremely high fuel prices. During this year there have been

constant increases in the prices of regulated goods and services, which have

diminished household consumption capacity.

In addition, slow economic growth has led to higher unemployment rates, at a time

of increased political uncertainty. In spite of the upcoming Christmas season, we do

not see a turnaround in the trend towards declining levels of private consumption.

Household Consumption

Quarter to Quarter Variation


Interest Rates

During September the Basic Lending Rate (BLR) fluctuated between 6.50% and

6.55%, a remarkably stable behaviour for the year caused by the new methodology

used to make weekly calculations.

Final Consumption Home Expenses


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The BLR has met with some resistance against decreasing from the current 6.55%

level and we have seen certain pressure towards increasing it in recent calculations.

This could lead to a rate between 6.60% and 6.70% in the next few months.

Although Public Banks pay an average rate of around 6.06% and account for 63% of

the BLR behavior, the Private Bank Group pays close to 6.86% and Savings and Loan

Cooperatives pay 8.63%, together accounting for 30% of BLR movements, which

caused the increase in the final average.

Mutual finance companies have had the lowest participation paying an average of

6.01% for 6-month deposits and accounting for 7% of the BLR calculated.

The four groups that comprise the calculation of the BLR have dropped their deposit

rates significantly from January to September and as the rates in the banking system

decrease, many depositors have moved over to Cooperatives, increasing their

weight in calculating the BLR from 14.6% to 15.5% during this year.

Base Lending Rate

Source: BCCR. Prepared by Aldesa.

While short term rates in colones have remained stable, Government Bond rates and

yields for terms beyond 2020 have been traded with a certain increasing trend.

2028 bonds have gone from an 8.33% yield in July to 8.84% in October and other

bonds for 2020, 2022 and 2023 have behaved similarly.

The national dollar denominated bond market is still somewhat unstable and subject

to international adjustments in the external debt curve. Internal bond yields have

risen, although still not in the same proportion as for external debt bonds.


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The 2020 dollar bond has gone from trading at a 4.41% yield in May of this year to

the current 5.14%. This means a price drop from 102.50 to 98.29, respectively.

Likewise, before the Federal Reserve change in Monetary Policy, the 2025 bond was

traded at prices close to 103, with a 4.47% yield, while in October they were traded

at 95.69 with a 5.55% yield. External debt bond yields are quoted at 5.80% on

international markets.

The current fiscal situation, even assuming another successful placement of $1 billion

on the international market during the first quarter of 2014, in our opinion implies a

steeper slope in the yield curve due to less confidence and/or less appetite for long

term Government bonds by national investors.

With regard to dollar interest rates, although the Prime, Fed Funds and Libor rates

remain at minimum levels during 2014, the scenario is primed for higher investment

yields, provided the Federal Reserve decreases its purchases of US Treasury Bonds in

accordance with its Monetary Policy plan.

In the absence of inflation in this country, we believe that yields should again reach

this years maximums during the first half of next year. However, the large majority of

investments have already assumed this adjustment.

Inflation

General price levels increased by 0.13% in September. The accumulated increase

for the year was 3.77%, for an interannual inflation of 5.37%

According to INEC data, during September the highest incidence on this increased

price index derived from increased fuel prices and in general, during the year, the

prices of regulated goods and services that have put pressure towards an increased

inflation level.

As far as groups are concerned, rentals and housing services prices increased the

most during the year, 10.31%; followed by alcoholic beverages, cigarettes and

education.

Data on price behavior are different because of the mentioned increases in tariffs

on goods and services.

At the end of September, 46% of

the 292 goods in the Basic Basket

increased in price, 37%

decreased and 17% showed no

change according to INEC data.


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Therefore, for September prices for regulated goods had accumulated interannual

growth of 11.7%, while unregulated were at 3.7%. At the same time, inflation for 12-

month tradable goods was at 1.6% and non-tradable goods at 7.3%.

Consumer and Regulated Price Index

Interannual variation

Source: Aldesa graph based on INEC data.

Exchange Rate

During September the volume of currency traded on the MONEX market increased

by 7.4%, as compared to the total traded during August.

A total of $361 million was traded during September -- $25 million more than August.

Of this total, $149 million were acquired by the Public-Non Banking Sector (PNBS),

representing close to 40%.

The behavior of PNBS purchases has been influenced since November of last year,

by the Central Government currency sales derived from the sale of bonds abroad.

In September, trading prices reached levels not seen since January and in general

the currency market seemed to have a dollar surplus, for this reason dollar sellers

had a better trading position.

BCCR only had to buy dollars on one occasion, but for a significant amount -- $57

million -- coinciding with the expiration date of a Ministry of Finance internal debt

Regulated Inflation Regulated Variation Un-Regulated Variation


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bond in colones. For this reason, it was assumed that Finance sold dollars from

Eurobond placements to cover this payment.

Average MONEX Exchange Rate


The remaining currency was acquired by the public sector, almost 45% of the total

traded. Average dollar trading prices in September ($502.73) were higher than

prices for prior months, very close to $500.00

Fiscal Deficit

Data on Central Government finances to August were similar to for recent years. A

monthly permanent operating or current deficit and a large financial deficit

because new debt was used to finance prior periods.

In August the monthly deficit in current expenditures was 94 billion, for an 8 month

accumulated deficit of 455 billion. This implies a dangerous deficit growth of 25% in

only one year. The total financial deficit reached 841 billion, 27% more than last

year.

The deficit to August represents 3.4% of the GDP and in our opinion, will be higher

than 5% by the end of the year, further undermining financial stability perspectives

for 2014.

499

501

503

505

507

509

511

513

Sep/12 Oct/12 Nov/12 Dec/12 Jan/13 Feb/13 Mar/13 Apr/13 May/13 Jun/13 Jul/13 Aug/13 Sep/13 Oct/1

Ave. ExRate Purchase Int.


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Deficit of the Central Government

8-month Aggregate

Source: Aldesa graph based on Ministry of Finance data

Additional Information

Economic Activity Index by Sector



Activity Index for the Manufacturing and Construction Sector


-900,000

-800,000

-700,000

-600,000

-500,000

-400,000

-300,000

-200,000

-100,000

0

Dficit Primario Dficit Financiero

2013 2012

Million of

Colones

+ 25%

+ 27%

Primary Deficit Financial Deficit

Indirectly measured Financial Mediation Services

Transportation, Storage and Communication

Finance and Insurance Services

Other services Rendered to Companies

Mining and Quarry Material Exploitation

Commerce

Construction

Hotels

Remaining Industries

Agriculture, Silviculture and FishingPower and Water

IMAE with IEAT, Cycle Trend

Manufacturing Industry

IMAE Cycle Trend


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Inflation Expected

BCCR expectations survey


Secondary Market Yields

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

Sep-10 Sep-11 Sep-12 Sep-1

Inflacin 12 Meses

Manufacturing Industry Construction

12-month inflation


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External Debt Instruments

Source: BNV. October 09, 2013.

Internal Debt Instruments

Ministry of Finance

Fixed Rate Dollar Instruments


PriceBond Yield

Government $ Bonds

PriceBond Yield

Government $ Ex Rate


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Ministry of Finance

Fixed Rate Colones Instruments


PriceBond Yield

Government Ex Rate

Coupon

Documents

201309 Economic Situation Report