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Commodity Price Movements Suggest Potential For Divergence Among Latin American Recoveries Published: 29 June 2021

  • Following a sharp fall in Q220 amid the onset of the COVID-19 pandemic, commodity prices have experienced a strong rally as rebounding global economic activity has fueled increased demand. However, rallies for several commodities have reversed in recent weeks, reflected in the sharp fall in the Bloomberg Commodities Index. 
  • The US dollar has strengthened in the wake of the US Federal Reserve's June 16 meeting, at the expense of several commodities, which are largely priced in the unit. Similarly, the Chinese government’s decision to release strategic metals reserves, combined with increased production globally as public health restrictions have eased, have weighed on prices for metals such as copper. 
  • Falling metals prices could limit the pace of the economic recovery in Chile and Peru, which rely heavily on copper exports. Fitch’s Commodities team forecasts copper prices to fall to US$9,000/tonne by end-2021, from a peak of US$10,747/tonne in May, averaging US$8,370/tonne for the year. 
  • Slowing Chinese growth has begun to weigh on demand for agricultural goods such as soybeans, which has seen its price decline significantly in recent weeks. Brazil and Argentina are the region’s largest producers, though Uruguay and Paraguay export soybeans as well. Fitch’s Commodities team forecasts the price of soybeans to average US$1,350/bushel in 2021, from an average of US$1,434/bushel in the year to date. 
  • Additionally, aluminum prices have risen by 46.0% to US$2,486/metric tonne since the start of the year, from the average of $1703/mt in 2020. The deceleration in Chinese growth could also cause a falloff in aluminum prices for the rest of the year, but the consensus by the IMF and World Bank is for aluminum prices to rise to $2,004/mt in 2021 relative to 2020, which should still augur well for income growth in the Jamaican mining and processing sector this year.  
  • In comparison, energy prices have continued to climb, and Fitch forecast Brent prices to average US$66.0/bbl and US$64.0/bbl in 2021 and 2022, respectively, up from US$43.2/bbl in 2020. The sustained bump in energy prices could benefit oil producers such as Colombia, Bolivia, Trinidad, and Ecuador, by encouraging increased foreign investment in their extractive sectors.

(Source: Fitch Solutions, NCBCM Research)

Weak Opposition Will Allow PUP To Continue Fiscal Consolidation In Belize Published: 29 June 2021

  • Belize’s opposition United Democratic Party has seen a number of internal fights in recent weeks, weakening its already fragile political position. As a result, the ruling People’s United Party (PUP) faces few formal constraints on its ability to address Belize’s poor fiscal situation. That being said, the risk of social unrest will limit the pace of consolidation. 
  • Belize’s fiscal deficit is expected to narrow to 9.7% of GDP in FY2021/22, from 11.7% in FY2020/21, while total government debt will reach 129.5% in FY2021/22 before declining thereafter. 
  • While talks with creditors around reducing the principal owed for the 2034 ‘superbond’ are ongoing, the government is unlikely to meet its target of reducing public debt to 85.0% of GDP by 2025. On May 20, the country defaulted on a scheduled coupon payment given the critical state of the public finances, the severe impacts of the pandemic and the consequent rigid budget recently approved by this Parliament.

(Source: Fitch Solutions)

China Central Bank To Make Monetary Policy Flexible, Targeted, Appropriate Published: 29 June 2021

  • China will make its monetary policy flexible, targeted and appropriate, while keeping interbank liquidity reasonable, as authorities seek to consolidate a post-COVID-19 economic recovery, the central bank said. 
  • China's economy has staged a strong rebound from the impact of the COVID-19 pandemic, with Chinese exporters racing ahead to fill global demand bolstering the vast industry sector, but the recovery in the consumer end has been weak. 
  • The People's Bank of China (PBOC), in a statement on its website after a quarterly meeting of the monetary policy committee was concluded, flagged a still-complicated internal and external environment facing the Chinese economy. 
  • It would step up forecasts and analyses of both the domestic and global economy, seek greater international economic policy coordination and fend off external shocks to support growth. 
  • A recent move to reform the way banks calculate deposit rates and continued efforts to unleash potential from previous loan prime rate reforms will help drive a further decline in real lending rates, the PBOC said. Authorities will make use of relending, re-discounting and other monetary tools that would directly help the real economy, said the PBOC.

(Source: Reuters)

 

Fed Officials Express Skepticism About A U.S. Central Bank Digital Currency Published: 29 June 2021

  • Two Federal Reserve officials on Monday expressed strong skepticism about the need for the central bank to issue a digital currency, saying that many dollar transactions are already virtual and some of the potential benefits of an official digital currency may be accomplished through other means. 
  • The remarks, made at two separate events on Monday afternoon, suggest policymakers could face intense discussions as they explore the potential benefits, costs and logistics of creating a central bank digital currency, or CBDC. 
  • Fed Vice Chair for Supervision Randal Quarles said any proposals to create a U.S. CBDC must clear a "high bar," and that he needs to be convinced the potential benefits would outweigh the risks. 
  • The Fed official said the U.S. dollar is already "highly digitized" and expressed skepticism that a CBDC would help to improve financial inclusion or lower financial costs. Some of those issues may be better addressed with other solutions, such as improving access to low-cost bank accounts, Quarles said. 
  • The policymakers' remarks come as the U.S. central bank is ramping up its efforts to explore the potential launch of a digital currency. The conversation about CBDCs is heating up as some other countries, including China, move more aggressively to pilot digital versions of their currencies, a shift some analysts say poses a threat to the U.S. dollar.

(Source: Reuters)

Government Launches Green Bond Project Published: 25 June 2021

  • The Government has launched a Green Bond Project, intended to raise funds on the domestic and regional debt capital markets to finance the implementation of climate-related or environmentally sustainable activities locally. These include engagements targeting energy efficiency; clean transportation; pollution prevention; sustainable agriculture, fisheries and forestry; protection of aquatic and terrestrial ecosystems; clean water; and sustainable water management. 
  • The project, titled ‘Facilitating an Enabling Environment for the Caribbean Green Bond Listing on the Jamaica Stock Exchange’, is being jointly implemented by the Climate Change Division (CCD) in the Ministry of Housing, Urban Renewal, Environment and Climate Change, and the Jamaica Stock Exchange (JSE), with support from the Green Climate Fund. It is expected to culminate in the listing of green or climate bonds on the JSE by mid-2022, targeting local, regional and global investors. 
  • Speaking during the launch on Wednesday (June 23), Minister of Housing, Urban Renewal, Environment and Climate Change, Hon. Pearnel Charles Jr., said the initiative is a “seminal” project that represents a “truly watershed moment for our country”. He further stated that the objective is to reduce greenhouse gas emissions by 24.5% in 2030 and 28.5% by that same time with international support. Mr. Charles also stated that the climate projects targeted for implementation locally are “ambitious” and noted that “the public purse does not have the capacity to supply the large sums that are going to be required for implementation.

(Source: JIS)

Slow Tourism Recovery to Weaken Jamaican Dollar in the Short-Term Published: 25 June 2021

  • The Jamaican Dollar (JMD) will continue to weaken against the U.S dollar (USD) in 2021 as the country’s domestic tourism industry faces a slow recovery, which will limit USD inflows. 
  • However, over the long-term, a stronger outlook for growth and tourism will limit the JMD’s depreciation, but elevated inflation, dovish monetary policy and persist current account deficits will keep the unit on its long-range depreciatory path. 
  • Fitch Solutions has revised its 2021 average forecast for the Jamaican Dollar to JMD$150.50/USD, from JMD$149.90/USD previously, as it expects weaker tourism activity will keep the unit in a weaker trading range in the near term. The revised forecast implies that the unit will trade 5.7% below the JMD$142.40/USD average in 2020. 
  • However, barring another spike in COVID-19 cases, we expect the gradual recovery witnessed in the tourism sector thus far to strengthen in H2 2021 supported by the robust vaccination programmes and economic recovery in source markets, to influence greater USD inflows and reduce the pace of depreciation of the JMD.

(Source: Fitch Solutions & NCBCM Research)

Trinidadian Government Will Face Increasing Pressure To Raise Spending To Combat COVID-19 Outbreak Published: 25 June 2021

  • It is anticipated that the ruling, centre-left People’s National Movement (PNM) in Trinidad & Tobago (T&T) will continue to cut public expenditures in line with a long-term push towards fiscal consolidation. 
  • Due to negative impact of the COVID-19 pandemic on government revenues, T&T’s fiscal deficit ballooned to 11.8% of GDP in 2020, from 3.2% in 2019, while total public debt rose to 68.9% in 2020, from 55.3% in the year prior. 
  • In response, the PNM passed a 2021 budget that cut public expenditures, largely through an extension of public sector wage freezes, which should allow expenditure to decline by an estimated 5.7% in 2021. 
  • However, the recent surge in COVID-19 cases and subsequent public health restrictions may increase political pressure for government assistance, potentially limiting PNM’s fiscal consolidation drive. 
  • Although this risk exists, Fitch Solutions maintains T&T‘s score of 61.5 out of 100 in its Short-Term Political Risk Index (STPRI), due to the country’s below-average scores in the ‘policy-making process’ and ‘social stability’ sub-components of the STPRI.

(Source: Fitch Solutions)

Colombian Fiscal Deficit Will Remain Wide In 2021, While Rising Opposition Delays Consolidation Efforts Published: 25 June 2021

  • Colombia’s fiscal deficit will remain significantly wider than the historical average in 2021 as the government sustains higher public spending levels to support economic activity. 
  • In 2020, the budget shortfall was 7.8% of GDP, the widest in over 30 years, as the COVID-19 pandemic depressed public revenues and prompted President Iván Duque’s government to enact countercyclical spending measures. For the year, revenues fell 11.2%, while expenditures increased 16.4%, which brought public spending to 23.0% of GDP, the highest in the last two decades. 
  • However, as the Colombian economy recovers from the pandemic, it is expected that revenues will strengthen over the coming quarters. That being said, the 2021 budget will roll over many of the social spending programmes enacted by the Duque administration in 2020 that are intended to bolster incomes for unemployed and low-income Colombians. 
  • Fitch Solutions forecasts that stronger revenues will bolster a fall in Colombia’s budget deficit to 7.5% of GDP in 2021 and 6.2% in 2022. 
  • While it also expects the government will enact fiscal consolidation measures to adhere to longer-term deficit reduction in line with the 'fiscal rule', ongoing political uncertainty clouds its medium-to-long term outlook.

(Source: Fitch Solutions)

Credit Suisse Predicts Global Growth Of 5.9% For 2021, Says Stocks To Outperform Other Asset Classes Published: 25 June 2021

  • Swiss investment bank Credit Suisse expects global growth to accelerate in the coming months as countries gradually reopen their economies, leading to a recovery in revenue growth and rehiring.
  • In its investment outlook for the second half of 2021, Credit Suisse predicted the world economy will grow 5.9% this year and 4% in 2022. That growth will be led by vaccine rollouts, fiscal stimulus and a broadening services recovery. It also said the United States is set to grow at a rate of 6.9% this year, the Eurozone is expected to expand by 4.2% while Asia ex-Japan is predicted to grow 7.5%. 
  • Economic expansion will likely lead to a sharp recovery in global earnings growth that is set to fuel the stock market, according to Ray Farris, chief investment officer for South Asia at Credit Suisse. 
  • “We are looking for equities to be the asset class that is going to outperform over the next six months to a year,” Farris told CNBC’s “Squawk Box Asia” on Thursday. “As long as earnings continue to trend higher, history suggests that equities will grind their way up.”

(Source: CNBC)

Canadian Exporter Confidence Rebounds To 20-Year High - EDC Index Published: 25 June 2021

  • Confidence among Canadian exporters has surged to its highest level in more than 20 years, amid mounting optimism that a sustained global economic recovery is underway, a survey by Export Development Canada (EDC) showed on Thursday. 
  • EDC's Trade Confidence Index jumped 19% from end-2020 to mid-2021, the largest 6-month increase since the survey began in 1999, the agency said. The recovery appears to be broad-based across all regions of the country, it said. 
  • Canada's economy - like those of many of its global peers - is set to boom in the second half of 2021, as widespread public vaccinations allow businesses to reopen and consumers begin to dip into their pandemic savings. 
  • A strong rebound south of the border is also expected to help. A growing share of companies reported orders from customers in the United States, Canada's largest trading partner, had improved in the past six months, EDC said. 
  • And 65% of respondents said they are planning to export to new markets, with the UK and Australia top destinations. Exports account for about a third of Canada's gross domestic product.

(Source: Reuters)