www.GlobalMarkets.bnpparibas.com Emerging Market ResearchMarcelo Carvalho 55 11 3841 3418 Florencia Vazquez 54 11 4875 4363 Italo Lombardi 1 212 471 6599marcelo.carvalho@br.bnpparibas.com florencia.vazquez@ar.bnpparibas.com italo.lombardi@americas.bnpparibas.com

Daily

Market Economics Friday, 22 October 2010

Daily Latin America Spotlight

Key Event

Brazil: Unemployment rate reaches new record low. Mexico: Today, we expect the H1 October CPI to post an increase of 0.51% bw/bw on the headline and 0.16% bw/bw on the core. Also watch today for the release of the September trade balance. Chile: Minister Larrain unveiled measures seeking to improve exporters’ competitiveness; no announcements were made in terms of directly affecting the level of the currency, contrary to market expectations. Colombia: COP weakened amid speculation of policy announcements (that did not materialize). Argentina: Heavy day in terms of economic data releases: September IP and merchandise trade figures, and August real GDP proxy will all be unveiled this afternoon. The relevant committees paved the way for the INDEC reform to be discussed in the lower chamber. Peru: Potential measures to cap the currency’s strength were also the focus in Peruyesterday.

BRAZIL All-time low. The unemployment rate (UR) declined

from 6.7% in August to 6.2% in September, significantly below consensus (6.5%). On a seasonally adjusted basis, we estimate that the UR fell from 6.6% to 6.3%, reaching a new low in the admittedly short current series that started in 2002, and well below the lower bound of the central bank's NAIRU estimated range (7.5~8.5%). Details are encouraging. While the fall in the unemployment rate was in part associated with a decline in the labour force, job creation increased too – all seasonally adjusted. On our estimates, September posted a net job creation of 42k s.a., while the labour force fell by an estimated 35k s.a. Looking across sectors, the largest job creation came from the services sector (an estimated 73k s.a.) and from the manufacturing sector (an estimated 16k s.a.). Real wages are rising too. Nominal average wage earnings (per worker) accelerated, rising 1.8% m/m s.a. in September, following gains of 0.9% m/m s.a. in August and 2.0% m/m s.a. in July. On a 12-month basis, growth in nominal average wage earnings

accelerated to 11.3% y/y in September from 10.1% in August – significantly above inflation. In real terms, average wage earnings (per worker) were up 6.5% y/y in September. In all, strong data. Labour markets are tightening, and real wages are rising. Coupled with a high level of consumer confidence and expansionary credit conditions, tight labour markets provide plenty of fuel for domestic demand.

MEXICO Today, we expect the H1 October CPI to post an

increase of 0.51% bw/bw on the headline and 0.16% bw/bw on the core. On a 12-month basis, headline inflation should increase from 3.70% y/y in H2 September to 3.83%. Core inflation should actually decline from 3.62% to 3.55% yy. October is the month when electricity rates increase as a result of the end of the summer subsidies. This will put pressure on public prices. Based on the behaviour of producer prices during the first half of the month, the rise in agricultural prices is likely to have accelerated from 2.0% bw/bw in H2 September to 2.3% bw/bw.

Major Data Releases and Events

Country Indicator Last BNP Paribas Mexico Bi-weekly CPI bw/bw : H1 Oct 0.40% 0.51%

Bi-weekly Core CPI bw/bw : H1 Oct 0.34% 0.16% Trade Balance : Sep Preview USD -699 mn USD -320 mn Unemployment Rate : Sep 5.44% 5.40%

Argentina Trade Balance : Sep USD 1054 mn USD 830 mn Industrial Production % y/y: Sep 10.1 9.7 Industrial Production % m/m (sa): Sep 2.0 2.0 Economic Activity (EMAE) % y/y: Aug 8.1 8.6 Economic Activity (EMAE) % m/m: Aug -0.2 0.6

www.GlobalMarkets.bnpparibas.com Emerging Market ResearchMarcelo Carvalho 55 11 3841 3418 Florencia Vazquez 54 11 4875 4363 Italo Lombardi 1 212 841 6599marcelo.carvalho@br.bnpparibas.com florencia.vazquez@ar.bnpparibas.com italo.lombardi@americas.bnpparibas.com

Watch today the release of September’s trade balance. We expect the trade balance for September to post a deficit of USD 320mn, up from a deficit of USD 699mn in August. We expect exports of manufacturing goods to be flat in September, after a slight increase in August. Intermediate goods imports should continue to outpace exports of manufactured goods, as inventories are increased. We expect total exports to increase by 22% y/y with some momentum coming from oil exports - as crude prices rose in September. Imports should grow by 18.6% y/y.

Separately, we expect the unemployment rate to have been little changed in September at 5.4%.

CHILE Minister Larrain unveiled measures seeking to

improve exporters’ competitiveness; no announcements were made in terms of directly affecting the level of the currency, contrary to market expectations. Finance minister Larrain announced a new mechanism with the aim of benefiting exporters by diminishing the administrative time needed to complete a shipment from 21 to 10 days. According to official estimates, each day spent in administrative dealings has a cost of USD 600mn in terms of exports. Thus, the proposed initiative could boost Chilean exports by up to USD 6bn (equivalent to 9% of exports during the last 12 months). The measure seeks to alleviate the negative impact on the sector’s profitability from CLP strength (which has recently led to strong complaints). But the effects of this positive initiative will not be felt soon, unfortunately. A newly-appointed committee will evaluate today’s announcements and the system is expected to be fully implemented only by end-2012. Exporters welcomed the official announcements, but continued to demand more immediate measures to address the issue of lost competitiveness. Market expectations regarding official announcements had built up significantly in recent days and the fundamentally-driven CLP strength is likely to resurface in coming days following the lack of measures targeting the level of the currency. Indeed, the peso closed modestly weaker yesterday but bounced back visibly from its intra-day low of USDCLP 488.

COLOMBIA COP weakened amid speculation of policy

announcements (that did not materialize). A meeting held yesterday morning between President Santos and the central bank board had sparked concerns among investors about potential announcements of additional measures to curb the currency’s strength. No decisions were taken in the end in this regard yesterday, but the currency still ended the day near its intra-day lows reflecting ongoing market concerns. Alternatives discussed by market participants include an increase in announced USD purchases by the central bank (which so far has not materialized even though there are no constraints on doing so), the introduction of capital controls (while this possibility was downplayed recently by central bank chief Uribe, the finance minister could decide to move forward on this front) and a rate cut amid a

context of benign inflation dynamics (the least likely option, in our view).

ARGENTINA Heavy day in terms of economic data releases:

September IP and merchandise trade figures, and the August real GDP proxy will all be unveiled this afternoon. On the external front, the merchandise trade surplus is expected to have declined slightly in September to USD 0.8bn. If the forecast materializes, the trade result would have inched down on a 12-month basis to USD 13.8bn last month. The y/y pace of advance of both exports and imports is expected to have moderated last month. On the economic activity front, industrial production is expected to have continued to expand on a monthly basis last month and to post a 9.7% y/y advance. Separately, the August economic activity report should also show a strong 9.1% y/y gain according to statements by President Kirchner earlier during the week. Such a performance would stand slightly ahead of both our forecast and the median estimate from Bloomberg’s survey (8.6% and 8.8% y/y, respectively). A m/m (sa) bounce is expected — following two straight monthly declines — based on strong performances by the industrial and construction sectors (both up 2% m/m, sa) in August.

The relevant committees paved the way for the INDEC reform to be discussed in the lower chamber. This opposition-sponsored bill had already been approved by the senate, but given that the lower chamber committees have made some changes to the original version, it should return to the senate after a potential approval in the lower chamber.

PERU Potential measures to cap the currency’s strength

were also the focus in Peru yesterday. Economy minister Casas stated that the Finance Ministry is considering administrative measures with the aim of moderating capital inflows. Mr Casas also mentioned that new taxes are not being considered but that a limit on local banks’ currency movements is being analyzed. He also highlighted the removal of the fiscal stimulus proposed for next year as another element in the official strategy to address the issue of FX strength.

According to the latest poll for presidential elections by Ipsos Apoyo, popular support concentrated behind former mayor of Lima Luis Castañeda and Keiko Fujimori. Castañeda has 24% of total voting intentions (up visibly from 19% in September), while 23% of voters would choose Fujimori (slightly below the previous month’s 24%). These percentages would decline and increase, respectively, according to the pollster company if rural voters were also considered (urban population was the one polled in this survey). Alejandro Toledo would come in third according to this survey, with 16% of the votes. Separately, the approval rating of President Garcia improved to 35% this month from 31% in September. The main reasons cited by those who disapproved of the current administration were corruption and the failure to fulfil previous promises.

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