Itaú BBA - “Big Center” builds alliance with PSDB

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“Big Center” builds alliance with PSDB

August 1, 2018

This coalition will have about 50% of available radio and TV campaign time

The Brazilian economy in July 2018

Parties that form the so-called “Big Center” officially backed presidential candidate Geraldo Alckmin (PSDB). Jair Bolsonaro (PSL) continues to lead voting intentions in the scenario without former President Lula (PT) in the race. Activity and inflation data show that the impact caused by the truckers’ strike seems to be dissipating. The consolidated public sector posted a primary budget deficit of 13.5 billion reais in June.

“Big Center” parties officially backed Geraldo Alckmin

The party block formed by DEM, PP, Solidariedade, PRB and PR announced support to presidential candidate Geraldo Alckmin (PSDB). His running mate has yet to be chosen. This coalition will have about 50% of available radio and TV campaign time, which begins on August 31. The period for party conventions and alliance negotiations ends on August 5.

Paraná Pesquisas: Bolsonaro leads in the scenario without Lula

The poll published by Paraná Pesquisas showed Jair Bolsonaro (PSL) with 24% of voting intentions (21% in the May survey by the same institute), Marina Silva (REDE) with 14% (12% previously), Ciro Gomes (PDT) with 11% (10% previously), Geraldo Alckmin (PSDB) with 8% (stable), Álvaro Dias (PODE) with 5% (6% previously), Fernando Haddad (PT) with 3% (stable), as well as 29% of null/blank and undecided voters in the scenario without Lula (PT). When included in polls, the former President leads with 29% of voting intentions.

Industrial production and retail sales declined in May due to strike

Industrial production fell 10.9% mom/sa in May, as the truckers’ stoppage impacted supply and production chains in the final two weeks of the month. Output was 6.7% lower than one year earlier. Manufacturing activity receded 12.2% during the month, while mining and extraction (less impacted by the truckers’ protest) advanced 2.3%. The two components that are more closely related to capital investments fell considerably: production of capital goods dropped 18.3%, while production of construction material receded 11.3%. Core retail sales shrank 0.6% mom/sa in May, while broad retail sales (including vehicles and construction material) declined 4.9%, impacted by the truckers’ stoppage. Eight out of 10 broad retail components posted monthly drops, with auto sales experiencing the sharpest decline (-14.6%).

Real revenues from services fell 3.8% in May

According to census bureau IBGE, real revenues from services dropped 3.8% mom/sa in May, impacted by the truckers’ strike, as were other activity indicators for the month. Compared to May 2017, real revenues from services also fell 3.8%, but positively surprised the median of market expectations. Breaking down the indicator, nine out of 12 sub-sectors receded, dragged by transportation, with a 7.8% slide. Importantly, the monthly service survey (PMS) encompasses just 34% of services GDP and does not represent the sector fully.

Activity shows signs of recovery in June

After most activity indicators fell in May due to the truckers’ strike, June figures point to a reversal. According to toll-road association ABCR, the flow of heavy vehicles on roads increased 46.9% mom/sa in June and is 6.7% higher than the March-April average. Cardboard paper manufacturers’ association ABPO reported strong gains in sales in June, with the year-over-year change advancing 11.7% (following a 19.5% drop in the previous month). According to auto dealers’ association Fenabrave, 202k vehicles were sold in June, rising 9.1% mom/sa. Nevertheless, auto sales in June were 2.5% lower than in the three months before the truckers’ strike (February, March and April), signaling that the recent improvement was not enough to offset the slide seen after the protest. In terms of production, auto manufacturers’ association Anfavea informed that 256k passenger cars were produced in June (268k seasonally adjusted), an increase of 43.1% mom/sa.

Confidence indicators rebound in July

Confidence indicators published by FGV showed positive results, partially reversing the declines caused by the tuckers’ strike in late May. Consumer confidence rose 2.6% after falling 10.8% between March and June. Confidence in the construction sector increased 2.1% but is 1.9% below its recent January peak. Confidence among industrial entrepreneurs was stable during the month, as the 3.7% drop in the component related to expectations for the future (probably reflecting the protest) offset the 4.1% gain in the component related to the current situation. In our view, the result reinforces our expectation of moderation in economic growth, which is also seen in a broad range of current activity indicators. Contrasting with other indicators, confidence in the retail sector receded for a fourth consecutive month, by 0.9%.

Inflation figures still reflect the strike

The consumer price index IPCA climbed 1.26% in June, printing in line with market expectations. The index went up 2.60% in the first half and the year-over-year change accelerated to 4.39% from 2.86% in May. Mid-month indicator IPCA-15 climbed 0.64% in July, below the median of market expectations (0.73%). Year-to-date inflation reached 3.00%, while the year-over-year change accelerated to 4.53% from 3.68% in June. Housing (0.31 p.p.), food and beverages (0.15 p.p.), and transportation (0.15 p.p.). provided the largest upward contributions during the month. Item-wise, there were noteworthy contributions from electricity, milk and dairy, and public transportation. Importantly, a lot of the pressure on food and fuel prices was caused by the impact of the cargo transportation stoppage on the distribution of these products, and the pressure should wane going forward. Our preliminary forecast for the headline IPCA in July is an increase of 0.28%, with the year-over-year rate unchanged at 4.4%. Overall, we expect inflation to remain near its 4.5% target in the coming months and to slow down in 4Q18.

Public debt remains on an upward trend

The consolidated public sector posted a primary budget deficit of 13.5 billion reais in June, which was better than our expectation (-17.2 billion) and market consensus (-15.0 billion). Regional governments posted a surplus of 0.4 billion reais (our call: 0.2 billion), while state-owned companies had a surplus of 1.1 billion reais (we estimated a deficit of 0.2 billion). The consolidated primary deficit accumulated over 12 months receded to 1.3% of GDP from 1.4%. The general government’s gross debt reached 77.2% of GDP in June, while the public sector’s net debt hit 51.4% of GDP. Notwithstanding still-negative annual primary results, the repayment by development bank BNDES of 130 billion reais to the National Treasury and historically-low real interest rates will moderate the advance in debt as a share of GDP in 2018. However, without reforms (such as the pension reform), fiscal readings will resume a worsening trend from 2019 onward.

Financial assets

In July, the Ibovespa advanced 11.8% in dollars and 8.9% in local currency. Country risk measured by the CDS receded and ended the month at 214 bps. The exchange rate appreciated to 3.75 reais per dollar. 

What’s next

The Central Bank’s Monetary Policy Committee (Copom) will announce its policy decision this evening at 6pm. News about the elections, including voting intention polls and possible alliances between parties and candidates, will be closely monitored in the coming weeks. The deadline for registering candidates is August 15.

 

 



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