Itaú BBA - Central Bank Signals an End to the Hiking Cycle and Extends Exchange-Rate Intervention

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Central Bank Signals an End to the Hiking Cycle and Extends Exchange-Rate Intervention

January 2, 2014

The Brazilian economy in December 2013

The Brazilian economy in December 2013

The Central Bank signaled that the interest rate hiking cycle is nearing an end and extended its currency-swap program through June 2014. The labor market remains tight: the unemployment rate dropped further despite a decline in the number of working people. Temporary revenue boosted the fiscal balance in November. GDP contracted in the third quarter, but probably rebounded in the fourth quarter. President Dilma Rousseff’s approval ratings have risen. And, the highway concession auctions continue to advance.

The Central Bank Signals an End to the Hiking Cycle

The minutes of the meeting at which the Central Bank Monetary Policy Committee (COPOM) raised the benchmark interest rate by another 50 bps (to 10.00% p.a.), showed important changes relative to the October minutes. First, as in last week’s statement, the Copom withdrew its analysis that rate hikes “will contribute to set inflation into decline and ensure that this trend persists in the upcoming year.” By removing this sentence, we believe the Copom may be suggesting that the goal of curbing inflation is largely ensured by monetary tightening that has already been implemented.

Also, the Copom wrote that “there are lags in the transmission of the effects of monetary policy actions to inflation” (paragraph 30), which could be a reference to the beginning of the tightening cycle (“April 2013”), mentioned in the latest post-meeting statement. We understand this as an indication that the hiking cycle is already longstanding, and the moment to pause and evaluate its effects on  inflation may be near. We maintain our forecast of an additional 25-bp increase of the Selic rate in January, to 10.25%, a level that will likely be maintained at least until the end of 2014.However, if inflation surprises (like the one in mid-December) persist into early 2014, there may be some additional interest-rate adjustments.

GDP Contracted in the Third Quarter, But Probably Rebounded in the Fourth Quarter

Following a sharp 1.8% expansion in the second quarter, GDP slid 0.5% in the third quarter. Capital expenditures declined due to lower confidence levels, but there are indications of a better performance in the fourth quarter. Itaú Unibanco’s monthly GDP estimate rose 0.3% in October, while confidence among industrial entrepreneurs increased in both November and December. We estimate a 0.6% GDP growth in the final quarter of the year, for a total growth of 2.2% in 2013.

Unemployment Declines Despite Falling Working Population

The number of working people continues to fall, with 170 thousand fewer working people in November 2013 than in November 2012 (only accounting for the six largest state capitals). However, there was a repetition of the October scenario: with fewer people seeking jobs, the unemployment rate fell again in November, to 4.6% (vs. 4.9% a year earlier). There were 248 thousand fewer people looking for work in November 2013 than one year earlier.

Temporary Revenue Boosts Fiscal Balance in November

The public sector posted an all-time high surplus of BRL 29.7 billion, driven by temporary revenue that included a new program for refinancing corporate tax debt (Refis) and funds related to the Libra oil field concession. The result for the last 12 months widened to 2.2% of GDP (from 1.4%); but excluding atypical revenue and expenses, the latest reading drops to 0.9% of GDP. We expect the primary budget surplus to end 2013 at 1.8% of GDP, receding to 1.3% in 2014.

IPCA-15 Surpasses Estimates for Year-End 2013

The IPCA-15 mid-month consumer price index climbed 0.75% in December (vs. 0.57% in November), and ended the year up 5.85% (vs. 5.78% in 2012). Market-set prices advanced 7.3%, while regulated prices rose just 1.2% throughout the year. Based on the IPCA-15 report and other current information, we expect the headline IPCA to end the year 5.84% higher, matching the 2012 reading.

The Central Bank Extends Its Currency-Swap Program through June 2014

The Central Bank announced the extension of its daily U.S. dollar swap auctions through June 2014, at the earliest. The daily amount offered will be reduced to USD 200 million (from USD 500 million), with additional adjustments to the program. According to our estimates, the amount offered in the form of currency swaps will total USD 100 billion by the end of the program (or 26% of the nation’s international reserves), assuming a full rollover of contracts and the sale of the total daily amount offered.

Rising Approval Ratings for the Rousseff Administration

According to an Ibope poll, 43% of voters regard the administration as excellent or good – surpassing the 41% rating in the Datafolha poll a few weeks earlier. The government’s approval ratings have been rebounding since July, when they hit 30% following a wave of street demonstrations.

Two More Highway Concessions Auctioned: BR-163 and BR-040

The concession of BR-163 highway in Mato Grosso do Sul comprises 847.2 km, from the Mato Grosso border to the Paraná border. The 30-year contract will require investments estimated at BRL 5.7 billion throughout the contract period. The BR-040 highway crosses Distrito Federal, Goiás and Minas Gerais. The infrastructure concession program is advancing, albeit at a more gradual and less comprehensive pace than initially anticipated.

The BRL Weakened, Risk Premiums Fell and Stocks Slid

The Brazilian currency weakened 0.8% to end the month at 2.34/USD, while the 5-year Brazilian CDS declined 5%, to 194. The Ibovespa fell 1.9% in local currency (2.6% in USD).

What’s Next?

The next COPOM decision on interest rates will come out on January 15, and we expect a 25 bp-hike. The weekly 5-10 minute TV presentations, to which each political party is entitled, will start on January 2, gradually shifting voters’ focus to the October elections.

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