Itaú BBA - GDP falls, fiscal adjustment moves on

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GDP falls, fiscal adjustment moves on

June 1, 2015

GDP declined in the first quarter, and a sharper slide is likely in the second quarter.

The Brazilian Economy in May 2015

GDP declined in the first quarter, and a sharper slide is likely in the second quarter. The Senate gave partial approval to three provisional measures related to the fiscal adjustment. The primary budget result in April showed an effort by the government, but payment of past expenses and weak tax revenues still hold back the improvement. The labor market continued to deteriorate, while inflation remained on the rise, reaching 8.2%. Members of the Monetary Policy Committee (Copom) reinforced the message that they intend to bring inflation to the center of the target range by the end of 2016. The current-account deficit narrowed for another month. New non-earmarked loans fell slightly and delinquency increased in April. The exchange rate depreciated again.

Negative GDP growth reinforces the weakening economic trend

Brazilian GDP fell 0.2% qoq/sa in the first quarter. Although slightly better than market expectation (-0.5%), the result reiterates the weakening economic trend this year. On the demand side, household spending, government spending and investments declined, while exports showed some reaction. Year over year, GDP contracted 1.6%.

Fiscal adjustment measures are approved by the Senate, as was the end of the “pension factor”

The Senate gave partial approval to three provisional measures (MPs) related to the fiscal adjustment. MP 665, which addresses unemployment benefits and bonuses to low-wage workers, will likely result in 11 billion reais in savings this year. MP 664, which tightens rules for survivor pensions but ends the so-called “pension factor” (an index that reduces social security payments to those who retire early), has a small impact in the short term (approximately 1 billion reais) and creates additional pressures on social security expenses in the long run due to the extinction of the index. President Dilma Rousseff is expected to veto this amendment. Finally, MP 668, which raises taxes on imported products, is set to increase public revenues by 700 million reais. The temporary decrees must now be sanctioned by the President. Regarding revenues, the government announced a hike to 20%, from 15%, in the tax rate applied to the net income (CSLL) of financial institutions. The decision goes into effect in September and will likely increase tax revenues by 1 billion reais in 2015 and 4 billion reais in 2016.

Government posts a primary budget surplus of 13.4 billion reais

The public sector posted a primary result (revenues minus non-financial expenses) that was positive by 13.4 billion reais in April. Year-to-date, the primary surplus stands at 32.5 billion reais, signaling that the government continues to carry out a substantial fiscal effort, although payment of past expenses and falling revenues due to slow economic growth are curbing the result. Over 12 months, the public sector has a primary deficit of 0.8% of GDP.

Industrial confidence continues to slide

Confidence among industrial companies, calculated by FGV, fell 1.5% on a monthly basis in May. The survey indicates that inventory levels remain high, suggesting further declines in industrial production going forward. In fact, the “forecasted production” sub-component is at an all-time low, and even worse than during the 2008 crisis.

Another hike in the unemployment rate

According to census bureau IBGE, the unemployment rate reached 6.4% in April, standing between our estimate (6.5%) and the median of market expectations (6.3%). Seasonally adjusted, the unemployment rate increased to 6.0% in April from 5.8% in March. Unemployment rose for a fourth consecutive month and remains on an upward trend. The real wage bill increased during the month, but remains below the level seen in April 2014. Consumer confidence, as measured by FGV, fell 0.6% in May and remains near the lowest level in the series started in 2005. The share of people surveyed who say that it is difficult to find a job widened to 82.2% from 78% in April.

Year-over-year change in the IPCA-15 reaches 8.2%

The mid-month consumer price index IPCA-15 rose 0.60% in May, in line with our call and market expectations. Year-to-date, the IPCA-15 is up by 8.2%. Food, healthcare & personal care, and housing provided the largest upward contributions to inflation during the month. Core measures in the IPCA-15, which track the underlying inflation trend, remain under pressure. The year-over-year change in core measures climbed to 7.5%.

Copom: aiming for the center of the target range in 2016

Monetary Policy Committee members have reinforced the goal of bringing inflation to the center of the target range by the end of 2016, with “determination and perseverance.” With that purpose in mind, they continue to signal that the Copom “was, is and will remain vigilant” and that “monetary policy efforts have not yet been sufficient.”

Current-account deficit gets narrower in April

The current account deficit stood at USD 6.9 billion in April. The seasonally adjusted annualized three-month moving average showed a decline in the deficit to USD 87 billion in April from USD 90 billion in March. The deficit over 12 months shrank once again (to USD 100.2 billion from USD  102.5 billion), remaining stable at 4.5% of GDP. The result reinforces our expectation of a gradual improvement in external accounts in Brazil, in line with a scenario of slower economic activity and a weaker exchange rate.

New non-earmarked loans decline slightly and delinquency rises in April

The daily average of new non-earmarked loans fell 1.0% in seasonally adjusted real terms, while new earmarked loans climbed 2.4%. The performance of non-earmarked credit was driven by a 0.6% slide in new loans to non-financial corporations and by a drop of 1.3% in new loans to households. As for earmarked credit, new loans expanded 1% to non-financial corporations and 4.1% for households. Overall delinquency increased 0.2 pp to 3%.

Exchange rate weakens again

The Brazilian real closed the month at 3.18 per U.S. dollar, weakening 6.2%. The Ibovespa benchmark stock index also posted losses, of 6.2% in local currency and 11.6% in dollars. The five-year Brazilian CDS increased slightly by 1 bps and ended the month at 235.

What’s next?

We expect a 50-bp hike in the benchmark interest rate on Wednesday, as the tightening cycle will probably end with the Selic rate at 13.75%. The next important vote in Congress regarding the fiscal adjustment will address payroll tax cuts. It will be also be relevant to follow whether President Dilma Rousseff vetoes the Congressional decision that ends the “pension factor.”

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