Itaú BBA - Impeachment Process Begins, New Finance Minister Takes Office

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Impeachment Process Begins, New Finance Minister Takes Office

January 4, 2016

The Supreme Court has set forth the rules for the impeachment process. Also, Nelson Barbosa became the new Finance Minister.

The Brazilian Economy in December 2015

The Federal Supreme Court (STF) has set forth the rules for the impeachment of President Dilma Rousseff, which was initiated by the Lower House. One of the decisions made by the STF is that the Lower House must hold another election to form the special impeachment commission. Joaquim Levy left the Finance Ministry and was replaced by Planning Minister Nelson Barbosa. The primary budget still has a deficit, and a second rating agency has downgraded Brazil from investment grade status. The economy remains in a recession, inflation remains above the target, and the risk of an increase in the benchmark Selic rate has risen. The Long-Term Interest Rate (TJLP) was hiked again. Direct investment is still larger than the current account deficit.

Federal Supreme Court sets forth the rules for impeachment process

The Federal Supreme Court (STF) has established the steps to be taken as part of the impeachment process of President Dilma Rousseff. A majority of justices voted to annul the ballot by the Lower House’s Special Commission, which now must be formed by representatives nominated by party leaders, according to the proportional representation of parties in the Lower House. Furthermore, votes by this commission must be explicit (rather than secret, as was the case in the first ballot). Another change in the process involves the role of Senate, which now must show a simple majority of votes on whether or not the process should be installed, after a decision is made in the Lower House. The impeachment process will resume after the end of Congressional recess, on February 2.

Nelson Barbosa replaces Joaquim Levy as Finance Minister

President Dilma Rousseff announced changes in her economic team. In the Finance Ministry, Joaquim Levy was replaced by Nelson Barbosa, who was until then the Planning Minister. He was replaced in that role by Valdir Simão. During the inaugural ceremony, President Rousseff stated that “the Ministers’ task (...) is immediately to spread across Brazilian society the belief that fiscal balance and economic growth can and must coexist.” In press interviews, Nelson Barbosa signaled that he will suggest changes in Social Security, leading to a reduction in mandatory spending.

Government decides to pay delayed expenses. Repatriation bill is approved.

The public sector’s primary deficit stood at BRL 19.5 billion in November, reaching BRL 52.4 billion over 12 months (0.9% of GDP). The government decided to pay in full all the remaining delayed expenses – totaling BRL 57 billion – in December 2015, in a move that is likely to drive the annual primary budget deficit to about 2% of GDP. The government was able to get Congress to approve the so-called repatriation bill, through which it expects to bring in BRL 21 billion in revenues in 2016.

Brazil loses its investment grade rating from Fitch

Fitch Ratings downgraded Brazil’s sovereign rating from BBB- to BB+, with a negative outlook. Hence, Fitch followed Standard & Poor’s in removing the country’s investment grade status. The former based its decision on the deep recession and on political and fiscal uncertainties. Brazil is still considered investment grade by Moody’s Investors Service.

Inflation Report increases likelihood of a hike in interest rates

The central bank’s Inflation Report reinforced the signal that the balance of risks for inflation has deteriorated due to rising current inflation and adjustments in relative prices (exchange rate, regulated prices) and “mainly due to uncertainties involving the pace of recovery in fiscal results and their composition.” Inflation forecasts increased from the previous report and are above the target center for 2016 and 2017. In this context, the probability of an increase in interest rates in January has risen.

Long-Term Interest Rate increased to 7.5%

The National Monetary Council (CMN) increased its Long-Term Interest Rate (TJLP) to 7.5% from 7%. This is used as a benchmark for a large share of loans granted by the development bank BNDES. It was the fifth increase in the rate in 2015, as part of a set of economic adjustments proposed by the government’s economic team.

IPCA-15 climbed 10.7% in 2015

The mid-month consumer price index IPCA-15 rose 1.2% in December, slightly above our forecast and the median of market expectations. Hence, the index went up 10.7% in 2015, accelerating from 6.5% in 2014. Food and transportation provided the largest contributions to the advance relative to the previous month, driven by fresh fruits and vegetables, fuels and airfares.

GDP contracted 1.7% during the third quarter. Unemployment continues to rise.

Investments fell 4%, marking a ninth consecutive quarterly drop, and stood out negatively in the National Accounts. The unemployment rate reached 7.5% in November. The seasonally-adjusted unemployment rate climbed for an eleventh consecutive month, to 8.2% in November from 7.9% in October.

Current account deficit continued to narrow and remains smaller than direct investment

In November, the current account deficit was narrower than anticipated, at USD 2.9 billion, while direct investment in the country totaled USD 4.9 billion. The current account deficit accumulated during the first eleven months of 2015 was USD 56 billion, or approximately USD 4 billion less than direct investment in the country, in a situation that is the opposite of that of 2014, when the deficit was wider than direct investment.

Markets deteriorated during the month

The Brazilian real closed the year at BRL/USD 3.90, depreciating 1.4% from the end of November, having reached BRL/USD 4.01 during December. Brazil’s 5-year CDS spreads widened 47 bps ending the month at 492 bps. The Ibovespa benchmark stock index fell 3.9% in local currency and 5.2% in dollars.

What’s Next?

The next decision by the central bank’s Monetary Policy Committee (Copom) is scheduled for January 20. Congress will be in recess until February 2.


 



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