Itaú BBA - Lots of Goals, Little Growth

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Lots of Goals, Little Growth

July 1, 2014

The economic slowdown was more intense, and the government announced measures to stimulate growth.

The Brazilian economy in June 2014

The World Cup began, with surprising eliminations and routs. Political parties chose their presidential candidates, while polls continue to point to President Dilma's victory in the run-off. The economic slowdown was more intense, and the government announced measures to stimulate growth. Foreign direct investment remained strong, funding a large part of the current account deficit of 3.6% of GDP. The central bank renewed its currency-swap program until the end of the year. It also indicated that the current monetary conditions will be maintained for a considerable period of time. Inflation reached 6.4%. The government posted a significant primary deficit in May. 

World Cup starts with lots of goals.

The FIFA World Cup started on June 12, with Brazil's 3-1 victory over Croatia. The elimination of traditional teams such as Spain, Italy and Portugal was a big surprise, as was the outstanding performance of Latin American teams. Games have included a large number of goals: the goal average in the first round was 2.83, the highest since the 1958 World Cup.

Parties chose candidates at conventions...

The PT party confirmed President Dilma Rousseff as its candidate for the presidential election in October, while the PSDB confirmed Aécio Neves and the PSB confirmed Eduardo Campos. President Dilma received support from various parties, including the PMDB, PSD and PR, but she lost the support of the PTB, which shifted to Aécio Neves, whose candidacy also receives support from the SDD and DEM. Dilma will probably have about 11 minutes during the 25-minute electoral program on TV, while Aécio will likely have about four minutes and Eduardo Campos, about two minutes. The final registration date of presidential candidates will be July 5, when the campaign officially begins.

...while polls continue to point to a victory by President Dilma. 

The latest Ibope poll showed the continuing lead of President Dilma Rousseff in the first round, with 39%, followed by Aécio with 21%, Eduardo Campos with 13% and the remaining candidates totaling 10%. In a possible run-off with Aécio Neves, Dilma would win, with 43% against 30% for the PSDB candidate. Dilma would also win against Eduardo Campos, by 43% to 27%.

The economic slowdown was more pronounced...

In April, there was a drop in both industrial production and retail sales. Indicators for May were not favorable either, with low job creation (59 thousand, the lowest result for May since 1992) and a sharp drop in business confidence, at its lowest level since 2009.

...and the government has adopted measures to stimulate growth.

The government announced the resumption of the tax incentive program for exporters of manufactured goods ("Reintegra") along with the extension of the BNDES program that stimulates the purchase of capital goods ("PSI"); the tax amnesty program ("Refis"); and tax incentives for vehicle purchases. The government also announced measures to stimulate capital markets, with tax incentives for investment in smaller companies and in debentures issued by the Infrastructure sector.

The current account deficit was 3.6% of GDP in May. The central bank renews its swap program.

The current account deficit reached USD 6.6 billion in May. Over 12 months, the deficit reached USD 81.9 billion – or 3.6% of GDP – compared with USD 72.7 billion last year. On the side of the capital account, in contrast, foreign direct investment (FDI) remains strong, financing a large part of the current account deficit. On the other hand, external investment in the local fixed income market was negative, interrupting the trend observed since January this year. The central bank extended its currency-swap program until the end of the year, maintaining the value of daily transactions at USD 200 million.

Inflation rises to 6.4% in May's preliminary result.

The IPCA-15 rose 0.47% in June, above our forecast (0.42%). With the result, the 12-month rolling rate increased to 6.41% from 6.31% in May. The IPCA-15 result was marked by pressure from certain services that may be associated with the hosting of the World Cup, such as food away from home, airfare, tourist excursions and hotel rates. Core inflation measures rose slightly versus the previous month. In the average of the three most commonly used measures, the variation over 12 months stands at 6.5%.

The Inflation Report indicates maintenance of current monetary conditions for a considerable period of time.

The Monetary Policy Committee of the Central Bank of Brazil (Copom) released its inflation report for 2Q14. In our view, the main goal of the report was to indicate that current monetary conditions are sufficient to bring inflation to a trajectory that converges to the target over the forecast horizon. "The Committee anticipates a scenario that contemplates persistent inflation over the coming quarters, but if monetary conditions are maintained, inflation tends to converge towards the target in the final quarters of the forecast horizon."

The Brazilian government posts a significant primary deficit in May.

The government posted a surprising primary deficit of BRL 11 billion in May. Net revenues adjusted for inflation were 9% lower than in May last year, while expenses were 8% higher. Over 12 months, the primary surplus fell to 1.5% from 1.9% of GDP.

The Brazilian real appreciates.

The exchange rate posted some depreciation during the month of June, reaching 2.28, but it ended the month at 2.20, an appreciation of 1.6% against May. The Ibovespa increased 3.8% in reais and 5.5% in dollars. The country risk measured by the 5-year CDS increased 2 bps, to 144 bps.

Upcoming events…

Overall focus will be on the World Cup, with the championship match scheduled for July 13 at the renowned Maracanã Stadium in Rio de Janeiro. In the economy, attention will be focused on growth indicators, given the slowdown in activity. 


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