Itaú BBA - Lower Fiscal Effort and Progress in Infrastructure Concessions

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Lower Fiscal Effort and Progress in Infrastructure Concessions

December 2, 2013

A highlight was the progress in concession auctions for airports and highways, which brought in higher-than-expected financial results.

The Brazilian economy in November 2013

Economic policy has been attracting attention in Brazil recently. On the fiscal side, the government reported a lower-than-expected primary surplus in October, for the second consecutive month. On the monetary side, the Copom indicated that its monetary-tightening cycle is close to an end. The government also authorized an increase in gasoline and diesel prices. Another highlight was the progress in concession auctions for airports and highways, which brought in higher-than-expected financial results. The Brazilian Federal Supreme Court postponed to 2014 an important decision concerning compensation for past economic plans and issued arrest orders for politicians and businessmen convicted in the “mensalão” trial. President Dilma has maintained her lead in the polls.

Another low primary surplus...

The primary surplus for the public sector in October came in at 5.4 billion reais, below the market consensus estimate of 8 billion reais. The September result had also fallen short of expectations. A breakdown of the numbers indicates an acceleration of discretionary spending.

The October figure brought the last-12-month primary surplus of the consolidated public sector to 1.4% of GDP, maintaining the recent downward trend.

... and the Copom hints at an end to the tightening cycle.

The Brazilian Central Bank’s Monetary Policy Committee (Copom) increased the monetary-policy rate (Selic) by 0.50 pp in November, to 10% per year, as had been widely expected. After four consecutive meetings followed by the same post-decision statement, the Copom modified the text so as to signal, in our view, the approaching end of the rate-hiking cycle. This signal was in line with our scenario. We maintain our forecast of an additional 0.25-pp hike in the Selic rate in January, to 10.25%, a level likely to be maintained until at least the end of 2014.

Economic activity remains only moderate...

The central bank’s monthly indicator of economic activity was flat in September, and the Itaú Unibanco monthly GDP indicator increased marginally. The overall picture for the month was a combination of growth in industrial production with a decline in broad retail sales. In the third quarter, the central bank’s indicator fell 0.1%, which is consistent with our forecast of a 0.3% drop in the IBGE’s GDP.

...but progress in the concessions program improves the outlook.

The government held the third round of concessions of Brazilian airports in November. This time around, Galeão, in Rio de Janeiro, and Confins, in Minas Gerais, were offered to the private sector. The consortium led by Odebrecht acquired the Galeão airport for 19 billion reais, 294% above the minimum bid. The auction for Confins airport was won by CCR for 1.82 billion reais, 66% above the minimum.

Federal highway BR-163 in Mato Grosso was also auctioned and reached the highest discount among highway concessions this year. The proposed price of BRL 0.02638/km represented a 52.03% discount to the maximum toll of BRL 0.0550/km defined by the government.

Although high, inflation was lower than expected...

The IPCA-15 inflation registered 0.57% in November, below our forecast (+0.67%) and the median of market estimates (+0.65%). The index has registered a cumulative variation of +5.79% in the last 12 months (+5.75% in October). Market prices rose by 7.3% over the period, while regulated prices rose by 0.9%.

...opening room for a hike in gasoline prices.

On the last business day of November, Petrobras announced price increases of 4% for gasoline and 8% for diesel. The magnitude of the adjustment for gasoline was slightly lower than our estimate (6%). The total impact on IPCA will be 0.11 pp, 0.09 pp of that in December.

The Federal Supreme Court orders the arrest of the so-called “mensaleiros” and postpones a decision on economic plans

The Brazilian Federal Supreme Court (STF) issued arrest orders for 12 politicians and businessmen convicted in the “mensalão” trial, including the former chief of staff José Dirceu. The sentences were handed down last year, but several appeals had been keeping those convicted out of jail. Separately, the STF decided to delay to early 2014 its final decision over lawsuits filed by depositors regarding the change in remunerations of their savings during the economic plans of the 80s and 90s.

Poll data are favorable to President Dilma

An Ibope poll showed an increase in the approval rate for Dilma’s government and higher voting intentions supporting Dilma in the next presidential election. The highlight was the ground gained by Dilma over candidates Eduardo Campos and Marina Silva. Aécio Neves maintained the same percentage of voting intentions observed in October.

According to the poll, the approval rate of Dilma’s government rose to 39% (from 38% in October), which was in line with CNT/MDA poll results that were also disclosed during the month.

The Brazilian real depreciated, country risk rose and the Brazilian stock exchange retreated.

The Brazilian real depreciated by 5.6%, closing the month at 2.32 reais to the dollar, and Brazil risk measured by 5-year CDS increased by 22%, reaching 205. The Ibovespa index fell by 3.3% in reais and by 8.4% in dollars.

What’s next?

Brazil’s third-quarter GDP figures will be released on December 3, along with a revision of the GDP historical series, which will likely show that the 2012 growth figure has been raised. The minutes of the Copom’s last meeting of the year, on December 5, may bring new signals regarding monetary policy in 2014. Toward the end of the month, attention will turn to the November fiscal results. We expect a strong surplus, benefiting from Libra oilfield concession revenues and fiscal renegotiations between the Federal Revenue Bureau and private companies (related to the “Refis” tax amnesty program).



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