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Lower House Elects New Speaker

August 1, 2016

Maia replaces Eduardo Cunha (PMDB-RJ) as Speaker of the House, who had stepped down from the post.

The Brazilian economy in July 2016

Deputy Rodrigo Maia (DEM-RJ) has been elected Speaker of the Lower House after Eduardo Cunha stepped down. The Central Bank held interest rates at 14.25% and renewed its currency intervention. Driven by food prices, July inflation was up from June, however the 12-month rate continues to fall. The primary deficit is still rising and the 2017 target was set at BRL 143 billion (2.2% GDP). Industrial activity has stabilized and confidence kept increasing, however the job market and consumption remained weak. The current account deficit rose in June, but is still being financed without difficulty.

Rodrigo Maia is elected the new Speaker of the Lower House

Congressman Rodrigo Maia (DEM-RJ) has been elected Speaker of the Lower House, with 285 votes. He beat Rogério Rosso (PSD-DF), representing the so-called “Centrão” parliamentary group, in the second round of voting. Maia replaces Eduardo Cunha (PMDB-RJ), who had stepped down from the post and was suspended by the Federal Supreme Court (STF) in May. During an interview with the press, Rodrigo Maia said “Brazil’s priority is the economic agenda: the constitutional amendment for the spending cap, renegotiation of state debts and Social Security reform.”

The Central Bank held interest rates at 14.25%…

At its July meeting, the Central Bank’s Monetary Policy Committee (Copom) held interest rates stable at 14.25%. The committee held the view that there is significant idle capacity in the economy, but pointed out that inflation has surprised on the upside because of food prices, which in turn, has pressured 2016 inflation expectations. On the other hand, expectations for 2017 have improved since the previous monetary policy meeting. The committee’s forecasts show inflation convergence in 2017 in the baseline scenario (stable interest and exchange rates), but indicate inflation at 5.3% in the market scenario. Overall, disinflation continues, but not as quickly as the committee would hope. We are forecasting that the Copom will make an initial 0.25 pp rate cut in October, when we expect the committee’s focus on inflation convergence to switch from 2017 to 2018.

...and renewed its currency market interventions, albeit with less intensity

The Central Bank has resumed intervention in the currency market, selling reverse swaps on a daily basis, albeit at a lower level (USD 500 million/day) than the previous administration. USD 9.5 billion in reverse swaps have been sold since July 1.

Foodstuffs put pressure on July inflation, but the 12-month rate continues to fall

The July IPCA-15 rose 0.54%, ahead of both our and market estimates. However, 12-month inflation fell to 8.93%, compared with 9.98% the previous month. The food group created the most pressure on inflation this month, and is being strongly influenced by beans and milk price hikes. Core inflation was down from the previous month, rising 0.47% against 0.58% in June, based on the average of the three most frequently used measures, and the 12-month rate dropped to 8.1% (8.4% the previous month).

The primary deficit continues to rise…

In April, the consolidated public sector recorded a 12-month primary deficit of BRL 151.2 billion (2.5% of GDP), with a nominal deficit of BRL 600.5 billion (10.0% of GDP). Public debt stands at 68.5% of GDP, practically stable as a percentage of GDP compared with the preceding month.

...and the 2017 fiscal target has been set at BRL 143 billion (2.2% of GDP)

The government announced a 2017 target for the primary deficit result of BRL 143 billion (2.2% of GDP). The target is lower than in 2016 (a deficit of BRL 164 billion, or 2.6% of GDP) and establishes that total primary spending growth for the year will be equal to 2016 inflation, in line with the proposed cap on public-spending increases. To achieve the target, an additional BRL 55 billion in revenues needs to be found and could come from asset sales, concessions, or tax hikes.

Industry shows signs of stability and confidence remains high…

Industrial output remained stable in May, as expected, and coincident industrial indicators for June (such as vehicle and cardboard output and the flow of heavy vehicles on highways) indicate growth ahead. Confidence surveys continue to improve: in July, business confidence in the industrial sector rose 4.4% and improved by 4.8% in the service sector.

...however, the job market and consumption remain weak. 

In June, there was a net loss of 91,000 formal jobs, or 116,000 in seasonally adjusted terms, which was worse than expected. The rate of unemployment rose to 11.1% (seasonally adjusted) during the quarter ending in June. The three-month moving average is -130,000 and weakness continues at all sectors. Retail sales remained weak and fell further in May (-1.0% from the previous month and -9.0% year over year).

The current account deficit rose in June, but is still being financed with ease

The current account registered a USD 2.5 billion deficit in June after two months of surplus. The 12-month deficit remained practically stable (USD 29.4 billion or 1.7% of GDP). Exchange rate appreciation in recent months and incipient stability in domestic economic activity have contributed to a slower decline of the deficit. In the financial account, direct investment in Brazil (IDP) totaled USD 3.9 billion, ahead of our estimates and the market consensus. Cumulative 12-month IDP is USD 78 billion, financing the current-account deficit with ease.

Local assets gain value

The Ibovespa gained 11.2% in BRL and 10.2% in USD, while country risk, measured by the 5-year sovereign CDS, fell 26 bps and ended the month at 291 bps. The BRL depreciated 0.9%, ending the month at BRL 3.24 per dollar.

Upcoming events

The Senate’s final impeachment vote is expected at the end of the month or early September. 54 out of 81 Senate votes are needed to approve President Rousseff’s impeachment. We will also be focusing on how much headway the fiscal reform agenda makes through Congress; the first item on the horizon is constitutional amendment 241, which creates a cap on public-spending growth.


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