Itaú BBA - New Economic Team Signals Adjustment

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New Economic Team Signals Adjustment

December 1, 2014

The government named Joaquim Levy and Nelson Barbosa to the Finance and Planning Ministries

The Brazilian economy in November 2014

New ministers Joaquim Levy and Nelson Barbosa promised a fiscal adjustment, while the central bank toughened up its message against inflation. Fiscal spending slowed down in October, moderating the downward trend in the primary budget surplus. GDP expanded 0.1% during the third quarter, after two quarters of declines. Investment increased, but consumption fell. Notwithstanding net job losses, the unemployment rate remained at an all-time low as the labor force shrank. The current-account deficit stood at 3.7% of GDP. Inflation lost steam in November. The IPI tax break for the auto industry is likely to end in January. The next Monetary Policy Committee meeting will be held on December 3; we expect an increase of 50 bps in the Selic rate.

New ministers Joaquim Levy and Nelson Barbosa promised a fiscal adjustment

The government named Joaquim Levy and Nelson Barbosa to the Finance and Planning Ministries, respectively. Alexandre Tombini will remain at the head of the Brazilian Central Bank. During a press conference attended by the three of them, Levy stated that the target for the primary budget surplus will increase to 1.2% of GDP in 2015 and “to at least 2% in 2016 and 2017.” He also said that there will be no packages or big surprises, and that he will work for transparency in public accounts. Nelson Barbosa will be responsible for the government’s main investment programs (the Growth Acceleration Program known as PAC, the Minha Casa Minha Vida low-income housing program, concessions and public-private partnerships) and announced that his goal is to lift the economy’s investment rate. According to the recently named ministers, the adjustments are necessary and compatible with the maintenance of social gains.

Brazilian Central Bank toughens up talk against inflation

Central bank director Carlos Hamilton Araújo stated that the Monetary Policy Committee “will not be complacent with inflation and, if needed, at the right moment, the Committee may recalibrate its monetary-policy action so as to ensure the prevalence of a benign scenario for inflation in the next years.” Central bank Governor Alexandre Tombini said that “monetary policy must remain especially vigilant” and repeated that the monetary authority is working to bring inflation to the midpoint of its target range.

Federal spending slows down in October

The consolidated public sector posted a primary surplus of 3.7 billion reais in October. Public spending decelerated, driven by the investment and discretionary spending lines, enabling moderation of the downward trend in the primary surplus. The conventional result over 12 months slid to 0.56% of GDP from 0.61%. Our estimate for the recurring result (excluding atypical revenues and expenses) fell to -0.55% of GDP from -0.47%.

GDP expands 0.1% in the third quarter

GDP expanded 0.1% in the third quarter, slightly below our forecast and market consensus, both at 0.2%. The advance does not compensate declines in the previous quarters, so the economy remains weak. Investments increased 1.3%, after four consecutive quarters of sharp drops. Private consumption fell 0.3%. The third quarter was the first with positive GDP growth in 2014.

Net job losses in October 

According to the Labor Ministry’s CAGED registry, there was a net loss of 30K jobs in October. The reading disappointed market expectations, which were pointing to the creation of about 50K jobs. Breaking down by sector, construction (-34K) and manufacturing (-11K) had the worst performance, while the retail sector added 33K net positions. Seasonally adjusted, 40K jobs were created, confirming the recent cooling trend in the labor market. Nevertheless, the unemployment rate remains at an all-time low (4.8% in October, seasonally adjusted), thanks to the shrinking labor force.

IPCA-15 retreats to 6.42% in November

The mid-month consumer price index IPCA-15 rose 0.38% in November. The year-over-year change slid to 6.42% from 6.62% in October. Market-set prices climbed 0.38%, with smaller-than-expected price changes for semi-durable goods, durable goods and services. Core inflation readings were also milder, in a possible indication that weaker economic activity may be contributing to mitigate price increases in some sectors.

Current-account deficit stood at 3.7% of GDP in October

The current-account deficit stood at $8.1 billion in October (3.7% of GDP over 12 months). Foreign direct investments (FDI) and portfolio investments continue to post strong inflows. FDI equals 2.9% of GDP over 12 months.

IPI tax on passenger cars likely to increase in January

Following talks with departing Finance Minister Guido Mantega, the national carmakers association (Anfavea) said that the Finance Ministry plans to increase the IPI (tax on industrialized products) for automobiles on January 1, 2015. The end of the tax break would lift the IPI rate to the level that was in effect until 2012. The impact on tax revenues is likely to be close to 6 billion reais.

Exchange rate weakens

The exchange rate continued its depreciating trend. The exchange rate reached 2.61 reais per U.S. dollar at one point during the month, its weakest level in over nine years, and ended November at 2.56 reais per dollar, losing 4.7% from the previous month. The Ibovespa benchmark stock index climbed 0.1% in local currency, but fell 4.5% in dollars. The five-year Brazilian CDS increased 187 bps at one point, but ended November at 154 bps, rising 1.2% from the previous month.

What’s next?

The next Monetary Policy Committee meeting will be held on December 3. We expect the tightening pace to accelerate to 50 bps, taking the benchmark Selic rate to 11.75%. We also look forward to statements by the new ministers detailing the fiscal-adjustment plan.

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