Itaú BBA - New Long-Term Rate advances in Lower House

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New Long-Term Rate advances in Lower House

September 1, 2017

The next step is the voting of the base text on the Senate, possibly next week.

The Brazilian economy in August 2017

The Brazilian Lower House approved bill 777/2017 that creates the TLP (long-term interest rate), replacing the TJLP. The measure will now move on to the Senate. The federal government submitted to Congress a bill changing fiscal targets for this year and the next, both to a deficit of BRL 159 billion. The government announced an asset concession program. There are 57 projects to be included in the Investment Partnerships Program (PPI) and offered for sale or awarded to the private sector under concessions. The Lower House rejected the complaint against President Michel Temer. The Congress resumed discussions on the political reform, with a final deadline for the President's sanction set on October 7.

TLP is approved in the Lower House

The Lower House approved bill 777/2017 that creates the TLP (long-term interest rate), replacing the TJLP. According to the approved bill, the new rate will be calculated on a monthly basis, and composed of the IPCA variation plus the real interest rates of inflation-linked government bonds (NTN-B). As the TLP will be more tied to market rates, the bill acts in the direction of reducing the government's fiscal costs, and tends to increase monetary policy effectiveness. The next step is the voting of the base text on the Senate, possibly next week.

Bill revising fiscal targets was forwarded to Congress

The federal government submitted to Congress a bill revising fiscal targets for this year and the next. Primary deficit targets were revised upwards by BRL 20 billion by 2017 and BRL 30 billion by 2018, both now reaching a BRL 159 billion deficit. The announcement included measures to cut spending and raise revenues. On the spending side, the government announced a reduction in public office, a freeze on compensation of commissioned posts, a reduction of civil servants' initial salary and an increase in civil servants' social security contribution. On the tax collection side, the government will attempt to raise revenues by BRL 14.5 billion in 2018, based on measures such as anticipation of taxes on exclusive investment funds, which could yield BRL 6 billion to the government. In our view, with expenditures close to the constitutional ceiling in 2018, any positive surprise from the revenue side could result in better primary results for the government.

Government announces privatization program

The proposal involves 57 projects that will be included in the Investment Partnerships Program (PPI) and offered for sale or awarded to the private sector under concessions. The measures are important for fiscal policy, and part of the government's efforts to raise revenues ahead.

Lower House rejects charges against Michel Temer

The charge against President Michel Temer was filed by the Attorney General's Office (PGR), and required authorization from the Lower House to be referred to the Federal Supreme Court (STF). However, by 263 votes in favor and 227 against, the Lower House endorsed the opinion of representative Paulo Abi-Ackel (PSDB-MG) for the inadmissibility of the complaint. 342 votes were necessary for a rejection of the opinion.

Discussions on political reform continue

Discussions in Congress about the political reform continue. Bills are being processed in the Lower House and must be sanctioned by the President until October 7 in order to be included in the next elections. The main points under analysis are: creation of a public fund for campaign financing, change of the electoral system, end of coalitions in the elections of representatives and councilors, and the establishment of a minimum performance clause for the parties. We issued a report describing the main changes under discussion in the National Congress about this subject (access here).

Inflation remains low

The IPCA-15 recorded a 0.35% variation in August, below expectations. As a result, the 12-month rate declined to 2.68%, having reached 2.78% in July, moving further away from the lower limit of the inflation target (3%). Despite the result, there were upward pressures in the month in some components, especially fuels - reflecting the recent tax hike on gasoline, ethanol and diesel - and electricity. Even so, the disinflation process is still ongoing, widespread among its components.

Activity indicators stronger than expected

The month of June was marked by positive surprises involving industrial production, retail sales, services real revenues and the labor market. Retail sales rose 1.2% in June, after seasonal adjustment, above expectations. The strong result in the month was widespread, with increases in eight of the ten components. In our view, the recent performance is a reflection of the fall of inflation (which increases households' real income), lower interest rates and the withdrawal of inactive FGTS accounts. In addition, real revenues from the services sector in June also posted a better-than-expected result, up by 1.3% seasonally-adjusted.

GDP grows 0.2% in 2Q and unemployment recedes

GDP grew by 0.2% in 2Q17 qoq/sa, in line with the scenario of moderate recovery of economic activity. The result was stronger than expectations (0.0% growth). On the supply side, the services sector provided the main upward contribution. On the demand side, household consumption and exports ensured positive growth. The unemployment rate continued to decline in July, with an increase in the population employed in the informal sector. Using our seasonal adjustment, unemployment fell for the fourth consecutive month, from 12.9% to 12.7%.

Public accounts deficit remains high

The consolidated public sector posted a primary deficit of BRL 16.1 billion in July. Thus, the consolidated primary deficit accumulated in 12 months advanced to 2.7% of GDP, prior to 2.6% in the previous month. We believe that the government will be able to meet the revised primary deficit target for the consolidated public sector. However, there is still some risk regarding the execution of extraordinary revenues, particularly the Refis/PERT program and auctions of hydropower plants.

Current account deficit remains contained

The current account posted a BRL 3.4 billion deficit in July, the first deficit after four consecutive months of surplus. Accumulated in 12 months, the current account deficit fell to BRL 13.8 billion or 0.7% of GDP. The strong trade surplus continues to contribute to the favorable current account results, but the increase in profit and dividend remittances and the seasonal payment of interest pressured the monthly result. On the financing side, direct investment in the country remains resilient, thus reducing dependence on more volatile capital.

Financial assets appreciate in August

In August, Ibovespa rose 6.9% in dollars and 7.5% in reais. Country risk measured by the five-year CDS fell 14 bps and ended the month at 196 bps. The exchange rate was relatively stable at BRL 3.15 per dollar.

Upcoming events

Attention will likely return to political events. A new complaint against President Michel Temer will probably be submitted to the STF next week. The TLP vote in the Senate is expected to take place next week, as the deadline for the voting on the new rate expires on September 6. On the tax collection side, the Board of Directors of the Investment Partnerships Program (PPI) announced the schedule of the privatization program, with highlight to the auctions of CEMIG plants, expected to take place next month.


 



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