Itaú BBA - Rising Concerns about Inflation

Brazil Review

< Back

Rising Concerns about Inflation

March 1, 2013

The Central Bank reinforced its message against inflation, saying that the interest rate is the adequate tool to fight it.

The Brazilian economy in February 2013

The Central Bank reinforced its message against inflation, saying that the interest rate is the adequate tool to fight it. The same concern prompted the government to try to stabilize the exchange rate slightly below BRL 2.00/USD. Fourth-quarter GDP suggests a slow recovery. The current-account deficit widened, partly due to higher fuel imports. Among the actions to increase competitiveness, new regulations for ports and highway concessions are advancing However, there are still uncertainties about the measures. Worried about the risk of power outages, the government signaled that it will keep thermal power plants running all year long. Moves for the 2014 presidential election started earlier this time. This month, the focus will be on the next meeting held by the monetary policy committee, on March 6.

The Central Bank reinforces the talk against inflation, saying that the interest rate is the adequate tool to fight it.

Central Bank President Alexandre Tombini said that “prices in the country have shown resistances against a drop in recent months” and that “monetary cycles have not been abolished.” At the same time, he expressed confidence that inflation will fall in the second half of the year. The same concern with inflation led the government to keep the exchange rate relatively stable, slightly below 2.00 reais per U.S. dollar.

Despite the drop in regulated prices, inflation has deteriorated.

Notwithstanding the cut in electricity tariffs, which shaved about 0.45 p.p. off the mid-month inflation index IPCA-15 in February, year-over-year inflation reached 6.2%, nearing the upper limit of the target range. Measures of underlying inflation remain high, such as the core measured by trimmed means (5.7%) and the diffusion index (71%). Inflation will probably climb to the upper limit of the target range by the middle of the year, and then retreat as the 2012 shock in food prices wanes.

Fourth-quarter GDP suggests a slow recovery.

GDP grew 0.6% in the fourth quarter, slightly below expectations (0.7%). The result confirms the slow recovery of activity. The breakdown came in a little better-than-expected, with consumption and investment growing 1.2% and 0.5%, respectively. Investment grew for the first time after five contractions in a row. The numbers are consistent with our 3.0% GDP forecast for this year.

Current-account deficit rises, partly due to higher fuel imports.

The trade balance has worsened due to rising fuel imports, which have been driven by growing demand as well as by insufficient domestic production. The account comprising spending on foreign travelling has also increased steadily. But none of this threatens Brazil’s external balance: the current-account deficit (2.6% of GDP in the 12 months through January) is fully covered by direct investments (2.8% of GDP). Furthermore, the improvement in global market trends brought capital flows back to the local stock market, which sustained the heavy flow registered in December (about $3 billion), after many months of net outflows.

Port regulations and highway concessions advance.

Congress is expected to vote by early April on a temporary decree creating a new regulatory framework for ports, with more room for private capital. The project is relevant because inefficiency in ports is recognizably one of the largest bottlenecks in the Brazilian economy. As for highway concessions, after initial difficulties, the government eased parameters — with longer concession contracts and improved credit conditions — in order to attract private investors. However, there are still uncertainties about the measures.

The government expects to keep thermal power plants running all year long.

Rainfall has been more intense, but the water level at reservoirs remains below the historical average. The outlook is for a still-tight balance between power supply and demand throughout the year. Seeking to lower risks, particularly for next year, the government signaled that it will keep natural gas- and coal-fired thermal power plants running all year long.

Moves for the 2014 presidential election started earlier

At a Workers Party (PT) event, the prospect of Dilma Rousseff as a candidate for reelection was consolidated. PMDB is probably going to remain on the same ballot as PT, in the vice-presidency box. In the PSDB, Aécio Neves’s name strengthened as the party’s choice for the race. Marina Silva, who ran as the Green Party candidate in 2010, launched a project for a new party called Sustainability Network, also eyeing the presidential election. The names of the candidates can only be officially filed after June 2014. Two PMDB politicians were elected for leadership posts in Congress: Renan Calheiros as Senate president and Henrique Alves as president of the House of Representatives. The Senate is scheduled to vote in March on the proposal to unify the rate of the tax on the circulation of goods and services (ICMS) across all states.

Equities fall, the real appreciates slightly.

The Bovespa benchmark index kept falling and dropped by 3.9% in reais (-3.3% in dollars) in February. Over 12 months, the index rose by 12.7% in reais (-24.5% in dollars). The 5-year CDS spread ended February at 133, up by 13.0% from the previous month. The real slightly strengthened in January, finishing at 1.98 real per U.S. dollar.

What’s next?

The focus will be on monetary policy. The monetary policy committee (Copom) meets on March 6 to make a decision on interest rates and communicate its strategy. Inflation indicators became more important: the headline IPCA for February will be out on March 8 and the mid-month IPCA-15 for March will be released on March 22.



< Back