Itaú BBA - Still weak, limited growth

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Still weak, limited growth

July 2, 2012

A modest recovery persists. Consumption was positive, but industrial production has not reacted so far. Inflation is trending slightly down.

A modest recovery persists. Consumption was positive, but industrial production has not reacted so far. Inflation is trending slightly down. More measures to help growth were announced by the government. The Central Bank signaled that it will continue to cut the interest rate. Fiscal revenues softened and expenditures accelerated. While FDI held up well, equity markets saw a large outflow in May. In June, however, financial flows recovered. M&A slowed down after an unusually strong performance.

A modest recovery persists. The most recent data show that economic activity is recovering at a moderate pace. Sectors encouraged by government stimulus, such as vehicles, showed a significant acceleration in June. Consumption, in general, remains positive. On the other hand, industrial production has not reacted so far. The prolonged inventory adjustment is part of the explanation for the weakness in the industrial activity. Private investment has not recovered yet. The high uncertainty regarding future demand has been a drag on capital spending.

And inflation is falling. The IPCA-15 for June came in at a below-consensus 0.18%, down from 0.51% in the previous month. Lower auto prices due to tax cuts were a major factor in this decline. Inflation in the services sector rose, but it reflected a slight increase in air-ticket prices, which had gone down substantially a month earlier. Year-over-year inflation dropped a bit to 5.0%, and core inflation is running at annualized 4.7%, a decline from previous months. The government authorized an increase in gasoline prices, but it has been totally offset by a simultaneous decrease in the CIDE, a tax on fuels.

Leading to further monetary and fiscal stimulus measures. In its quarterly inflation report, the Central Bank reaffirmed its recent communication, suggesting that it will continue lowering the Selic rate “parsimoniously”. Also, the National Monetary Council lowered the BNDES’ benchmark interest rate, the TJLP, to 5.5%, from 6.0%. Another stimulus measure was the decision to increase government purchases of capital and durable goods by the equivalent of 0.2% of GDP. Trucks, buses, cars and motorcycles are among the benefited products.

Fiscal revenues are softening and expenditures are speeding up. A slowdown in federal revenues continues as economic growth remains weak, while spending is picking up, driven by transfers. With administrative difficulties still holding back the expansion in infrastucture spending by the federal government, capital expenditure growth has been explained by expenses in the "Minha Casa Minha Vida" home subsidy program.

While FDI held up well, equity markets saw a large outflow in May. Local capital markets posted a $2.4 billion outflow and medium- and long-term external debt was renewed at a lower rate than in previous months. On the other hand, foreign direct investment reached $3.7 billion, adding up to a solid 2.7% of GDP over the past 12 months. A surplus in the balance of trade also stood out, as soybean exports topped 7 billion metric tons, a record high.

In June, however, flows recovered. Up to the 22nd, financial flows were positive in $2.1 billion, reversing the large outflow seen in May. The Central Bank sold $ 11.4 billion through currency swaps, more than twice the amount sold in May. This move helped bring the exchange rate to 2.02 reais per dollar, after having reached 2.08 during the month. The Ibovespa fell 0.25% in both and local currency terms. The 5-year CDS fell to 153 bps against the Libor, down from 171 bps a month ago.

M&A slows down after an unusually strong performance. A new antitrust framework announced by Brazil’s antitrust agency (Cade) in May prompted companies to settle deals earlier than expected. As a consequence, only a few deals were announced in June. France’s Casino exercised its option to become the sole owner of Pão de Açucar, Brazil’s biggest retailer. Sage Group, the UK’s biggest software maker, entered Brazil for the first time after acquiring a controlling stake of Folhamatic Tecnologia em Sistemas, an American-based developer of accounting and business-management software. The deal reached $ 196 million.

Ri Happy, one of Brazil’s main toy retailers acquired PBKids. Ri Happy is controlled by the American private equity fund Carlyle. Finally, BR Malls, a shopping-center manager, increased its stake in shopping Villa Lobos by 19% to 58% in a deal that reached $110 million.

What’s next? The focus will be on economic activity, especially the pace of the recovery. The Central Bank will meet on July 11 for its decision on monetary policy. The developments in the global crisis and their impacts on the domestic economy will also capture attention.



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