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Supreme Electoral Court rejects Lula candidacy

September 3, 2018

The candidacy of former President Lula (PT) was rejected during the TSE session on August 31

The Brazilian economy in August 2018

The Supreme Electoral Court (TSE) completed the analysis of presidential candidacies and voted to reject Lula’s in the last day of the month. Polls carried out before the decision show increased vote intentions for Lula and Bolsonaro. The Central Bank kept the benchmark Selic rate unchanged at 6.5%. GDP expanded 0.2% in 2Q18, but underlying growth is losing momentum. The consumer price index IPCA normalized after the truckers’ stoppages. The consolidated public sector ended July with a primary budget deficit of 3.4 billion reais.

TSE bars Lula from running in the presidential race

The candidacy of former President Lula (PT) was rejected during the TSE session on August 31.  Lula’s capacity to run was denied by six votes to one, based on the Ficha Limpa law, giving PT ten days to present a substitute candidate. The ruling may be contested in the Federal Supreme Court (STF) and Supreme Court of Justice (STJ). Effective immediately after the decision on the 31st, the party will not be allowed to exhibit campaigns on radio and television using the former President’s name as the candidate. In addition, poll institutes will no longer be required to include Lula in their scenarios. Twelve other candidates submitted registrations to TSE and were approved: Álvaro Dias (Podemos), Cabo Daciolo (Patriota), Ciro Gomes (PDT), Geraldo Alckmin (PSDB), Guilherme Boulos (PSOL), Henrique Meirelles (MDB), Jair Bolsonaro (PSL), João Amoêdo (Novo), João Vicente Goulart (PPL), José Maria Eymael (DC), Marina Silva (Rede) and Vera Lúcia (PSTU).

Polls show rising voting intentions for Lula and Bolsonaro

According to surveys carried out during August (before the TSE ruling against Lula’s participation in the election), in the scenarios including the former President, Lula (PT) led with 39% of voting intentions in the Datafolha survey, 37% in Ibope’s and also 37% in MDA’s. These readings compare with 30% in the previous Datafolha survey (published in early June), 33% in the previous Ibope poll (late June), and 32% in the previous MDA poll (mid-May).

Datafolha and Ibope also published scenarios without Lula, featuring Fernando Haddad (PT) as his substitute.  According to Datafolha, Jair Bolsonaro (PSL) is the front runner with 22% of voting intentions (19% in the previous Datafolha survey), followed by Marina Silva (REDE), with 16% (15% previously); Ciro Gomes (PDT) with 10% (unchanged); Geraldo Alckmin (PSDB) with 9% (7%); Fernando Haddad (PT) with 4% (1%); and Álvaro Dias (PODE) with 4% (unchanged). According to Ibope, Jair Bolsonaro (PSL) led with 20% of voting intentions (17% in the previous Ibope survey), followed by Marina Silva (REDE) with 12% (13% previously); Ciro Gomes (PDT) with 9% (8%); Geraldo Alckmin (PSDB) with 7% (6%); Fernando Haddad (PT) with 4% (2%); and Álvaro Dias (PODE) with 3% (unchanged). This week, Ibope and Datafolha will release new polls on Tuesday and Thursday, respectively.

Central Bank keeps the Selic rate unchanged at 6.5%

The Central Bank’s Monetary Policy Committee (Copom) took the widely expected decision, leaving the base rate unchanged at 6.50% pa, without a bias, in a unanimous vote. Authorities undertook the usual factual updates, noting the effects of the transportation sector disruption on activity (negative) and inflation (apparently temporary). The committee noted that the economic slack is still wide, which added a dovish twist to the statement, but noted that risks to the inflation outlook, stemming from uncertainty on the implementation of reforms and from the external environment, remain elevated, providing balance to the message. One gets the impression that the committee does not want to fuel any discussion of short-term rate moves, be it up or downwards.

GDP expands 0.2% in 2Q18, but underlying growth loses momentum

Brazilian GDP expanded 0.2% qoq/sa in 2Q18 and 1.0% yoy, printing above the median of market expectations (0.1% qoq/sa). From a demand standpoint, the breakdown shows deceleration. Fixed capital investment fell 1.8% under tighter financial conditions, while household spending advanced 0.1% (down from 0.4% in the previous quarter). Assuming that underlying growth in economic activity will continue to lose momentum, we expect GDP to grow 1.3% in 2018 and 2.0% in 2019.

Activity indicators show normalization

After most activity indicators declined in May due to the truckers’ stoppage, June figures conveyed normalization. Industrial production climbed 13.1% mom/sa, returning to its pre-May level but not compensating lost production. Real revenues from services rose 6.6% mom/sa, led by a 15.7% hike in the transportation component.

On the other hand, retail sales did not return to pre-stoppage levels, falling 0.3% mom/sa and extending the previous month’s slide. Broad retail sales (including vehicles and construction material) increased 2.5% during the month and beat the median of market expectations, but did not offset the 5.1% drop in May.

Unemployment recedes in July; CAGED points to 47k new jobs

The nation-wide unemployment rate slid to 12.3% in July from 12.4% in June. The index fell 0.1p.p. to 12.2%, seasonally adjusted. The participation rate (ratio of the labor force to the working-age population, both seasonally adjusted) had been receding since November, but went up slightly to 61.4% in the quarter ended in July, printing in line with its historical average. With gains in the average real wage and employment, the real wage bill expanded 0.7% qoq and 2.0% yoy.

According to the Ministry of Labor’s CAGED registry, a net 47,319 formal jobs were created in July, above market expectations (25.7k). Seasonally-adjusted figures point to 15k new jobs during the month. Notwithstanding the July increase, the three-month moving average receded to 4k from 6k, extending the weakening trend seen since the beginning of the year. Overall, deterioration in the formal job market – a key factor behind the downward revision in our 2018 GDP growth forecast – continues in early 2H18.

IPCA normalizes after truckers’ stoppage

The consumer price index IPCA climbed 0.33% in July, printing above the median of market expectations (0.26%). Inflation decelerated sharply from 1.26% in June, showing the waning impact of the cargo transportation stoppages (on food and fuel prices) and the red mode in the tariff flag system (on electricity bills). In August, the mid-month index IPCA-15 rose 0.13%, slightly above the median of market expectations (0.10%). Year-to-date inflation reached 3.14%, while the year-over-year change decelerated to 4.30% from 4.53% in the previous month. Housing (0.17 p.p.) provided the largest upward contribution during the month, led by electricity tariffs. On the other hand, transportation (-0.16 p.p.) gave the biggest negative contribution, following price cuts for fuels and airfares. Our preliminary forecast for the headline IPCA in August is -0.02%, with the year-over-year rate receding to 4.3% from 4.5%. Overall, we expect inflation to remain near the 4.5% target in the coming months, starting to decline in 4Q18.

Consolidated public sector has a primary budget deficit of 3.4 billion reais in July

The consolidated public sector posted a primary deficit of 3.4 billion reais in July, which was better than market consensus (-7.0 billion). Regional governments posted a deficit of 1.8 billion reais (our call: -2.5 billion), while state-owned companies had a surplus of 1.1 billion reais (we estimated a deficit of 0.3 billion). The main positive surprises were bigger-than-expected revenues and the fact that payments to the election finance fund should be registered only next month.  The consolidated primary deficit accumulated over 12 months receded to 1.1% of GDP in July from 1.3% in June. The general government’s gross debt reached 77.0% of GDP, while the public sector’s net debt hit 52% of GDP in July. Notwithstanding still-negative annual primary results, the repayment by development bank BNDES of 130 billion reais to the National Treasury and historically-low real interest rates will moderate the advance in debt as a share of GDP in 2018. However, without reforms (such as the pension reform), fiscal readings will resume a worsening trend from 2019 onward.

Pace of federal revenues remains robust

Federal revenues beat market expectations, reaching 129.6 billion reais in July. The year-over-year increase in real terms was 18.3%, led by components related to corporate taxes (+28%) and oil royalties (+104%). Notwithstanding a gradual recovery in economic activity, the persistent strong pace of federal revenues is consistent with our expectation that the central government’s primary budget deficit in 2018 will be slightly better than the target of 2.3% of GDP (-159 billion reais).

Financial assets

In August, the Ibovespa plummeted 12.1% in dollars and 3.2% in local currency. Country risk measured by the CDS rose 88 bps and ended the month at 302 bps. The exchange rate depreciated to 4.13 reais per dollar. 

What’s next

The Copom will announce its monetary policy decision on September 19. News about the elections, including voting intention polls, will be closely monitored in the coming weeks.


 



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