Itaú BBA - Senate approves new long-term rate

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Senate approves new long-term rate

October 2, 2017

The Senate approved MP 777/2017, creating the long-term rate TLP to replace the TJLP.

The Brazilian economy in September 2017

The Senate approved MP 777/2017, creating the long-term rate TLP to replace the TJLP. The Federal Supreme Court (STF) decided not to suspend the accusations against President Michel Temer, which will now proceed to the Lower House. The Central Bank’s Monetary Policy Committee (Copom) unanimously decided on another 100bp-cut in the benchmark Selic interest rate, slashing it to 8.25% p.a. The federal government raised BRL 15.8 billion after auctioning four hydropower plants (BRL 12.1 billion) and carrying out the 14th round of licensing for the exploration of natural gas and oil fields (BRL 3.8 billion). The National Monetary Council (CMN) decided to maintain the long-term interest rate TJLP at 7% p.a. Unemployment receded to 12.6% in August.

STF forwards accusations against Temer to Congress

In a 10-1 vote, the Federal Supreme Court (STF) decided not to suspend allegations against President Michel Temer, who was accused by the Prosecutors General’s Office (PGR) of obstruction of Justice and participation in a criminal organization. At least 342 votes (2/3 of representatives) are needed for the Lower House to authorize the start of a process against the President and two of his ministers. Discussions on the matter should continue in the Constitution and Justice Commission (CCJ) this week, when the President will present his defense. The Chairman of CCJ in the Lower House, Rodrigo Pacheco, said that the commission will vote only after October 12 holiday, which would probably delay the House floor voting to the week of October 23.

Senate approves the TLP

In a 36-14 vote, the Senate approved Provisory Measure nº 777/2017, setting the long-term rate TLP as a benchmark for loans granted by development bank BNDES. Under the approved proposal, the new rate will be set every month, formed by the change in the consumer price index IPCA plus a fixed interest rate. In a note, the Brazilian Central Bank pointed out that the new rate, based on market parameters, should respond “much more quickly to the Central Bank’s efforts to control inflation in the country, thus contributing to increase the potency of monetary policy.” As per the Central Bank, with the TLP, “the need for intense monetary policy cycles diminishes, volatility in inflation and the economy declines. Hence, interest rate premiums decrease and we may have lower long-term interest rates for all.”

Central Bank signals gradual completion of the cycle

The Central Bank’s Monetary Policy Committee (Copom) once again reduced the Selic benchmark interest rate by 100bps to 8.25% p.a., in a unanimous decision that matched expectations. The post-meeting statement signaled a moderate slowdown in the easing pace going forward. The minutes of the meeting and the Quarterly Inflation Report reinforced the outlook for a gradual completion of the easing cycle, suggesting a path that would drive the benchmark interest rate to 7.0%. The documents also corroborated signals of a slowdown in the cycle, indicating that, at this moment, the next Copom decision would be a cut of 75 bps.

CMN maintains the TJLP at 7%

The National Monetary Council (CMN) decided to maintain the long-term interest rate TJLP at 7% p.a. This figure will be effective during 4Q17. TJLP is currently the benchmark for loans granted by BNDES.

Inflation remains low

The mid-month consumer price index IPCA-15 rose 0.11% in September, close to expectations. Year-over-year inflation decelerated to 2.56% from 2.68% in August. Transportation provided the largest upward contribution during the month (0.22 p.p.), driven by fuels and airfares. On the opposite side, food and beverages provided the biggest downward contribution (-0.23 p.p.), as the group posted its fourth consecutive month of deflation.  

Confidence indicators are on the rise in September

Confidence indicators, published by FGV, show widespread improvement in September. Confidence among industrial entrepreneurs advanced 0.7% during the month, with positive readings in components that appraise the current situation (0.7%) and expectations for the future (0.5%). The indicator, at its highest level since 2014, reinforces our outlook for a rebound in the industrial sector. In that sense, confidence in the construction industry climbed 1.8% and confidence among retail entrepreneurs soared 8.3%, more than offsetting declines seen between May and August. Consumer confidence increased 1.7% in September, reversing some of the 3.9% slide seen between May and August. Components addressing expectations for the future (2.5%) and the current situation (0.3%) advanced.

Labor market improvement begins to impact formal jobs

According to the national household survey (PNAD Contínua), Brazil’s unemployment rate declined to 12.6% in August from 12.8% in the quarter ended in July. Using our seasonal adjustment, unemployment dropped for a fifth consecutive month to 12.6% from 12.7%. The downward trend is still influenced mainly by informal jobs, but formal jobs in the private sector contributed positively for the first time in the current cycle. We expect the unemployment rate to fall to 12.2% by the end of 2018, with a growing contribution from formal jobs.

A smaller-than-expected primary budget deficit in August

The consolidated public sector posted a primary deficit of BRL 9.5 billion in August, performing better than forecasts. The deficit accumulated over 12 months shrank to 2.4% of GDP from 2.6% in July. The central government’s result, as published by the National Treasury, was a deficit of BRL 9.6 billion, in a surprise that reflected mostly anticipated withdrawals related to “precatorio” bonds, which were expected only in September. In our view, the government will likely achieve its primary deficit target of 162 billion reais (-2.4% of GDP) for the consolidated public sector in 2017. In terms of revenues, the federal government took in BRL 15.8 billion after auctioning four hydropower plants (BRL 12.1 billion) and carrying out the 14th round of licensing for the exploration of oil and natural gas fields (BRL 3.8 billion). Notwithstanding positive surprises in the latest monthly report, fiscal readings remain in a structural trend of deterioration, reinforcing the extreme importance of reforms (particularly the pension reform) to correct the nation’s fiscal imbalance.

Narrower current account deficit in August

The current account deficit totaled USD 302 million in August, in line with expectations. The current account deficit accumulated over 12 months remained stable around  USD 13 billion or 0.7% of GDP. The biggest positive contribution again came from the trade balance, with a USD 5.3 billion surplus, up from USD 3.9 billion in August 2016. The trade surplus has been losing momentum due to the decline in commodity prices and some rebound in economic activity. Yet, we believe that a strong trade balance will continue to be the main factor supporting a low current account deficit.

Financial assets appreciate in September

In September, Ibovespa rose 4.2% in dollars and 4.9% in reais. Country risk measured by the five-year CDS remains stable and ended the month at 196 bps. The exchange rate was relatively stable at BRL 3.17 per dollar.

What’s next

Political events will take centerstage once again. The CCJ and the main floor of the Lower House will probably vote on the second accusation against President Temer during the coming month. Political reform bills are set to be voted in the Lower House and must be sanctioned by the President October 7 in order to be effective in the next elections. The Copom will meet again on October 25-26 to set the Selic rate. 


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