Itaú BBA - Growth deceleration and weaker currencies in LatAm

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Growth deceleration and weaker currencies in LatAm

June 7, 2013

The strong dollar environment is here to stay, at least in the medium term.

Global Economy
An Asymmetric World
The growth outlook for the United States continues to look better than the prospects of other major developed economies and emerging economies in general

Lower Growth and a Weaker Currency
Following the release of a weaker-than-expected GDP in 1Q13, we reduced our growth forecasts for 2013 and 2014.We also expect a weaker exchange rate and higher inflation  

Trapped in Its Policies
The central bank has lost USD 4.8 billion of its international reserves in 2013 despite exchange-rate controls. Government intervention reduced the gap between the parallel and the official exchange rate

No More Cuts
We now expect a slower pace of exchange-rate appreciation, and no longer expect rate cuts

Slower Growth Leaves Room for Rate Cuts
Chile’s economy decelerated over the first four months of the year. Below-trend growth in a very benign inflationary environment will allow for lower interest rates

Weaker Sol
The Peruvian economy decelerated at the beginning of this year. Part of the weakening is due to temporary factors. Higher U.S. rates led to a more depreciated exchange rate

Peso Weakens, Reforms Continue
The government seems comfortable with the peso’s decline in recent weeks. Adjusting for calendar effects, economic growth has been weak but in line with our scenario

Lower Prices Consistent With Macro Fundamentals
Prices rose in May, driven by low grain inventories and concerns with planting delays in the U.S., but Macro fundamentals remain consistent with lower commodity prices. 

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Growth deceleration and weaker currencies in LatAm

The strong dollar environment is here to stay, at least in the medium term. The growth prospects of the U.S. are better than those of other developed economies (European nations, Japan) and more recently of many emerging-market economies. China’s growth has disappointed slightly (we have reduced our GDP forecasts for China for this year and next), and so have other emerging-market economies. This asymmetry triggers different monetary policy responses. While the Fed is already thinking about withdrawing stimulus – we now expect the tapering off of quantitative easing to begin in September – other central banks are still biased toward more expansionary stances. Interest rates in the U.S. will probably rise further.

In this scenario of asymmetric growth and higher U.S. interest rates, the dollar will likely appreciate against most currencies and commodity prices will tend to retreat, due to both the strong dollar and the slowdown in emerging markets.

This is a changed environment for Latin America. Growth deceleration and FX depreciations are part of a new scenario for the region.

After a period of bonanza, the downturn is finally hitting most Latin American countries, albeit at different intensities. Mexico’s economy, even though it is closely linked to the U.S., decelerated in the first quarter of 2013. Colombia’s economy is also weaker. Chile grew slowly in the first four months of this year. Peru has been less affected, due in part to continued investments in mining. In all of these countries, however, sound fundamentals and the prospect of reforms suggest that the slowdown will be temporary. The Pacific trade alliance is also advancing, which benefits these countries.

We now expect more depreciated currencies in Latin America. With low inflation in most of the region, exchange rates are generally allowed to depreciate, as it improves regional competitiveness.

In Brazil, unlike in other countries in the region, higher inflation is a concern, and limits further exchange rate depreciation. We should expect currency intervention and the removal of FX controls (e.g., the IOF tax). The scenario we foresee is one of a slightly weaker exchange rate, rate hikes and a falling primary surplus.

Brazil’s slowdown came a couple of years earlier than the rest of the region. Its recovery is still moderate. We have reduced our growth forecasts for Brazil for this year and next. Hopes are resting on the rebound in investment, which, if maintained, will promote a healthy economic rebalancing.

Argentina, in turn, continues to struggle with its particular problems. The rapid loss of reserves shows the inconsistency of its current model. Meanwhile, freezing prices highlight the lack of a solid anti-inflationary strategy.

Global Economy
An Asymmetric World

•           The growth outlook for the United States continues to look better than the prospects of other major developed economies.

•           Based on the improved short-term outlook and the recent communication by FOMC members, we now expect the Fed to start tapering its asset purchases in September instead of December.

•           A reduction in Fed easing would likely strengthen the U.S. dollar against other currencies from both advanced and emerging economies. 

•           The growth momentum is also better in the U.S. than in China and emerging economies in general, an asymmetry that is making it more difficult for the latter to cope with expansionary Fed policy.

The growth outlook for the United States continues to look better than the prospects of other major developed economies. Moderate and asymmetric world growth, with U.S. improving and Europe struggling, is one of our major themes for the global economy this year.

Improving economic activity data indicate that the mid-year economic slowdown in the U.S. will likely be softer than we anticipated. Although there are tentative signs of improvement in the euro zone, we continue to expect the recession in Europe to end only in 2H13. Japan, where strong stimulus is boosting activity, is becoming a positive surprise. We have increased our growth forecasts for both the U.S. and Japan and maintained our forecast for the euro zone (see below).

An asymmetric world entails different monetary policy stances. In the U.S., if monthly payroll growth averages at least 175,000 – in line with our scenario and below its moving average in the last six months – then recent statements from FOMC members suggests to us that the Fed will start cautiously tapering down its quantitative easing (QE) in September instead of December. Meanwhile, we foresee the European Central Bank staying on hold but with an easing bias, given the downside risks to the economy. Japan’s economic recovery is still incipient, so the Bank of Japan will likely continue adding stimulus at full speed.

The U.S. dollar has strengthened against most major currencies (see graph) in response to expectations of a slowdown in in the QE. We expect the trend to continue against the euro and the Japanese yen. We see the euro at 1.25 EUR/USD and the yen at 105 JPY/USD by the end of the year.

Another major theme in the making is the asymmetric growth momentum in the U.S. and China. The Chinese economy continued to grow at a slow pace in April. Despite the slowdown, however, Chinese policymakers are not signaling new stimulus. Hence, we have revised our growth forecasts for China downward, to 7.6% from 7.7% for 2013 and to 7.5% from 7.7% for 2014.

Is the U.S.-China asymmetry representative of a broader trend in which growth improves in the developed world but slows down in emerging economies? Latin American economies slowed more than expected in 1Q13. Calendar effects related to Easter holidays might have played a role in this deceleration, but the poor performance still raises questions. The economies of emerging Europe remain close to stagnation, weighed down by the recession in the euro zone. And many emerging economies in Asia also slowed down in 1Q13. Overall, growth in emerging economies excluding China slowed to 1.7% (SAAR) in 1Q13 from 3.3% in 4Q12 (see graph).

With the weaker growth in developing economies, we now see the world GDP expanding by 2.8% (up from our previous estimate of 2.9%) in 2013 and by 3.4% (up from 3.5%) in 2014.

Finally, lower growth in China and a stronger U.S. dollar do not favor commodity prices. The U.S. is likely to have a good crop, which will also likely push grain prices down in 2H13. We have increased the estimated price decline of our Itaú Commodity Index (ICI) to -3.8% yoy from -1.9% yoy at the end of 2013.

U.S. Fed to start cautiously reducing the pace of monetary expansion in September

The mid-year economic slowdown in the U.S. – due to the increased fiscal drag in the period – is looking softer than we anticipated. The activity indicators released in May were surprisingly positive. Lower consumer-price inflation and easing financing conditions are supporting household spending.

We now foresee U.S. GDP growing at an average rate of 2% (seasonally adjusted annualized rate – SAAR) in 2Q13 and 3Q13, higher than the 1.6% we expected one month ago. In addition, we foresee better financial conditions extending into next year. Hence, we have revised our growth forecasts, to 1.9% from 1.8% for 2013 and to 2.5% from 2.4% for 2014.

Based on the improved outlook for the short term and the recent statements by FOMC members, we now expect the initial tapering of the Fed’s asset purchases to start in September, rather than December. In his testimony to the Joint Economic Committee, Fed chairman Ben Bernanke said that if the FOMC sees a real improvement in the economy and is confident that the improvement is going to be sustained, then the committee could slow down its purchases in the next few meetings. The minutes of the May 1 FOMC meeting added that most participants thought the outlook for the labor market had improved. But many also indicated that continued progress, more confidence in the outlook or diminished downside risks would be required before reducing asset purchases. On balance, we believe that if the U.S. economy sustains a 2% (SAAR) pace of growth and the monthly payroll growth averages at least 175,000 – below the moving average in the last six months (see graph) – then the Fed will be willing to start tapering down the QE quantitative easing in September.

It is important to note that the FOMC will be cautious and flexible. The central bank wants to maintain a tight grip on market expectations and to avoid a premature tightening of financial conditions. We see the committee reducing the QE expansion in small steps, starting with a slowdown to USD60 billion per month in September from the current USD85 billion. Upward or downward adjustments could be made based on economic data. The risk in our scenario seems tilted toward the Fed delaying the tapering to December (in the event the economy falters again in the next few months) rather than moving it up to June or July.

Europe – Still in recession, but signs of incipient growth in 2H13

The euro zone remains in recession, with GDP declining by 0.22% qoq in 1Q13, slightly worse than our estimate of a 0.15% decline. We expect a further contraction of 0.10% this quarter.

Despite the continuing recession, we see some tentative signs that the region might in fact see small growth in 2H13, in line with our scenario. Most of the leading indicators improved in May. The Purchasing Manager’s Index (PMI) improved to 47.7 in May from 46.9 in April. The current PMI level still points to a GDP contraction; nonetheless, the gain in May was notable and was the second increase in two months.

At the country level, Germany appears set for a recovery in 2Q13. The German economy grew only 0.06% qoq in 1Q13. But consumption growth was strong (0.8%). Investment in equipment declined 0.6%, while construction plummeted 2.1% due to a colder winter. Construction should rebound in 2Q13, and the decline in investment in equipment is slowing; investment in equipment could soon turn positive as the risks associated with the euro crisis diminish. Finally, net exports, government spending and inventories were all also drags in the last quarter. All of these factors could revert to positive territory in 2Q13. Overall, we believe that the German economy could grow 0.3% qoq in 2Q13.

However, the risks to the outlook remain on the downside. The fiscal adjustments being carried out in the economies on the periphery of the euro zone are still incomplete, and some countries in the core also need to act.

The situation in France looks particularly worrying. After stagnating in 2012, the French economy contracted 0.2% in 1Q13. Rigid labor markets, closed professions and a large government – which spent 56% of GDP in 2012, more than any other in Europe – are hurting its competitiveness. These problems have become more evident as Europe’s peripheral countries undergo painful adjustments. At the same time, French president François Hollande, after just one year in power, already lacks enough public support to implement bold reforms. France has the advantage that its public debt can be stabilized with moderate adjustments: according to our estimates, if the French government adjusts its structural nominal deficit, which we expect to close this year at 2.2% of GDP, by another 0.8% of GDP, its gross debt would stabilize at about 95% of GDP in 2020. This buys time, but does not eliminate the need to reform the economy. And as debt stabilizes at a high level, sustainability becomes more difficult, even with only moderate shocks.

Japan – Growth is improving

The Japanese economy grew 0.9% qoq in 1Q13, exceeding our estimate of 0.6%. Private consumption and net exports were the main drivers of growth in the period. Additionally, 4Q12 GDP growth has been revised upward, to 0.3% from 0.0%.

After incorporating both the surprise in the first quarter and the net revisions to past data, we have raised our GDP growth forecast to 1.5% from 1.0% in 2013.

For 2014, we see economic activity showing a slightly better response to the fiscal and monetary stimulus currently being implemented. We now expect Japan’s GDP to grow by 1.3%, up from our previous estimate of 1.1%.

China – Policymakers keep focusing on reforms as growth weakens

The Chinese economy continued to grow at a slow pace in April. Industrial production expansion improved slightly, to 9.3% yoy from 8.9% yoy in March, but this was mostly due to base effects. Meanwhile, investment in fixed assets decelerated to 20.1% from 20.7%. Finally, consumption is recovering, albeit at a subdued pace. Retail sales were up 12.8% yoy in April, above the 12.6% growth seen last month but lower than the 14.5% growth posted in 4Q12.

Despite the slow pace of growth, policymakers are not signaling new stimulus. Chinese authorities have made clear that they are more concerned with structural reforms than with short-term growth. Premier Li Keqiang stated that the government’s room to rely on stimulus policies is limited, and that China must rely on market mechanisms to revive its economy. President Xi Jinping declared that China will not sacrifice the environment to ensure short-term growth. The governor of the People’s Bank of China, Zhou Xiaochuan, said that the country needs to sacrifice short-term growth to pursue the larger goal of reform.

We have revised our growth forecasts for China downward, to 7.6% from 7.7% for 2013 and to 7.5% from 7.7% for 2014.

Commodities – Agricultural surpluses ahead

Our Itaú Commodity Index (or ICI) rose 0.3% on average in May, driven by higher agricultural prices. Low inventories and residual fears of planting problems in the U.S. pushed up grain prices for delivery before the next crop in the Northern Hemisphere, leading the ICI Agricultural Sub-Index to rise 1.0% in the month. Meanwhile, base metals and energy prices still reflected their strong drop since mid-April, partly offset by a small recovery in May; hence, the averages in May were 1.2% and 0.5% below their April levels, respectively.

Looking forward, the macroeconomic fundamentals continue to suggest falling prices. Weaker growth in China and other emerging economies, a stronger U.S. dollar and receding inflation expectations are all consistent with lower cyclical commodity prices.

The macro outlook reinforces our expectation of lower base metals prices, in particular. We have revised our year-end iron ore price forecast downward, to USD 115/ton from USD 125/ton. We maintain our below-consensus estimates for other base metals.

For agricultural commodities, we see stronger supply ahead, which should push prices down. Favorable weather conditions in Europe and China, as well as the prospect of a larger crop in the U.S. compared with last year, suggest that surpluses in corn and soybeans are likely. Global surpluses are also already accumulating for other agricultural commodities, like coffee and sugar. Hence, we have lowered our forecast for the ICI Agricultural sub-index to a decline of 6.5% yoy at the end of 2013 (compared with our previous forecast of a 3.3% decline).

Finally, stronger-than-expected growth in the U.S. is leading to lower spreads between WTI and Brent crude oil prices as Brent prices recover slowly, in line with our scenario. Looking ahead, crude production may resume its upward trend, causing the discount to widen again. However, the prospect of stronger growth in the U.S. will probably prevent the gap from returning to its 2012 levels (of around USD17.5/bbl). Meanwhile, we maintain our forecast for a year-end Brent price of USD 110/bbl, with refinery operating capacity recovering but oil supply being somewhat affected by geopolitical factors.

Lower Growth and a Weaker Currency

Following the release of a weaker-than-expected GDP in 1Q13, we reduced our growth forecasts to 2.4% in 2013 and 2.8% in 2014 (from 2.8% and 3.3%, respectively). As the U.S. dollar strengthens on a global level, we changed our call for the exchange rate by year-end to 2.07 reais per dollar from 2.00. 

• With higher current inflation and the outlook for a weaker currency, we raised our forecast for the consumer price index IPCA this year to 5.8% from 5.6%. We now expect a total adjustment of 150 bps in the benchmark Selic interest rate this year.

• We lowered our forecast for the trade balance in 2014 to USD 8 billion from USD 12 billion. Our call remains at USD 6 billion for 2013. Our estimates for the public sector’s primary budget surplus are unchanged at 1.5% of GDP this year and 0.9% of GDP in 2014.

Lower economic growth

GDP surprised negatively in 1Q13.The expected acceleration in growth did not materialize, even with a large contribution from agriculture. The economy grew 0.6% qoq/sa in 1Q13, matching the rate seen in 4Q12. Agricultural and livestock GDP advanced 9.7%, accounting for virtually all the expansion in GDP in the first three months of the year. The disappointment was concentrated in the service sector, which grew less, probably as a lagging effect of weakness in industrial activity and slower income gains.  

We cut our growth estimates for 2013 and 2014.We reduced our forecasts for GDP growth to 2.4% (from 2.8%) this year and to 2.8% (from 3.3%) next year (Macro Vision - We Revised Brazilian GDP Growth Forecast Down to 2.4% in 2013). After a negative surprise in 1Q13, we expect growth to pick up somewhat in 2Q13. However, the economy should go back to lower growth rates in following periods due to low business-confidence levels and slower productivity gains. Figures from recent quarters show that, despite all policy stimulus, the economy has not grown (even temporarily) above its long-term rates. This situation reinforces a scenario of slower productivity growth, even when cyclical factors are taken into account. Concession plans (highways, railways, airports, ports, oil exploration etc.), some of them advancing in the short term, may contribute to increase investment and to boost efficiency, which may improve potential growth in the long run.

Consumption slowed down while investment increased sharply in 1Q13.Consumption growth was below expectations in 1Q13. Slower real income gains, which were already behind a moderation in retail sales, are now probably hurting services demand as well. On the other hand, capital investment grew sharply. Credit expansion at subsidized interest rates played an important role in the acceleration of gross fixed-capital formation early in the year. Maintenance of the growth composition seen in 1Q13 – more investments and less consumption – would contribute to bring back sustained growth. However, business confidence remains at low levels and could curb investment growth ahead.

Credit market shows signs of deceleration. New loans slowed down in April, probably because of lower aggregate demand, but likely also due to deleveraging in some income brackets. New loans fell 0.5% yoy in real terms. The deceleration is more evident for non-earmarked corporate loans, possibly a consequence of slower expansion in economic activity. Replacement of non-earmarked credit with earmarked credit, which enjoys lower interest rates and has been increasing sharply, may also be contributing to slower growth in non-earmarked credit. Total delinquency in loans over 90 days past due remained constant, as delinquency in non-earmarked loans to consumers kept improving and fell for a fourth straight month, while delinquency in non-earmarked corporate loans rose 0.1 p.p., after four months of stability.

Dollar strengthens and sets new level for the exchange rate

As the dollar appreciated on a global level, the Brazilian real dropped 6.5% in May, and hit 2.15 per dollar. The prospect of an earlier-than-expected withdrawal of monetary easing measures in the U.S. lead to a worldwide strengthening in the dollar this month.

The Central Bank resumed interventions in the currency market and the IOF-tax was removed. Concerned about the impact on inflation,the Central Bank intervened through currency swaps, selling a total of USD 880 million in the market. Also, the government removed the 6% IOF-tax on foreign investments in fixed income, in force since 2010. We expect the strong dollar scenario to persist globally, but also the domestic currency weakening to be bounded by the concern with domestic inflation. We revised our forecast for the exchange rate, although it may remain in weaker levels in the short run, the Brazilian currency will reach 2.07 reais per dollar by year-end and to 2.10 by the end of 2014 (we previously estimated 2 reais per dollar for both periods).

Strong foreign-exchange flows were recorded in May, reaching USD 10.8 billion, with USD 14.1 billion in trade flows. The funds are probably related to high borrowing volumes during the month, adding up to USD 13 billion, with USD 750 million in sovereign-bond issues.

Current-account deficit reaches 3% of GDP. In April, the current-account gap stood at USD 8.3 billion, as the trade balance contributed negatively with USD 1 billion. The deficit over 12 months amounts to USD 70 billion or 3.0% of GDP. Foreign direct investment (FDI) surprised positively, reaching USD 5.7 billion, out of which 75% came from equity capital transactions. We maintain our forecasts for the current-account deficit at USD 75 billion and for FDI at USD 58 billion in 2013.

Trade surplus stood at USD 760 million in May, even with historically high contribution from soybeans exports. Crude oil exports rebounded slightly, but not enough to reach a surplus in the month (the result was a deficit of USD 335 million). Regarding the imports, the end of delayed registration of fuel imports stood out. We believe that the trade balance will improve over the year. As a result, we maintain our forecast for the trade surplus in 2013 at USD 6 billion. Our estimate for 2014 was reduced to USD 8 billion from USD 12 billion, as a consequence of revisions in our forecasts for exports of grains and mining products, in addition to price changes for Brazil’s main exports. With the change in our trade balance forecast, our call for the current-account gap in 2014 is now USD 83 billion.

More pressure on current inflation and a weaker currency prompt an increase in our forecast for the IPCA

Food prices should start to reverse the steep hike seen in recent months. The pass-through of lower grain prices and normalization of the fresh-food supply will contribute to cool down inflation in coming months. Tomatoes, potatoes and onions, which were responsible for a 64% lift in the item comprising tubers, roots and legumes between January and April, will enter a seasonally favorable period, thanks to dry weather and to the winter crop. This should ensure a material decline in prices until September, at the earliest. However, this drop should be less intense than in the past, as part of the recent price movement reflects more permanent effects, such as the reduction in the planted area and higher freight and labor costs. We anticipate an average monthly increase of 0.34% for the IPCA from June through October.

We raised our estimate for the IPCA in 2013 to 5.8% from 5.6%. Our scenario now incorporates more-pressured inflation at the margin and a weaker currency by year-end. Our forecast points to increases of 7.0% in market-set prices (6.6% in 2012) and only 2.0% in regulated prices (3.7% in 2012). Market-set prices ex-food should climb 6.3% (5.1% in 2012). The discount in electricity tariffs will be the main factor behind lower inflation for regulated prices this year, with impact amounting to -2.4 p.p. on the group and -0.6 p.p. on the IPCA. For 2014, our call remains at 6.0%, with market-set prices rising 6.5% and regulated prices advancing 4.5%.

Despite the lower headline IPCA in coming months, the underlying inflation should remain under pressure. Core inflation should run at around 6.0% in annualized terms. Despite sluggish economic growth, labor-market conditions should remain tight, pressuring services inflation. A tougher monetary-policy stance should bring favorable effects to inflation expectations. However, the increase in long-term inflation expectations in recent years will contribute to keep inflation at higher levels.

Monetary policy: Accelerating the fight against inflation

The Central Bank accelerated the pace of interest-rate hikes. The monetary policy committee (Copom) raised the benchmark Selic rate by 50 bps to 8.0% p.a. in its May meeting in a unanimous decision. The step signaled a more assertive stance by the committee in the fight against inflationary pressures.

Inflation resilience is at the core of public debate, government concerns and statements. Notwithstanding a recent decline, inflation remains under pressure and requires attention from the government and the central bank. The impact of tax breaks and the temporary decline in food prices have indeed reduced inflation, but less sharply than anticipated.

In public statements, Copom members are signaling greater determination in their fight against inflation. The goal is to “put inflation on a declining trend in the second half”, and “to ensure that the trend will continue next year.” The unanimous decision reveals a stronger commitment to curb inflation.

Our scenario contemplates a total 150-bp increase in the Selic rate. We expect an additional 50–bp increase in the next meeting and a final increase of 25 bps in August.

Fiscal policy: Heading toward a narrower primary surplus

Results for the public sector’s budget keep pointing to a reduction in the fiscal effort. The primary budget surplus stood at 10.3 billion reais in April, or 2.6% of GDP, below the average for the month since the collapse of Lehman Brothers (5.2%, for 2009-2012). The recurring primary balance, which excludes revenues and expenses that we regard as atypical, hit 1.45% of GDP accumulated in 12-months, the lowest in over two years.

Lower fiscal result reflects weak tax revenues and higher expenses. The sluggish recovery in central government revenues follows the high volume of tax cuts and the gradual recovery in economic activity. Furthermore, government outlays outpace trend growth, with administrative costs and transfers behind the increase in central government expenses. Considering that federal investment advances modestly, we conclude that budget stimuli through the expense channel seem to be directed more toward consumption than investment.

The government announced an initial budget adjustment (contingenciamento).On May 22, the government published the contingenciamento decree, blocking 28 billion reais in expenses written in the 2013 Budget Law. Revenues were also revised down by about 68 billion reais, out of which 20 billion imply lower transfers to states and municipalities.

The government signaled that the budget program will seek a lower primary balance. The government now estimates the public sector’s primary surplus at 2.3% of GDP in 2013 vs. 2.6% previously. This revision includes a greater use of fiscal target deductions via spending in the Growth Acceleration Program (PAC, its acronym in Portuguese) or via tax cuts. The leeway created by the deductions increased to 45 billion reais (0.9% of GDP) from 25 billion reais (0.5% of GDP).

Three elements suggest that the public sector’s primary result will fall short of the budget forecast. First, the assumption that the primary balance of regional governments will stand at 1.0% of GDP seems too optimistic, considering that the annual result has been hovering around 0.4% of GDP. Furthermore, there are incentives in place for states and municipalities to accelerate spending, particularly on investments, which seems inconsistent with a fiscal consolidation at regional level in the short term. Second, recent changes indicate that the central government will no longer be required to compensate below-budget results for states and municipalities, reducing the central government’s willingness to make precautionary savings or to seek mechanisms to ensure greater fiscal efforts by regional entities. Third, the budget law allows deductions from the 2013 fiscal target up to 65 billion reais (1.3% of GDP), suggesting additional room for the government to reduce the federal surplus to as low as 0.9% of GDP (official forecast: 1.3%).

We maintain our forecast for the public sector’s primary surplus at 1.5% of GDP in 2013. Basically, the gap between our forecast and the budget program stems from our estimate for the primary surplus of regional governments this year, 0.3% of GDP. Our scenario counts on central government’s real revenue growth around 2%, and a real spending clip close to 5%. In both cases, the growth rates are lower than in the newly revised official budget forecasts.

Oil field auctions could potentially prompt an upside surprise for the fiscal accounts this year. If such extra revenues top our estimate of 17 billion reais, the full-2013 budget reading may be slightly better. Further upside risk comes from the delayed negotiations about the change in the cost of regional governments debt owned by the central government. By the end of the day, the lack of agreement could reduce the pace of deterioration in the fiscal performance by states and municipalities. Downside risk for this year’s budget result stems from the (remote) possibility that the National Treasury loans more than the 4.5 billion reais signaled by authorities to the Energy Development Account (CDE, in Portuguese acronym), as part of the plan to reduce energy costs.


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