Itaú BBA - Brazil announces a new long term benchmark rate

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Brazil announces a new long term benchmark rate

March 31, 2017

According to BCB governor Goldfajn, the new TLP rate “is consistent with a lower structural interest rate in the medium term”.

With information available until 6:30pm Brasilia time


  • Long Brazilian yields narrowed as the government announced a new benchmark rate dubbed TLP (see Macro Backdrop). According to BCB governor Goldfajn, the TLP “is consistent with a lower structural interest rate in the medium term”. In DI Futures, the Jul-17 fell 3bps to 10.96% and the Jan-25 went to 10.19% (-2bps). 
  • In Chile, the curve bull steepened as February’s monetary policy meeting minutes signaled further easing ahead (see Macro Backdrop). In Camara swaps, the 1-year fell 10bps to 2.72% while the 5-year fell 4bps to 3.55%. 

Macro Backdrop

  • The consolidated public sector posted a primary deficit of BRL 23.5 billion in February, wider than our forecast (BRL 19.6 billion) and market consensus (BRL 22.7 billion). The consolidated primary deficit accumulated over 12 months remained at 2.3% of GDP. The central government’s result was worse than expected (deficit of BRL 26.3 billion, while we estimated BRL 20.6 billion), but regional governments did better (BRL 5.3 billion surplus, while we forecasted 1.5 billion), in line with the month’s strong positive seasonality. State-owned companies had a deficit of BRL 46 million. Regarding the central government, the deviation from our forecast was driven by transfers to states and municipalities as well as mandatory and discretionary expenses that were larger than expected. Public debt dynamics deteriorated somewhat during the month and remains unfavorable. The general government’s gross debt edged up to 70.6% of GDP in February (January: 70.0%), while net debt advanced to 47.4% of GDP (previous: 46.6%). If approved, the pension reform will be essential for public debt dynamics, by reversing the current upward trend in pension expenses and possibly generating the necessary conditions for the structural decline in interest rates and the rebound in economic activity. The nominal deficit accumulated over 12 months remained at 8.5% of GDP, but excluding the Central Bank’s gains/losses on FX swap transactions, the nominal deficit stands at a high level (10% of GDP), reinforcing the need for reforms (particularly the pension reform) to reverse the structural trend of fiscal deterioration. Full Report
  • Unemployment climbs to 13.2% in February. The data came slightly above our estimate and market consensus (both at 13.1%). The indicator increased 3.0 p.p. from 10.2% one year ago. Applying our seasonal adjustment, the unemployment rate rose to 13.1% in February (January: 13.0%), marking the 27th consecutive advance. The labor force was stable at the margin and expanded 1.4% y/y. Employment fell 0.2% during the month and is 2.0% lower than in February 2016. Informal jobs in the private sector (-0.2% m/m) and jobs in the public sector (-0.8% m/m) were behind the decline in overall employment. Nominal wages climbed 0.4% m/m in February, and picked up to 6.8% from 6.5% y/y. The average real wage advanced 0.4% m/m, the fifth consecutive gain at the margin. The indicator is up by 1.4% y/y. The real wage bill expanded 0.2% during the month, and has been showing milder declines in year-over-year terms in recent months (February: -0.3%; January: -1.3%). We expect unemployment to continue its upward trend, as the drop in economic activity has not yet been fully reflected in the labor market. Full Report 
  • IBC-Br activity index fell in January. According to the central bank, the IBC-Br index declined 0.26% m/m, between our forecast (-0.4%) and market expectations (-0.2%). The historical series (without seasonal adjustment) had significant revisions (Dec-2016 was revised -0.5% downward) probably due to the new retail and services series (PMC-IBGE, PMS-IBGE). Relative to the same month in 2016, the IBC-Br shrunk 0.8% y/y. The carry-over into 1Q17 reached -0.5% q/q. This result contrasts with our recent GDP tracking and our proprietary monthly activity indicator, which rose 0.3% in the same month. We emphasize that the historical revisions to the retail and service surveys probably explain this discrepancy. 
  • The National Monetary Council (CMN) decided Thursday night to cut the TJLP long term interest rate to 7% from 7.5% per annum, in a widely unexpected move, but also announced a reform to change how the rate is set. The TJLP is a benchmark rate for loans from BNDES development bank. 
  • Afterwards, the government announced a new interest rate that will gradually eliminate subsidies embedded in BNDES credit concessions. The new benchmark rate (dubbed TLP) would be effective for new concessions starting January 1, 2018 and will kick off at the same level as the old TJLP on that date. This new rate will be set on a monthly basis and converge linearly to the 5-year NTN-B bond yield. The period of convergence spans from January 2018 through December 2022. The current TJLP will continue being valid for the outstanding credit stock already granted by the development bank and for the new concessions until the end of 2017. Also, the TJLP is going to be announced quarterly by CMN as long as there are credit operations tied to it. 
  • As expected, power regulator Aneel changed to red from yellow mode in the tariff flag system for April. We estimate the impact of this change over April’s IPCA is 7bps. 
  • The BCB placed the offering of USD 0.55 billion (out of USD 2 billion) in FX credit lines.
  • Nominal fiscal indicators improved in February. The rolling 12-month primary balance posted a MXN 33 billion surplus (January: MXN 12.6 billion, 0.1% of GDP), while the public sector nominal deficit narrowed to MXN 465.1 billion (January: MXN 485.1 billion, 2.4% of GDP). The rolling 12-month public sector borrowing requirements (the broadest measure of the fiscal deficit), however, widened a bit, to MXN 543.4 billion (January: MXN 542.6 billion, 2.7% of GDP) because of extraordinary losses from financial operations (such as net loss from issuing debt at discount, marking-to-market of inflation linked debt, among others). These extraordinary losses are recorded in the PSBR, but not in the other fiscal accounts. 
  • In our view, it is likely that the Mexican government will meet its fiscal targets for 2017, which would be crucial to prevent a rating downgrade. The government is targeting a primary surplus of 0.4% of GDP, a public sector nominal deficit of 2.4% of GDP, and public-sector borrowing requirements (broadest measure) of 2.9% of GDP for 2017. Up to February, using our estimates for Q1’s GDP growth, we estimate that the rolling-12 month public sector nominal deficit and PSBR are already complying with these targets, whereas the primary surplus is only 0.2 p.p. away from compliance. Two days ago, the Central Bank announced that it will remit a MXN 321.7 billion (1.5% of GDP) dividend to the Treasury in April, which exceeds the MXN 239.1 billion (1.2% of GDP) dividend of last year. So the primary surplus could reach 0.4 p.p. of GDP as soon as in April. Mexico’s Finance Minister has stated that, given this windfall, he not only expects the fiscal targets to be met but actually surpassed. Full Report
  • The minutes of the central bank’s March monetary policy meeting revealed an unanimous decision to lower the policy rate by 25-bp to 3.0%, following the strategic pause in the previous month. In a preview of the Inflation Report (IPoM), to be released on April 3, the technical staff only presented rate cut options to the board (25-bp or 50-bp), suggesting that the central bank sees the need for additional monetary easing beyond the 50-bp cycle offered - and already implemented - in the 4Q16 IPoM. In offering the 50-bp rate cut option, the technical staff noted that this would be consistent with the idea of a rapid expansion of monetary stimulus following the updated outlook of the economy. However, it was also cautious not to give the impression that substantially more stimulus was required. Most board members were not opposed to the option of a larger rate cut but flagged the surprise factor and the uncertainty it could create.
  • We expect the IPoM to consider a path for the monetary policy that goes beyond that considered by the market. The market has priced in one additional 25-bp rate cut ahead. We believe further easing is needed to ensure inflation remains anchored to the 3% target. A firm Chilean peso and a widening output gap will ensure that inflation remains in the lower half of the of the 2%-4% tolerance range. By yearend, we see the policy rate at 2.5%, concluding a 100-bp easing cycle. Full Report
  • As economic growth remains frail, the unemployment rate continues to rise and the quality of jobs created deteriorate further. The unemployment rate came in at 6.4% in the quarter, up 0.5 p.p. from one year before, and slightly above market expectations (6.3%). The latest data indicates diminishing support for private consumption ahead. Moreover, it will heighten the central bank’s concern for the evolvement of the labor market and support the extension of monetary easing. Total job growth was 0.7%, down from the 1% in 4Q16 and is the third lowest growth rate since the adoption of the new labor survey in 2010. Meanwhile, the labor force growth has remained broadly stable at 1.2%. Low quality self-employment remains the driving force behind employment gains, increasing 8.1% y/y (4Q16: 4.6%). In contrast, salaried employment contracted 2.1% from one year earlier (4Q16: -0.1%) - the largest annual decline since the introduction of the new survey - led by the 3.1% drop for males. With no meaningful economic turnaround expected on the near horizon, we see the labor market continuing to loosen. We expect the unemployment rate to near 7.0% this year (2016: 6.5%). Full Report

Market Developments 

  • GLOBAL MARKETS: Equity markets mixed and volatility gauges increased. Us Treasuries fell as the 5-year went to 1.93% (-3bps) and the 10-year decreased to 2.40% (-2bps). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed as oil prices increase further (WTI: +0.87% to USD 50.79/bbl). Soybean prices fell 1.77% as, according to USDA’s Grain Stocks report, soybeans stored in all positions on March 1 increased 13% from one year ago, beating all analyst estimates. In LatAm FX, most currencies under our coverage appreciated. The CLP posted gains of 0.47% to 660.17/USD and the COP strengthened 0.34% to 2,873.98/USD. The MXN was broadly stable at 18.72/USD (-0.06%). The BRL outperformed the majors, closing at 3.1220/USD (+0.92%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor traded range bound. Both Colombian and Chilean country risk inched up 1bp, to 134bps and 72bps, respectively. Mexican spreads stood flat at 130bps. On the other hand, CDS in Brazil fell 1bp to 227bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Long Brazilian yields narrowed as the government announced a new benchmark rate dubbed TLP (see Macro Backdrop). According to BCB governor Goldfajn, the TLP “is consistent with a lower structural interest rate in the medium term”. In DI Futures, while the belly traded range bound (Jan-19 flat at 9.50%), long yields fell (Jul-17: -3bps to 10.96%) as well as short (Jan-25: -2bps to 10.19%). Accordingly, breakevens tightened as the 4-year fell 5bps to 4.49%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve bear flattened in the session. In TIIE swaps, the 6-month increased 3bps to 7.02% and the 10-year inched up 1bp to 7.43%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the curve bull steepened as February’s monetary policy meeting minutes signaled further easing ahead (see Macro Backdrop). In Camara swaps, the 1-year fell 10bps to 2.72% while the 5-year fell 4bps to 3.55%. Chile Rates Tracker In Colombia, most rates traded lower in the session. In IBR swaps, the 9-month went down 1bp to 5.95% and the 5-year decreased 2bps to 5.50%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Supreme Electoral Court (TSE) is scheduled to take the case against the Rousseff-Temer 2014 presidential ticket to trial (starting Tue.). The case is ruled over by simple majority, which sums to four out of seven votes. Then, the key activity release of the week will be February’s industrial production figures (Tue.). We expect a 0.2% m/m increase. Additionally, both Anfavea (Thu.) and Fenabrave (undefined) will release data from the automobile sector in March, providing relevant coincident indicators for both industrial production and broad retail sales. Moreover, March’s IPCA consumer inflation will be released (Fri.). We forecast a 0.27% monthly rise, with year-over-year inflation falling to 4.6% (February: 4.8%). On the external sector, we expect continuous improvement in the trade balance (Mon.). We forecast a surplus of USD 6.3 billion in March, topping the USD 4.4 billion surplus in March 2016. 
  • In Mexico, the Central Bank will publish March’s Economist Survey (Mon.). We do not expect significant changes in inflation expectations, considering that the recent appreciation of the exchange rate could help to curb the upward trend of inflation. Then, the statistics institute (INEGI) will publish January’s gross fixed investment (Wed.). We forecast that gross fixed investment grew 0.3% y/y (December: +0.9%). Finally, INEGI will announce March’s CPI inflation (Fri.). We expect a 0.44% m/m variation, driven by an increase of core goods (tradable) prices - which are pressured by the lagged effects of exchange rate depreciation - and a rebound of agricultural prices. 
  • In Chile, the national statistics agency (INE) will publish the private consumption activity indicators for February (Mon.). We expect the commercial activity index to have expanded 1.0% from last year. Then, the central bank will publish its quarterly Inflation Report (Mon.). We do not expect significant changes to the inflation outlook (current yearend forecast of 2.9%), but see a 0.25 p.p. lowering of the growth forecast range for this year to 1.25%-2.25%. Also, we expect the baseline scenario for the monetary policy rate to consider a trajectory that includes more easing than the one additional rate cut considered in asset prices and trader surveys, as previewed in the monetary policy minutes for the March meeting. Moreover, the central bank will publish the GDP proxy (Imacec) for the month of February (Wed.). We expect the GDP proxy to contract 0.7% from January (previous: +0.4%), resulting in an annual growth rate of -1.7% (previous: +1.4%) as activity in the quarter continues to disappoint. The National Institute of Statistics (INE) will publish nominal wage growth for February (Thu.). In the previous month, nominal wage growth moderated to 4.4% y/y (previous: 4.7%), as low inflation and the loosening labor market ease wage pressure. Still, INE will publish inflation data for March (Fri.). We expect prices to gain 0.5% from February (previous: +0.2%). Consumer prices are expected to be pulled up by seasonal increases to lemon and tomato prices. As a result, annual inflation would remain at 2.8%, hovering below the center of the central bank’s 2%-4% tolerance range. Finally, the central bank will publish the trade balance for March (Fri.). We forecast a USD 50 million surplus (previous: USD 236 million surplus), taking the rolling 12-month trade balance to USD 4.1 billion (2016: USD 5.3 billion). 
  • In Colombia, inflation for March will be released (Wed.). We expect consumer prices to gain 0.44% from February with food price gains continuing to moderate. As a result, annual inflation will decline to 4.66%. Then, the monetary policy meeting minutes from March will be published (Fri.). At the meeting, the central bank cut the policy rate by 25-bp to 7.0%. The decision was by a three-way split. The minutes will likely confirm that the policy rate will keep falling at a steady pace in the months ahead, with the timing of each cut being data dependent.

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Today's editors: Eduardo Marza, Pedro Correa

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