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Brazilian quasi-fiscal reform on the market’s radar

August 22, 2017

The market is closely monitoring the debate on the TLP (new long-term BNDES benchmark rate) in the joint commission (Lower House and Senate).

With information available until 6:30pm Brasilia time


  • Brazilian yields narrowed marginally on improved risk appetite abroad. In DI futures, the Jan-19 fell 3bps to 8.04% and the Jan-21 narrowed 2bps to 9.50%. The market is closely monitoring the debate on the TLP (new long-term BNDES benchmark rate) in the joint commission (Lower House and Senate). According to Broadcast, the commission will hold another session on Wednesday (August 23). 
  • In FX, the CLP appreciated 0.25% to 640.98/USD as copper prices strengthened (+0.33%). Then, the COP (+0.09% to 2,985/USD), the MXN (-0.02% to 17.6585/USD) and the BRL (+0.07% to 3.1630/USD) were broadly stable in a volatile session. 
Macro Backdrop

  • The preview for August’s business confidence in the industrial sector (FGV) increased 1.7% to 90.7. This way, the indicator is back to levels seen in May, recovering completely from the drop in June (-2.8 p.p.). The break down shows a rise both in the current situation component (1%) and the expectations component (2%). Worth mention, the current situation component is at its highest level since May 2017. Capacity utilization (NUCI) fell 1.0 p.p. in the month to 73.7%, remaining well below the historical average. The final reading will come through on August 29. 
  • Macro Vision: FAQs on Brazil’s political reform. The Brazilian Congress resumed debates to approve a political reform. Proposals are advancing in the Lower House and must be sanctioned by the President by October 7 in order to be effective in the next elections. This report outlines changes being studied and, taking the 2014 elections for the Lower House as an example, concludes that compared to the current electoral system, the largest parties would increase while the smaller parties would decrease if there had been a so-called “big district” or mixed electoral system. Full Report
  • GDP growth came in at 1.8% year-over-year in 2Q17, down from 2.8% in 1Q17, but this is largely due to the negative calendar effect from the Easter holidays. The result was line with market expectations (and the flash estimate) and slightly above our forecast (1.7%). But according to calendar-adjusted data reported by the statistics institute (INEGI), year-over-year growth was higher in 2Q17 than in the previous quarter (2.9% year-over-year, from 2.6% in 1Q17). At the margin, the quarterly GDP figures show a 0.6% expansion between 1Q17 and 2Q17, while the IGAE (monthly proxy for GDP) expanded by a more modest 0.3%. 
  • Given the solid performance of the economy in 1H17, we have revised our growth forecast for 2017 (to 2.3%, from 2%). Thus, GDP would grow at the same pace as in 2016. The shocks battering the economy (uncertainty over trade relations, inflation spike, and falling oil output) seem to be moderating. The real wage bill is already recovering at the margin and the US manufacturing PMI is hovering at strong levels, supporting Mexico’s manufacturing exports. Moreover, fading uncertainty over Nafta will also help to curb the slowdown of investment. Full Report


  • The demand-side breakdown for the 2Q17 national accounts shows that gross fixed investment increased for the first time since 3Q15, while net exports are the main drag. Activity recorded a mild recovery in 2Q17 with growth of 1.3% year-over-year in 2Q17, up from 1.2% in 1Q17. Nevertheless, growth in 1H17 dropped to 1.2% (2.5% in 1H16; 2.8% in 1H15) as the economy continues to adjust to the terms-of-trade shock. We expect growth of 1.6% this year, down from 2.0% in 2016, as activity gradually recovers in 2H17. Higher average oil prices compared to 2016, low inflation and falling interest rate aid a growth recovery ahead. 


  • The central bank left the monetary policy rate unchanged at 26.25% for the ninth consecutive time. The decision was expected by us and the market. The press release announcing the decision noted that, according to high frequency indicators tracked by the central bank, inflation will likely fall in August, but core inflation remains above the level sought by the central bank. Although in our base scenario there is no additional interest rate increases in Argentina, we think that even with a reduction of inflation expectations for the coming months, the central bank will likely stay put for a while. Our forecast for the policy rate by the end of this year currently stands at 25%. Full Report
  • The primary fiscal deficit fell in July, relative to the same month of 2016. The primary balance came in at a deficit of ARS 22.1 billion in July, compared with a deficit of ARS 24.3 billion registered in July 2016. The primary deficit accumulated over the last 12 months fell to ARS 373 billion in July, from ARS 375 billion in June. According to our estimates, the deficit stays at 4.1% of GDP and it is in line with the treasury’s 2017 target of 4.2%. We expect the government to meet its official target deficit of 4.2% of GDP in 2017. But meeting the 2018 target (-3.2% of GDP) will be more challenging, especially considering the absence of resources related to the tax amnesty. 
Market Developments 
  • GLOBAL MARKETS: Risk-on day as equity markets were strong on the green and volatility gauges receded. US Treasuries widened (5-year: +4bps to 1.79%) in tandem with the strengthening USD (DXY: +0.43%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed as oil prices increased (WTI: +0.15% to USD 47.60/USD) and agriculture posted losses (wheat: -1.77%; corn: -0.86%). In FX, the CLP appreciated 0.25% to 640.98/USD as copper prices strengthened (+0.33%). The COP (+0.09% to 2,985/USD) and the MXN (-0.02% to 17.6585/USD) were broadly stable in a volatile session. Finally, the BRL was broadly stable, closing at 3.1630/USD (+0.07%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads traded range bound in the session. In Chile, CDS inched up 1bp to 62bps. Meanwhile, country risk in Brazil, Mexico and Colombia narrowed 1bp to 202bps, 107bps and 129bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve shifted 1-3bps downwards in the session. In DI futures, the Jan-19 fell 3bps to 8.04% and the Jan-21 narrowed 2bps to 9.50%. Likewise, the breakevens curve also descended 2-3bps. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields narrowed marginally. The 1-year TIIE swap inched down 1bp to 7.31% and the 5-year fell 2bps to 6.87%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The Chilean curve shifted 1bp downwards. In Camara swaps, the 1-year narrowed 1bp to 2.35%. Chile Rates Tracker   In Colombia, markets reopened after Monday’s holiday. The IBR swaps curve went up 1-3bps in the session (1-year: +1bp to 4.94%; 5-year: +3bps to 5.59%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, August’s IPCA-15 consumer inflation preview will be released (Wed.). We forecast a 0.40% monthly increase, with year-over-year inflation slowing to 2.7% from 2.8%. Onto the balance of payments report (Wed.), we expect a USD 3.5 billion current account deficit and direct investment in the country (DIC) to register inflows of USD 5.5 billion in July. Still, retail and consumer monthly surveys for August, also from FGV, will be released (Fri.). Moreover, July’s tax collection may also be released next week, for which we forecast BRL 108.3 billion.
  • In Mexico, the statistics institute (INEGI) will announce June’s retail sales (Wed.). We estimate that retail sales slowed down to 2.5% year-over-year. Moving forward, INEGI will publish CPI inflation figures for the first half of August (Thu.). We expect bi-weekly inflation at 0.25%. Then, Banxico will publish the minutes of the latest monetary policy meeting (Thu.). Finally, INEGI will announce July’s unemployment rate (Fri.). We expect the unemployment rate to post 3.4%. Shortly after, Banxico will publish 2Q’s current account balance. We expect the current account deficit to come in at USD 3,800 million. 
  • In Colombia, think-tank Fedesarrollo will release the July Industrial and Retail confidence (Thu.). We expect confidence levels to remain low in the months ahead as an activity recovery is not imminent. 
  • In Argentina, the INDEC will publish the EMAE (official monthly GDP proxy) for June (Thu.). We expect activity to grow 3.6% year over year in June (+0.6% mom/sa). Then, the IGA (GDP proxy published by OJF consulting firm) for July will see the light (Thu.). Furthermore, the trade balance for July will also come out (Thu.). We expect a trade deficit of USD 50 million.  Finally, Universidad Di Tella will publish its consumer confidence report for August (Thu.). 

For details, refer to our Monthly Strategy Report.

For details on Brazilian markets, refer to our Handbook - First edition.

Today's editors: Eduardo Marza, Pedro Correa

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