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Brazil’s new economy minister reinforces uncontrolled expenditure growth as the main problem

January 3, 2019

He stated his view that the uncontrollable expansion of government spending is the main problem in Brazil

Talk of the Day
 

Brazil

Paulo Guedes, the Economy Minister, made his first speech yesterday. He stated his view that the uncontrollable expansion of government spending is the main problem in Brazil. The spending ceiling is very important, but reforms are necessary.
 

The necessary reforms are set in 3 pillars: 1) The social security reform is the first and biggest challenge. Legislators, judiciary and public opinion are responsible for the reform. If the reform fails, the proposal will be to delink the budget completely from inflation or revenues, which would also require Congress approval. Guedes still didn’t announce what will be the exact strategy for the social security reform, or whether they will try to approve the current reform proposal or announce an entirely new one. 2) Privatizations (with Salim Mattar). 3) Tax reform (with Marcos Cintra): simplification and decentralization (more revenue for states and municipalities, less for the federal government).

Still according to Guedes, several “small” measures, that do not require approval by the Congress, will be announced in the next 30 days, aiming at simplification and improving business conditions. In early February, as Congress returns from vacations, social security reform becomes the top priority. He also indicated that  BNDES will return the money to the Treasury at a faster pace, and trade liberalization will be made together with improving business conditions.

According to the local news (Valor, Globo), Bolsonaro’s party PSL (52 Lower House members) will support Rodrigo Maia in the election for Lower House speaker in early February.

The trade balance posted a strong surplus for a fourth consecutive year. Although exports rose at a slower pace than imports, the trade surplus remained at a historically-high level. In December, the surplus reached $6.6 billion, driven by $19.6 billion in exports and $12.9 billion in imports. For 2019, we continue to expect a wide trade surplus ($58 billion), with growing exports as well as imports.
** Full story here.

Chile

Deteriorating private sentiment is a risk to the activity recovery. Concluding 2018, business confidence moved further into pessimistic territory after dropping below 50 points (neutral) in November for the first time in the year. Icare’s business confidence index ticked down to 48.8 points in December, from 49.0 in the prior month, as industrial confidence waned at the margin (to 43.5 points from 46.0 in November). Overall, confidence remains above the level recorded one year earlier (+4.8pp). Mining (53.8) and retail (53.4) confidence remain optimistic, but the latter continues to be the only sub-index to have deteriorated over 12-months (-3.0pp). We expect the activity recovery to consolidate this year with growth of 3.5% (3.9% expected for last year), however, persistent headwinds (ongoing global trade uncertainties and lower confidence) could hamper the growth outlook. 

Colombia

Day ahead: The institute of statistics (DANE) will publish exports for the month of November at 1:00 PM. Oil and coal drove the export growth of 15.8% in October (4.1% previously). Nevertheless, as prices have fallen towards year end, the support from oil exports to the trade balance is likely to falter. We expect November exports to come in at USD 3,461 million, up 11.5% from last year.



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