Itaú BBA - Evening Edition – Industrial confidence slightly increases in Brazil

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Evening Edition – Industrial confidence slightly increases in Brazil

April 29, 2019

Despite the increase, the level of industrial business confidence remains low, pointing to stagnation of industrial production going forward.

Talk of the Day


Business confidence in the industrial sector increased 0.7 p.p. to 97.9 in April, according to FGV’s monthly survey, a bit higher than the preview released last week and partially offsetting the 1.8 p.p. decline registered in the previous month. The breakdown shows an increase in the current conditions index (1.4 p.p.), but the expectations component remained flat in the period. Capacity utilization in the sector (NUCI) receded 0.2 pp. to 74.5%. Despite the increase, the level of industrial business confidence remains low, pointing to stagnation of industrial production going forward.

On the fiscal side, the central government posted a BRL 21.1 billion primary deficit in March, close to the market consensus (at BRL -20.6), but better than our estimate (at BRL -28.4), given a delay on the payment of judicial deposits. We expected this payment of BRL 9 bln to be brought forward to March this year, against a payment in April in the last years, given the government recent effort to pay these lines as early as possible, but the payment happened this month. Other than that, both net revenues and discretionary expenditure were a bit lower than we expected. Central government result will likely be around BRL 15 bln (0.3% of GDP) better than the target for the year (BRL 139 billion or 1.9% of GDP), even without the transfer of rights oil auction, which may add up to BRL 73 bln (1.0% of GDP). The loose fiscal target is explained by the government’s conservatism in changing it last year, amid disappointments on GDP growth this year and lower mandatory and discretionary spending than previously forecasted in the budget. The consolidated primary result for March (including regional governments and state-owned companies) will be released tomorrow. We now expect a BRL 21.7 bn deficit.

The BCB released its weekly survey with market participants (Focus), with no major changes. According to the survey, the median forecast for GDP growth remained virtually flat for 2019, at 1.70% (from 1.71%), after a 24 bps correction in the previous week. For 2020 and 2021, growth expectations remained stable at 2.50%. The median of IPCA inflation forecasts did not change: at 4.01% for 2019, 4.00% for 2020 and 3.75% for 2021. Similarly, the year-end Selic rate remained flat for the three years horizon (2019-2021): at 6.50% for 2019, 7.50% for 2020 and 8.00% for 2021.  The median of the forecasts for the exchange rate remained flat for 2019 (at BRL 3.75/USD) and virtually stable for 2020 and 2021: at BRL 3.79/USD (from 3.80) and BRL 3.83/USD (from 3.82), respectively.

Tomorrow’s Agenda: FGV’s business confidence survey for April on services, as well as the economic uncertainty indicator, will be released at 8:00 AM. On economic activity, March’s national unemployment rate will come out at 9:00 AM. We expect a 12.8% unemployment rate, which, in seasonally-adjusted terms, would mean a decline to 12.1% from 12.2% in the previous month. On the fiscal side, March’s consolidated primary budget balance will see the light at 10:30 AM, for which we forecast a deficit of BRL 21.7 bln.


The Central bank has now more room to intervene in the exchange rate market, eliminating the non-intervention zone in practical terms. The monetary policy committee decided that, given the recent volatility in the exchange market, the central bank will sell dollars even if the exchange rate is trading stronger than the upper bound of the non-intervention zone (51.45 ARS/USD). However, it provided no guidelines for the size and format of the interventions. The central bank noted that if the ARS weakens above the upper bound of the non-intervention zone, dollar sales will be up to USD 250 million per day (from USD 150 million previously), but indicated that discretionary interventions are also possible if the currency is above the upper bound of the zone. We remind that the central bank had previously announced that it would not purchase dollars if the peso strengthens below the lower bound. According to the central bank, interventions will not be sterilized to reinforce the contractive stance of the monetary policy. 

The decision had the support from the IMF and is in addition to the USD 9.6 billion sales from the treasury through daily auctions. The central bank seeks to lower inflation through the stabilization of the nominal exchange rate and tight monetary policy. The total amount of dollar sales from the public sector has the potential to be meaningful, especially taking into account the size of market turnover. However we highlight that the level of net international reserves in Argentina is low (around USD 17.5 billion), so a capital flight is unlikely to be prevented if agents perceive a high probability of policy shift after the elections.

On a separate note, the trucker union called for a national strike on Tuesday. There will be limited transportation in the country, and other unions (banking and teachers) are expected to support the measure.

Tomorrow’s Agenda: The INDEC will publish the EMAE (official monthly GDP proxy) for February at 4:00 PM. We forecast a 0.3% gain against January 2019, implying a 5.7% yoy drop.


Tomorrow’s Agenda: The national institute of statistics (INE) releases industrial activity indicators for March at 10:00 AM. We expect manufacturing to grow 2.8% yoy, partly aided by a low base of comparison. At the same time, INE releases the national unemployment rate for the first quarter of the year. We expect the unemployment rate to come in at 7.0%, similar to the 6.9% recorded one year before.


Tomorrow’s Agenda: At 12:00 PM, the institute of statistics will release the unemployment rate for March. We expect the urban unemployment rate in March to come in at 11.7% (10.6% one year before), resulting in a rate of 12.5% in 1Q19 (12% in 1Q18).


Tomorrow’s Agenda: At 10:30 AM, the statistics institute (INEGI) will publish the flash estimate of Q1’s GDP growth. We estimate 1.1% yoy growth (from 1.7% in 4Q18). Additionally, the Ministry of Finance (MoF) will publish reports on economic activity, public finances and public debt as of the 1Q19. We expect lower revenues in real terms in 1Q19, dragged mainly by oil revenues (mainly due to the fall in oil production). Also tomorrow, Mexico’s government will publish the National Development Plan 2019-2024, which includes the strategies and objectives (in general terms) the new Administration will pursue during the next six years.


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