Itaú BBA - Evening Edition - Jair Bolsonaro takes office in Brazil

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Evening Edition - Jair Bolsonaro takes office in Brazil

January 2, 2019

In the speech, Bolsonaro indicated that he will undertake initiatives to clash crime as a high-level priority

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The newly sworn-in president of the Republic, Jair Bolsonaro, began his inaugural speech in Congress with an appeal to lawmakers, seeking support in the fight against corruption, crime and economic irresponsibility. In the speech, Bolsonaro indicated that he will undertake initiatives to clash crime as a high-level priority, and that economic policy will be based on free market and respect for contracts. The new president said he will implement reforms aimed at ensuring the sustainability of public accounts, and signaled, still, its intention to open the domestic markets for international trade. The president also vowed to renew Brazil’s democracy, and concluded that foreign policy "will resume its role in defending sovereignty, building greatness and fostering Brazil's development."

Paulo Guedes, the Economy Minister, also made his first speech today. 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.
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Manufacturing activity was weaker than expected in November and dragged down industrial production. The month of November was hampered by an unfavorable calendar effect (one fewer working day), yet, even once adjusted for this factor, manufacturing was weak and highlights the consolidation of the activity recovery remains vulnerable. On the other hand, mining activity, which had been an activity drag for the previous four months, bounced back as the base of comparison normalizes and ore-grade improved. Preliminarily, we expect the monthly GDP proxy (Imacec) to grow a mild 1.7% in November, down from 4.2% in October. Despite signaling for a continuation of the normalization cycle this month, inflation that is likely to dip further (and downside risks growing), along with underwhelming activity in November, risks rising from waning private sentiment and slower global growth mean a hike in January (30th) is not a done deal. 

The strong activity start to last year means growth was solid in 2018, despite some moderation at the back-end (we expect 3.9% from 1.5% in 2017). However, persistent headwinds (ongoing global trade uncertainties and lower confidence) could hamper the growth outlook for this year (we expect a 3.5%).
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There was a favorable composition of net job creation in the quarter ending in November, but total employment has slowed down. The unemployment rate of 6.8% for the quarter ending in November (0.3pp higher than one year ago) was in line with our expectation but below the 7.0% Bloomberg market consensus. The labor force growth was 0.9% year over year (in line with the rate in 3Q18), more than offsetting the employment growth of 0.5% (also in line with 3Q18), while falling participation contained the tick-up in the unemployment rate. Complementary sources of information (mainly capturing formal employment) that the central bank is monitoring show mixed results with pension contributors (AFP) continuing to grow at a brisk pace (4% for the quarter ending in October, in line with 2Q18), while the data captured by the labor ministry (SIL) slowed to 1.2% in 3Q18 (3.4% in 2Q18).

Salaried job creation continued to lead employment growth. Public salaried jobs grew 2.8%, moderating from 5.6% in 3Q18 as fiscal consolidation unfolds, while private salaried jobs grew 0.5% (1.1% in 3Q18). Self-employment was broadly unchanged from one year ago (+0.2% in 3Q18).

We expect the unemployment rate for 2018 to come in around 7.0%, up from 6.7% in 2017. As dynamism in the labor market normally lags the economic recovery, some tightening of the labor market is expected this year.
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Tomorrow’s agenda: 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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