Itaú BBA - Jair Bolsonaro takes office in Brazil

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Jair Bolsonaro takes office in Brazil

January 2, 2019

The new president kept the campaign tone

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President Jair Bolsonaro took office yesterday. The new president started his inauguration speech with an appeal to Congress for help to fight corruption, crime, and economic irresponsibility. He stated his intention to share power with the states. Indicated that education will focus on forming workers, not political militants. Indicated that he will undertake initiatives to fight crime as a high priority, including ensuring proper support for the Armed Forces. Economic policy will be based on free enterprise, respect for contracts. Will implement reforms aimed at ensuring that public accounts will be sustainable [did not mention social security explicitly]. Will open up the economy, without any ideological bias. Vowed to renew Brazil's democracy, getting rid of the nefarious practices [corrruption] that have prevailed of late. External policy will be assertive and search Brazil's proper role within the concert of nations. 

Today at 3PM we shall have the maiden speech by Economy Minister Paulo Guedes, which should bring details on the administration's economic agenda.

The national unemployment rate dropped slightly to 11.6% in November (from 11.7% in October), in line with our call (11.6%) and market expectations (11.5%). The decrease was once again driven by an increase in employed population, especially from the informal sector. Compared to the same month of 2017, the unemployment rate receded 0.4 p.p.

Importantly, the PNAD’s figures for employed population in the formal sector continue to evolve at a weak pace, still not reflecting the better performance seen since July in the CAGED report. Considering our seasonal adjustment, the unemployment rate remained stable at 12.1%. All in all, the labor market continues to show a gradual improvement in November. For 2019, we forecast the average unemployment at 11.7% and year-end, seasonally adjusted, at 11.6%.
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The consolidated public sector posted a primary deficit of 15.6 billion reais in November, which was narrower than our expectation (-18.2 billion) and in line with market consensus (-15.5 billion). The central government had a deficit of 16.2 billion reais, as expected, while regional governments had a surplus of 2.0 billion reais and state-owned companies had a deficit of 0.2 billion reais (we anticipated a deficit of 0.8 billion and a surplus of 0.2 billion, respectively). The consolidated primary deficit accumulated over 12 months deteriorated to 1.5% of GDP in November from 1.2% in October. The latest monthly reading confirms the outlook for a better primary result than the target set for the deficit in 2018.

The general government’s gross debt increased to 77.3% of GDP in November from 77.0% in October, while the public sector’s net debt slipped to 53.3% of GDP from 53.6%. A favorable fiscal scenario depends strictly on the approval of reforms (such as the pension reform) that would signal a gradual return to primary surpluses that are compatible with structural stabilization in public debt. Full story here.

Also, FGV has released two monthly indicators for December: services sector survey and economic uncertainty index.

Confidence within the services sector rose 1.4% in December to 94.7, reaching the highest level since April 2014. The increase was driven by both expectations (2.0%) and current conditions (0.6%).

The economic uncertainty index rose 1.3pp to 113. Despite small increases in Nov/Dec, the index remains below the 3Q18 average (117.5). The survey is relevant for mapping part of the economic agents’ risk aversion that was not explained by traditional financial conditions indicators, given that the analysis of newspaper accounts for 70% of the aggregate index . A high figure is associated with greater uncertainty that is negatively related to economic activity. 

Day Ahead: The numbers on external accounts will be released at 3:00 PM. We expect the trade balance to post a USD 5.8 bn surplus in December, above the USD 5.0 bn surplus posted in the same month of last year.


Manufacturing production was weaker than expected in November and dragged down industrial production. Manufacturing contracted 4.7% yoy (+9.1% in October), well below our -1.5% call. The decline was a milder 2.6% once adjusted for calendar and seasonal effects. The food division was the main drag contributed -1.9pp to the total manufacturing decline. Meanwhile, the mining division grew 5.7% (bouncing back from the 4.3% drop in October and -1.3 % in September). Overall, the consolidated industrial production increased 0.4% (+2.0% previously).

Overall, growth was solid in 2018 (we expect 3.9% from 1.5% in 2017), due to a strong first half. However, persistent headwinds (ongoing global trade uncertainties and lower confidence) could hamper the growth outlook for next year (we expect a 3.5%).

Salaried jobs continued to drive employment in the quarter ending in November. 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. The labor force growth picked up 0.9%, more than offsetting the employment growth of 0.5%. Private salaried jobs grew 0.5%, while public salaried jobs increased 2.8%, reducing downside risks to the expected consumption recovery. Self-employment was broadly unchanged from one year ago.

We expect the unemployment rate for 2018 to come in around 7.0%, up from 6.7% last year. With the activity recovery likely to endure next year, some tightening of the labor market is expected resulting in a decrease of the unemployment rate.


The minutes of the December monetary policy decision to leave the policy rate unchanged at 4.25% show a board grappling with a number of uncertainties. Inflation has been somewhat lower than expected, but some board members highlights potential shocks that may affect prices in the future. Growth is expected to improve next year, yet there is no consensus on the strength of this increase, and, therefore on the evolution of the output gap. Meanwhile, a recent deterioration of external conditions have lowered growth expectations for trading partners and led to a slower expectation of the current account deficit correction. Overall, we see the board on data depending mode and signaling that under the current conditions there is no rush to start the normalization cycle (from 4.25%) in the short term.


Trade deficit surprised to the downside in November. Monthly trade balance posted a USD 2.4 billion deficit in the last month, well below market expectations (USD 0.15 billion surplus, as per Bloomberg), coming from a 2.9 USD billion deficit in October. For the coming months, we expect US economic activity to continue to support manufacturing exports. However, this support is expected to fade away as the US economy decelerates. Moreover, a decreasing trend in oil output is a downside risk to the energy balance.

The Week Ahead in Latam


Opening 2019, this week should be relatively empty, with numbers on external accounts. We expect the trade balance to post a USD 5.8 bn surplus in December, above the USD 5.0 bn surplus posted in the same month of last year. In month over month terms, both exports and imports are set to decline (3.9% and 4.8%, respectively, seasonally adjusted). However, it’s worth noticing that both exports and imports were inflated by oil platform transactions in November. We expect the trade surplus to sum USD 58 bn in 2018, below the USD 67 bn posted in 2017, but still at a strong level.  


During the week, INE will publish the private consumption activity indicators for November. Consumption related activity strengthened in October, surprising to the upside. Retail sales including vehicles grew 7.5% (1.3% in September), well above the Bloomberg market consensus. Meanwhile, wholesale trade showed robustness, favorably led by sales of investment-linked materials. However, high frequency data points to a weaker activity as new car sales contracted in annual terms for the first time since early 2016, while consumer confidence continued to slide. Overall, we expect retail sales growth of 1.0%.


On Thursday, the institute of statistics (DANE) will publish exports for the month of November. Oil and coal drove export growth of 15.8% in October (4.1% previously). Nevertheless, as prices have fallen towards yearend, 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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