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New loans climb in Brazil

January 30, 2019

The daily average of new non-earmarked loans for consumers increased 2.0% mom

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The Central Bank released the credit figures for December. The daily average of new non-earmarked loans for consumers increased 2.0% mom (6.4% accumulated in 12-months), after increasing 5.1% in the previous month. New business loans rose 6.1% (11.0% accumulated in 12-months), after a 1.3% decline in November - all in real terms, seasonally adjusted. Average interest rates on consumer loans receded to 48.9% (from 51.6%) and to 18.8% on business loans (from 20.3).
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The central government posted a BRL 31.8 bln primary deficit in December, in line with our call (BRL -31.6 bln) and the market’s (BRL -32.3 bln). In the year, the central government had a BRL 120 bln primary deficit  (1.8% of GDP), much better than the target (BRL 159 bln, or 2.3% of GDP). Even with a more moderate economic growth and the adoption of subsidies for diesel prices, lower than currently estimated expenditures and some resilience in recurring revenues eased any pressure to comply with the target. In 2019, the primary result will continue to gradually improve, following the compliance with the spending ceiling and the recovery in recurring revenues. We expect a BRL 105 bln (-1.4% of GDP) central government primary deficit for the year, agains t a targ et of BRL 139 bln (-1.9% of GDP).

According to FGV’s monthly industry survey, business confidence in the industrial sector rose 2.6pp to 98.2 in January. Capacity utilization fell 0.5 p to 74.3 – reaching the lowest level since Sept 17 and remaining well below our estimate for the neutral level (81). The confidence headline came 0.6pp above the preview released a week ago while capacity utilization came 0.2pp lower. The confidence breakdown shows a 1.0pp increase in current conditions and a 4.3pp increase in expectations.


Following two consecutive months in pessimistic ground, business confidence recovered in January, led by improved retail and industrial confidence. Upbeat private business sentiment will be key to sustain the investment and activity recovery ahead. Business confidence moved back into optimistic territory in January (50.7 points; 50 = neutral), a 1.9 point improvement from December but still 3.1 points below levels one year earlier. Mining confidence was the principal drag at the margin and over twelve months having dropped to 50.3 points (53.8 in December; 63.0 in January 2018). Excluding mining, business confidence reached 50.8 from 47.7 in December (51.7 one year ago). Retail confidence is firmly in optimistic ground at 56 points (53.4 in December), but still below the c yclical peak around 60 points one year earlier. Industrial confidence rose 4.3 points from the end of 2018 to 47.8 points, but is also somewhat below levels from early last year. Construction confidence edged to 49.6 points, the closest to neutral levels since March 2018 and registering the largest 12-month gain (6.4 points), and a favorable development for the persistence of the investment recovery. We expect the activity recovery to consolidate this year with growth of 3.5% (4.0% estimated for last year), however, persistent headwinds (ongoing global trade uncertainties and lower confidence) could hamper the growth outlook.

Day ahead: The central bank will announce its first monetary policy rate decision of the year at 7:00 PM (SP Time). Following the first rate hike of the cycle in October, the board unanimously decided in December to hold the policy rate at 2.75%, consistent with the repeated message of a gradual withdrawal of the monetary stimulus. With activity surprising and confirming the output gap narrowing continued at the close of 2018, the board will likely feel comfortable with delivering another interest rate increase. Hence we expect a 25bp hike to 3.0%. Supporting the decision would be the board’s view that the output gap is near closed, its upbeat mood about the labor market, and inflation indicators sensitive to domestic demand gradually rising.


Day ahead: The statistics institute (INEGI) will publish the flash estimate of Q4’s GDP growth at 12:00 PM (SP Time). We estimate at 1.9% yoy (down from 2.5% in 3Q18), taking 2018 annual growth to 2.0%. Also, the Ministry of Finance (MoF) will publish the reports on economic activity, public finance and public debt as of 4Q18. We expect fiscal balance indicators reached MoF estimates of 0.7% and -2.0% of GDP for the primary balance and nominal balance for 2018, respectively, reflecting the final year of fiscal consolidation of the previous administration (Enrique Peña).

Fixed Income Strategy

We recommend paying the 1-year local rate in Chile, and receiving the 1-year local rate in Colombia. Colombia’s 1-year rate currently stands at 4.45%, while Chile’s sits at 3.17%. The spread between the two rates is currently at 1.28%, and we believe it could fall to a level in between 1.0% and 1.1%.
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