Itaú BBA - Congress approves labor reform

Brazil Review

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Congress approves labor reform

agosto 1, 2017

The reform changes the labor legislation in more than one hundred points, aiming to make the labor market more flexible.

The Brazilian economy in July 2017

The labor reform, aiming to add flexibility and efficiency to the Brazilian labor market, was approved in the Senate and sanctioned by the President. The Constitution and Justice Commission (CCJ) rejected the charges against Michel Temer and the decision in the Lower House floor is expected in the beginning of the present month. Former President Luiz Inácio Lula da Silva was sentenced in a first instance court to 9 years and 6 months in prison for corruption and money laundering crimes in the Guarujá triplex apartment case. The BCB cut the Selic rate by 100 bps once again, pushing the Selic rate back to single-digit territory. The government raised taxes on fuels amid a well-behaved inflation environment.

Labor reform approved in Congress and sanctioned by the President

The Senate approved the base text of the labor reform, with 50 votes in favor and 26 against. In addition to the Lower House decision, the bill was sanctioned by President Michel Temer, but may go through adjustments by means of edition of the provisional measure regulating specific points. The reform changes the labor legislation in more than one hundred points, aiming to make the labor market more flexible, with potential positive impacts on productivity and labor market formalization. The main points include intermittent jobs, the prevalence of individual negotiations between companies and workers over the law, limiting the power of courts to interpret the law, and the end of the mandatory union contribution.

CCJ rejects report against Temer and decision at the House Floor is expected in August

The Lower House Constitution and Justice Commission rejected, with 40 votes in favor and 25 against, Sérgio Zveiter's (PMDB-RJ) report recommending the approval of the accusation against President Michel Temer. With the result, the commission had to choose a new rapporteur, and decided to approve the report by Paulo Abi-Ackel (PSDB-MG), who considers that there is no evidence to justify prosecution of the president at this time. The next step is the vote on the report in the Lower House floor, which is scheduled to take place this Wednesday (August 2), but may be delayed. The opening of the case against the President requires at least 342 votes (two thirds of the Lower House representatives). If authorized in the Lower House, the accusation will be forwarded to the Brazilian Supreme Court (STF).

Lula convicted of corruption in first instance court

Former President Luiz Inácio Lula da Silva was sentenced to 9 years and 6 months in prison for corruption and money laundering crimes in the Guarujá triplex apartment case. The next step is to forward the decision to the second instance. Depending on the court's schedule, the decision may be forwarded before or after the beginning of the 2018 election calendar. The deadline for candidates' electoral registry is August 15, 2018.

Inflation continues to fall and government raises taxes on fuels

The IPCA-15 posted a -0.18% change in July, matching the floor of market expectations. As a result, accumulated over 12 months, the rate fell to 2.78%, below the lower limit of the inflation target (3%), having reached 3.52% in June. This is the lowest reading for the month since 1998. The result reinforces the downward trend in inflation observed in recent months, reflecting a widespread deceleration among its components. The Finance and Planning ministries announced an increase in the PIS/Cofins tax on gasoline, diesel and ethanol. Different tax rates will be levied on each type of fuel. The measure seeks to increase federal tax revenues by R$ 10.4 billion, according to government expectations, and will have an upward impact on fuel prices and inflation.

Selic rate back to single-digit territory

The Brazilian Central Bank's Monetary Policy Committee (Copom) unanimously decided to implement another 100 bps rate cut, taking the Selic rate to 9.25%, in line with expectations. This marks the return of the policy rate to single-digit territory for the first time since November 2013. The text also suggests that the debate within the committee, regarding the next policy meeting, remains limited to the 75-100bps range. Barring a shock, the macroeconomic scene is unlikely to change much by early September, we thus reckon the Copom will repeat the 100bps pace. After that, taking into account the stage of the cycle, the committee is likely to slow down the pace of easing to 50bps per meeting, with the Selic rate ending the year at 7.25%.

Unemployment declines in July, with increase in informal jobs

According to data from the national household survey (PNAD Contínua), the national unemployment rate reached 13.0% in June, from 13.3% in the previous month. Using our seasonal adjustment, unemployment fell to 12.9% from 13.0%, and remained virtually flat throughout 2017. The drop in the unemployment rate was a consequence of the increase in informal jobs in the private sector and self-employment, while the labor force in the formal sector continues to decline.

Public accounts deficit remains high

The consolidated public sector posted a primary deficit of R$ 19.6 billion in June. Thus, the consolidated primary deficit accumulated in 12 months advanced to 2.6% of GDP, from 2.5% in the previous month. We see the meeting of the fiscal target for 2017 as the most likely scenario, but challenging. For this to happen, there must be no additional frustration in extraordinary revenues (especially on the new Refis tax arrears program), and the government must be able to deliver spending cuts of at least R$ 40 billion this year.

Current account surplus in the first half of 2017

The first half of the year ended with a slight current account surplus (US$ 715 million), with a strong trade surplus contributing positively. Accumulated in 12 months, the current account deficit receded to US$ 14.4 billion or 0.8% of GDP. On the financing side, direct investment in the country remains robust, thus reducing dependence on more volatile capital. Portfolio investment flows (fixed income and equities), however, continue to show outflows over the past twelve months.

Upcoming events

Attention will likely continue to be focused on political events, as Congress returns to work after the parliamentary recess in July. The vote on the accusation against President Michel Temer in the Lower House will be the highlight. Another important reform proposal underway is the creation of the TLP (new Long Term Interest Rate), in substitution of the TJLP, the interest rate on which BNDES loans are based. The deadline for the vote on the new rate is September 7; therefore it is possible that it will not be voted this month. On the tax revenue side, according to Secretary of the Investment Partnership Program, the bidding rules for the auction of Cemig's four hydroelectric plants will be made available next week. There is still substantial uncertainty surrounding the auctions date, but it is most likely to occur between the end of September and the beginning of October. Finally, the deadline for joining the tax arrears program (Refis) is August 31. Meeting the primary deficit target in 2017 remains a challenging task, and will depend on the materialization of these extraordinary revenues, as well as the government's ability to implement the steep spending cuts announced.


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