Itaú BBA - Depreciation of the Real Sharpens

Brazil Review

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Depreciation of the Real Sharpens

abril 1, 2015

GDP Grows 0.3% in 4Q14 In the full year, growth stood at 0.1%

The Brazilian Economy in March 2015

GDP growth reached 0.1% in 2014. The latest confidence and employment indicators showed a further weakening of the economy this year. In its inflation report, the Brazilian Central Bank suggested that the interest-rate hiking cycle is coming to an end. The Long-Term Interest Rate (TJLP) increased again. Inflation reached 7.9%, pressured by the readjustment of tariffs (electricity, gasoline, urban bus fares) early this year. The fiscal result was worse than expected and the current account deficit receded. Government approval fell again, amid public protests throughout the country. Education Minister Cid Gomes resigned soon after a confrontation with the PMDB party.

GDP Grows 0.3% in 4Q14 In the full year, growth stood at 0.1%

GDP expanded by 0.3% qoq in 4Q14. For the full year, growth stood at 0.1%, with a 0.9% expansion in private consumption and a 4.4% drop in investment. The numbers already incorporate the new National Accounts methodology. The data for 2012 and 2013 were revised upward after the adoption of the new methodology. The major revisions focused, from the demand side, on investment, and from the supply side, on the industry.

Consumer Confidence Recedes to an All-Time Low

Consumer confidence (calculated by FGV) fell 2.9% in March mom/sa. Thus, for the third consecutive time, the index reached a new record low for the series started in 2005. The percentage of people reporting difficulty in finding employment increased from 67.9% in February to 75.4% in March, reinforcing the scenario of weakening labor market.

Rising Unemployment

According to IBGE, the unemployment rate reached 5.9% in February. On a seasonally-adjusted basis, unemployment rose from 5.4% in January to 5.6% in February, posting a second consecutive increase and sustaining an upward trend. There was a decline in the real wage bill due to a drop in both the workforce and the real wage.

Inflation Report Suggests that the Hiking Cycle is Coming to its End

The Monetary Policy Committee published the first-quarter Inflation Report. The report discussed the current realignment of relative prices (regulated prices, exchange rate) and concluded that the effects on inflation "tend to be limited to the short term and be strongly mitigated by 2016." The inflation forecasts included in the report support this conclusion. As we understand it, the report suggests that the interest-rate hiking cycle is nearing an end. We believe that the COPOM will implement a final rate hike in April.

Long-Term Interest Rate Rises to 6%

The National Monetary Council raised the Long-Term Interest Rate (TJLP) by 0.50 pp, which parameterizes the majority of BNDES loans. The hike – the second this year – is part of a set of economic adjustments proposed by the government’s new economic team.

IPCA-15 Inflation Reaches 7.9% in the Last 12 Months

Inflation measured by the IPCA-15 stood at 1.24% in March, in line with market expectations. The result was substantially higher than in March of last year (0.73%), bringing the inflation accumulated over the last 12 months to 7.9%. Regulated prices continued to put pressure on inflation, reflecting the realignment of tariffs (electricity, gasoline, urban bus fares) early this year. Over the last 12 months, regulated price inflation reached 11.5%.

Worse-than-Expected Fiscal Result

The consolidated public sector registered a worse-than-expected primary deficit of BRL 2.3 billion in February. The negative surprise was concentrated in the central government, which showed a deficit of BRL 6.7 billion. Federal revenue continued to fall as a result of weak economic activity. Federal spending is also on a downtrend, but deeper spending cuts are necessary for the primary surplus to reach levels close to the target stipulated for this year.

Current Account Deficit Recedes in February

The balance of payments in February showed a lower-than-expected current account deficit, with a decline in both the service and income deficit. Over the last 12 months, the current account deficit has dropped to USD 89.8 billion (from USD 90.4 billion in January), but has remained stable as a percentage of GDP (4.2%). In the capital account, foreign direct investment was lower than expected, at USD 60 billion in the last 12 months (or 2.8% of GDP).

Government’s Approval Rating Fell Again Amid Country-Wide Public Protests

Millions of people gathered in various Brazilian cities to protest against the government. According to a Datafolha survey, the government's approval rating dropped to 13% in March, from 23% in February. President Dilma Rousseff's rejection rate rose from 44% to 62%. Soon after a confrontation with the PMDB party, Education Minister Cid Gomes (PROS) resigned from his post.

Strong BRL Depreciation; BCB Ends Its FX Swap Program

The exchange rate reached 3.20 reais per dolar at the end of March – an increase of 11.5% over the previous month. The Brazilian Central Bank announced that, starting in April, it will no longer offer FX swap contracts, but will continue to renew the existing contracts. The Ibovespa fell 0.6% in reais and   10.9% in dollars. The country risk measured by the 5-year CDS increased 41 bps, to 284 bps, reaching 306 during the month.

Upcoming Events

The progress of the fiscal adjustment bills in Congress will be a highlight, particularly provisional measures 664 and 665, relating to changes in unemployment insurance, salary bonuses and survivor pensions. The next COPOM meeting is scheduled for April 29, when we expect a final monetary rate hike.



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