Itaú BBA - Dilma Rousseff is reelected, BCB increases the Selic rate

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Dilma Rousseff is reelected, BCB increases the Selic rate

noviembre 3, 2014

In the run-off held on October 26, President Dilma Rousseff, from the PT party, was reelected with 52% of the valid votes

The Brazilian economy in October 2014

President Dilma Rousseff won the election and promised changes for her second term. The Central Bank surprised the market and increased the monetary policy rate. The primary surplus continued to fall. The economy started to grow moderately again, and inflation remained above the upper limit of the target range. The unemployment rate decreased due to a reduction in the workforce. The current account deficit increased to 3.7% of GDP. Non-earmarked new loans declined. Brazilian assets had a volatile month.

President Dilma Rousseff wins the presidential election  

In the run-off held on October 26, President Dilma Rousseff, from the PT party, was reelected with 52% of the valid votes, while Aécio Neves, from the PSDB party, followed with 48% of the votes. Dilma Rousseff led in the North and Northeast, while Aécio led in the South, Southeast and Center-West regions. In the congressional elections, PT, PMDB and PSDB parties maintained the largest representations, but the fragmentation of the legislative power increased. These three parties are also the parties that will govern the largest number of states.

Changes for the second term

In her victory speech, President Dilma said that her "first commitment in the second term is dialogue," and that she intends to "make the important changes that society demands." Commitment to political reform was mentioned as a priority. On the economic team, the president had already said that the Finance Ministry will change hands, but the name of the new minister has not yet been announced.

Central Bank surprises and increases the monetary policy rate

The Monetary Policy Committee of the Brazilian Central Bank (Copom) raised the monetary policy rate (Selic) by 0.25 pp, to 11.25% per year. The decision was split: five members voted for an increase, while three members voted to maintain the Selic rate at 11.00%. According to the post-meeting statement, the Copom saw deterioration in the balance of risks for inflation since the previous meeting, among other factors, due to the intensification of adjustments in relative prices in the economy. We understand that this is a reference to the recent depreciation of the exchange rate and its effect on price dynamics in the economy. We expect the Copom to continue hiking the Selic rate at upcoming meetings.  

Primary surplus continues to fall

The consolidated primary surplus posted a primary deficit of BRL 25.5 billion in September. The 12-month accumulated conventional primary surplus fell to 0.6% from 0.9% of GDP, and our estimate for the recurring primary surplus (excluding atypical revenues and expenditures) fell to -0.5% from -0.1% of GDP.

Economic activity starts moderate recovery

The Itaú Unibanco monthly GDP expanded 1% in August, the second consecutive increase since the drop that occurred in June, impacted by the lower number of working days due to the World Cup. Among the sectors, industrials and core retail grew, while broad retail (including vehicles and construction materials) declined. The August result implies a slightly positive statistical carry-over for 3Q14. In October, business confidence in the industrial sector rose for the first time after nine consecutive declines.

Unemployment rate falls due to a reduction in the workforce

The unemployment rate dropped in September from 5.0% to 4.8% (seasonally adjusted), remaining close to its lowest level since 2002. However, the reduction in unemployment is a result of a shrinking workforce, and it occurred despite the reduction in the employed population. The average real wage also posted a slight decline during the month.

Consumer inflation remains above target

Inflation as measured by the IPCA-15 reached 0.48% in October, slightly below our forecast (0.50%) and the median of market expectations (0.52%). Based on this result, we expect the IPCA to reach 6.75% for the 12 months ending in October. The main upward contribution compared with the previous month came from food and beverages, which grew by 0.69%, following a 0.28% increase in September.

Current account deficit reaches 3.7% of GDP

In September, the current account deficit stood at USD 7.9 billion, accumulating USD 83.5 billion, or 3.7% of GDP, in 12 months. Unlike previous months, the trade balance posted a deficit of USD 940 million. In the capital account, the inflow of foreign direct investment (FDI) surprised again and totaled USD 4.2 billion. Accumulated over 12 months, however, FDI declined from 3% of GDP to 2.9% of GDP (USD 66.5 billion).

Non-earmarked new loans decline

In September, the daily average of non-earmarked new loans declined by 2.1% (in real terms, seasonally adjusted). The performance resulted from a 3.0% decrease in personal loans and a 1.0% drop in corporate loans. As for earmarked credit, the daily average of new loans grew by 2.2%. The default rate of the system dropped from 3.1% to 3.0%. Both the system's interest rate and spread fell 0.1 pp, to 21.0% and 12.7%, respectively.

Brazilian assets have a volatile month

The Brazilian real strengthened 0.3%, closing at 2.44 reais per dollar, but during the month the currency fluctuated between 2.39 and 2.53 reais per dollar. The Ibovespa rose 0.9% in local currency, and 1.2% in US dollars. The 5-year Brazilian CDS fell 24 bps, to 152 bps.

Upcoming events

The upcoming highlights will be the eventual changes signaled by the government for the second term. In particular, market attention is focused on the new composition of the government, especially in the Finance Ministry and the Central Bank, and on guidelines for fiscal policy in 2015. Discussions of political reform are also important.

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