Itaú BBA - Economic Adjustments for 2015

Brazil Review

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Economic Adjustments for 2015

enero 2, 2015

The long-awaited economic adjustment has begun. The National Monetary Council raised the Long-Term Interest Rate (TJLP) by 0.50 pp, to 5.50%

The Brazilian economy in December 2014

The government undertook a set of economic adjustments, which included raising interest rates (Selic, TJLP, PSI) and changing the rules for accessing social benefits. The primary surplus target of BRL 66 billion was reaffirmed, and the government indicated a possible IPO of Caixa Economica Federal. The current account deficit reached 4% of GDP, and the primary fiscal result turned negative. The central bank extended, but reduced, the USD swap program. Inflation measured by the IPCA-15 ended the year at 6.5%. Industrial production remained stable in October, and the level of capacity utilization dropped again. The unemployment rate increased due to a larger workforce. The cabinet for President Rousseff’s second term was announced.

The government announced a set of adjustments 

The long-awaited economic adjustment has begun. The National Monetary Council raised the Long-Term Interest Rate (TJLP) by 0.50 pp, to 5.50%, and increased the interest rate of the Investment Support Program (PSI). The central bank accelerated the hiking pace of the Selic rate and indicated further increases ahead (see below). On the fiscal side, the newly appointed Finance Minister, Joaquim Levy, confirmed the primary surplus target of BRL 66 billion (1.2% of GDP), and executive-secretary Paulo Caffarelli said that there are no plans for new Treasury loans to the BNDES. The government changed the rules for accessing social programs such as unemployment insurance, annual bonus (“abono salarial”) and survivor pensions in order to reduce public spending, and it also indicated a possible IPO of Caixa Economica Federal. New measures, especially in the fiscal camp, are expected over the next months.

Copom will do “whatever is necessary” for a declining inflation trend

The Monetary Policy Committee of the Central Bank of Brazil (Copom) accelerated the hiking pace of the Selic rate to 0.50 pp, bringing the interest rate to 11.75% per year. Despite mentioning in the minutes that it would implement the additional effort “parsimoniously,” in the inflation report released the following week, the Copom stated “it will do whatever is necessary for inflation to enter into a long period of decline next year.” We believe that the Copom’s indications are compatible with our scenario of a 0.50-pp Selic hike in the next meeting, and a final adjustment of 0.25 pp in March, bringing the rate to 12.50%.

Current account deficit reaches 4% of GDP in November

The current account deficit in November totaled USD 9.3 billion, beating expectations. The 12-month accumulated deficit reached 4.0% of GDP. Foreign direct investment (FDI) inflows stood at USD 4.6 billion, maintaining the 12-month total close to 2.9% of GDP. The need for external financing (measured by the difference between the current account deficit and FDI) stands at 1.2% of GDP, the highest since 1998.

Public sector posts a primary deficit in November 

November’s fiscal results surprised negatively, with the public sector registering a primary deficit of BRL 8.1 billion. On top of the already expected delayed payment of judicial claims (BRL 6.1 billion), the expansion of federal discretionary spending was decisive for the month’s negative result. Revenues from the Refis tax-amnesty program (BRL 8.1 billion) prevented an even lower outcome. The 12-month accumulated primary result fell to -0.2% of GDP, and our estimate for the recurrent primary result (one that excludes atypical revenues and expenses) reached -0.7% of GDP.

The central bank extends, but reduces, the swap program

The central bank announced the extension of the FX swap program until March 31, 2015, and will offer USD 100 million per day. The extension of three months is smaller than the previous extensions of the program (six months), and the daily placements are also lower than the previous amount (USD 200 million per day).

IPCA-15 ends 2014 at 6.5%

Inflation measured by the IPCA-15 reached 0.79% in December, slightly above the market median (0.75%) and in line with our forecast (0.80%). Thus, the IPCA-15 ends 2014 at 6.5%, above the 5.8% posted in 2013. The variation is due to the behavior of regulated prices, which increased 5.7%, compared with 1.2% the previous year. Market prices, in turn, posted a lower increase: 6.7% against 7.3% in the previous year.

Stable industrial production in October, low level of capacity utilization

Industrial production was stable in October following the drop in September, thus remaining below the pre-World Cup level. Only six out of a total of 24 activities posted production growth. Business confidence in industry fell by 1.5% in December, according to the Industry Survey by FGV, remaining at an historically low level. Capacity utilization decreased from 82.7% in November to 81.3% in December, seasonally adjusted. This is the lowest level since August 2009.

Unemployment rate rises with an increase in the workforce

The unemployment rate in Brazil reached 4.8% in November, above our expectations and the market's (both at 4.5%). Seasonally adjusted, unemployment rose from 4.7% to 5.2%. The increase is mainly a result of the 0.8% growth in the workforce, which had been falling since 2013. It is not yet clear whether an increase in job searches will become a trend. Employment grew by 0.2% in the month, adjusted for seasonality.

The Brazilian real depreciated, and the Ibovespa fell

The exchange rate ended the month of December at 2.66 reais per dollar, a depreciation of 3.8%. The Ibovespa decreased 8.6% in reais and 11.9% in dollars. The country risk measured by the 5-year CDS rose 44 bps, to 197 bps.

Cabinet for President Rousseff’s second mandate is announced

The government announced the cabinet for President Rousseff’s second term. Among the new names are: Pepe Vargas (PT) for the Institutional Relations Ministry; Miguel Rossetto (PT) for Secretary-General; Eduardo Braga (PMDB) for the Ministry of Mines and Energy; Cid Gomes (Pros) for the Ministry of Education; Gilberto Kassab (PSD) for the Ministry of Cities; Katia Abreu (PMDB) for the Ministry of Agriculture; Aldo Rebelo (PC do B) for the Ministry of Science and Technology; and Ricardo Berzoini (PT) for the Ministry of Communications. The new ministers join the already announced economic team formed by Joaquim Levy (Finance), Nelson Barbosa (Planning) and Armando Monteiro Neto (Development, Industry and Trade).

What’s next?

Attention will remain focused on announcements about changes in fiscal policy and the composition of ministries. The next Copom meeting will take place on January 21. We expect an interest rate hike of 0.50 pp.



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