Itaú BBA - Impeachment Approved, Temer Sworn in as President

Brazil Review

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Impeachment Approved, Temer Sworn in as President

septiembre 1, 2016

The Senate voted in favor of impeachment, and Temer has been sworn in as Brazil’s president. 

The Brazilian economy in August 2016

The Senate voted in favor of impeachment, and Temer has been sworn in as Brazil’s president.  Investment has shown signs of recovery in the second half of 2016, but unemployment continues to rise. The Central Bank held interest rates at 14.25% but indicated that its next steps will depend on how the data evolve. Food prices slowed but continue to pressure inflation. The government submitted its budget to Congress, detailing the revenues and expenditures needed to achieve the primary deficit forecast for 2017. The Lower House continues to debate the constitutional amendment that would create a public-spending cap. The current account adjustment slowed, while the CB continued its interventions in the currency market.

Senate approves impeachment, Temer is sworn in as president

The Senate concluded the impeachment process against former president Dilma Rousseff, resulting in her permanent removal from office but allowing her to retain her political rights. Sixty one senators voted for impeachment and 20 against. Interim President Michel Temer (PMDB-SP) has been sworn in as the permanent President of the Republic until the 2018 elections. Temer has previously been President of the Lower House, a federal lawmaker, Secretary of Public Safety and Attorney General for the State of São Paulo. In a nationwide TV address, Temer said his government will focus on administrative efficiency, a return to growth, job creation, legal security, enhanced social programs and fostering peace in Brazil.

Investment grows for the first time in 10 quarters...

GDP slipped again in the second quarter, shrinking 0.6% in seasonally adjusted terms, in line with expectations. On the demand side, family consumption fell (-0.7%), but investment showed signs of recovery after 10 consecutive negative quarters, edging up 0.4%. On the supply side, the downward trend in figures from industry was interrupted by a 0.2% increase during the second quarter, while the Service and Agriculture sectors shrank 0.8% and 0.2%, respectively. Compared to a year ago, GDP fell 3.8%. 

... but unemployment continues to rise

In July, there was a net loss of 95 thousand formal jobs (91 thousand if we strip out seasonal effects), in line with forecasts. The moving three-month average improved, from -128 thousand to -103 thousand, but it still indicates ongoing deterioration in the job market. Excluding seasonal effects, the rate of unemployment rose to 11.3% during the quarter ending in July, up from 11.1% the previous month.

Copom holds interest rates at 14.25% but signals that next steps will depend on data

The Central Bank’s Monetary Policy Committee (Copom) voted unanimously to hold the Selic benchmark rate stable, at 14.25% per annum. The Copom changed its statement, removing the phrase “there is no room for monetary policy easing.” The document listed a number of conditions on which monetary easing will depend: limited persistence of food-price shocks, an appropriate speed of disinflation among those IPCA components that are most sensitive to monetary policy and activity, and less uncertainty over the implementation of fiscal adjustments. The changes in the Copom statement suggest its next steps will depend on how the data and events unfold.

Food-price increases slow but continue to pressure inflation

The August IPCA-15 rose 0.45%, reflecting expectations. The 12-month rate was relatively stable, at 8.9%.  Although food prices rose less than the previous month, they continue to put pressure on inflation. We believe that food price pressure is likely to dissipate in the coming months.

Government sends budget to Congress

The government presented Congress with its proposed Annual Budget Act for 2017, setting out revenues and expenditures for next year. In order to meet the BRL 139 billion primary deficit forecast for 2017, the government has increased revenue estimates by BRL 49.7 billion (including BRL 18.4 billion in concessions and permits), and it has reduced its expenditure estimate by BRL 5.3 billion, with an overall positive impact of BRL 55.4 billion on the primary result. 

The Lower House continues to debate the constitutional amendment that would create a public-spending cap

The constitutional amendment that sets a cap on increased public spending continues its progress through Congress and is currently in the Lower House’s special committee phase. Rapporteur Darcísio Perondi (PMDB-RS) is required to issue his opinion within a minimum of 10 sessions and a maximum of 40. Lawmakers may propose changes by submitting amendments to the bill during this period. Once it has passed through the special committee, the amendment needs three-fifths of the vote in the Lower House and Senate for approval.

Current account adjustment slows...

In July, the current account deficit was USD 4.1 billion. The cumulative, 12-month deficit slid back to USD 27.9 billion (or 1.6% of GDP), falling less than it has in recent months as activity stabilizes and, to a lesser extent, as the exchange rate appreciates. In the financial account, foreign direct investment (FDI) totaled USD 78 million, a record low resulting from one specific Banking sector transaction (capital outflow registration). The 12-month FDI figure stands at USD 72 billion.

... while the Central Bank continues to intervene in the currency market

The Central Bank (CB) continued its currency-market interventions, offering reverse swaps. During the month, there was a brief increase the in the volume of daily currency-market interventions, from USD 500 million to USD 750 million, but volumes swiftly returned to normal. Based on our calculations, if the current USD 500 million in interventions continues, the CB is likely to exhaust its stock of swaps by the end of December.

Local assets gain value

The Ibovespa rose 1.0% in BRL and by a similar amount in USD, while country risk, as measured by the five-year sovereign CDS, fell 31 bps and ended the month at 260 bps. The BRL remained stable compared with July, ending the month at 3.24 BRL to the dollar.

Upcoming events

The focus will remain on how much headway fiscal reforms make in Congress, particularly the constitutional amendment setting a cap on public-spending growth. The Special Committee rapporteur, Darcísio Perondi (PMDB-RS)is expected to submit his report in September. The government may also send a social security reform bill to Congress. Much attention is also focused on October’s municipal elections. The monetary policy highlight is the Central Bank’s quarterly inflation report; its 2017 inflation forecasts will be significant for the October Copom meeting. 



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