Itaú BBA - Jair Bolsonaro is elected President

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Jair Bolsonaro is elected President

noviembre 1, 2018

Jair Bolsonaro won the presidential election with 55% of the valid votes, while parties usually considered more traditional lost seats in the congress.

The Brazilian economy in October 2018
 

Jair Bolsonaro wins the presidential election with 55% of valid votes. Parties considered more traditional lost seats in Congress. The Central Bank maintained the Selic benchmark interest rate stable at 6.5%. Unemployment declined in September. Retail sales performed strongly, but industrial production continues to slide. CPI (IPCA) accelerated in September and is expected to rise further in October. The consolidated public sector posted a primary budget deficit of BRL 24.6 billion in September.

Jair Bolsonaro is elected President with 55% of valid votes

Last Sunday, Jair Bolsonaro (PSL) became the 38th president of Brazil, to start his term on January 1, 2019. He obtained 55.1% of the valid votes, against 44.9% gained by his opponent, Fernando Haddad (PT).

In the state government elections, NOVO and PSL (Jair Bolsonaro's party), parties currently without governors, obtained important results. NOVO won in Minas Gerais, while PSL won the election in 3 states: Roraima, Rondônia and Santa Catarina. The last time the PSL had a governor elected was in 2002. On the other hand, the parties considered more traditional, such as MDB, PSDB, DEM and PT, lost the most ground compared to 2014. The MDB, for example, shrank from 6 to 3 governors, winning only in Pará, Alagoas and the Federal District.

Traditional parties lose seats in Congress

In the Lower House, PT elected 56 representatives (down from 61 currently), while other left-leaning parties[1] advanced from 63 to 80 seats. PSDB, DEM and MDB lost a significant number of seats (20, 14 and 17, respectively), while PSL elected 52 representatives and became the second largest party in the Lower House. NOVO, a party formed officially after the 2014 elections, took 8 seats. In the Senate, PT lost 3 seats (from 9 to 6), while other left-leaning parties advanced from 9 to 11. The number of Senators from the so-called “Big Center[2]” increased to 34 from 28. MDB went down from 19 to 11 Senators; PSDB receded from 12 to 8; DEM advanced from 4 to 7 Senators, while PSL got 4 seats.

Central Bank keeps the Selic rate stable at 6.5%

The Copom delivered the expected decision, leaving the base rate unchanged at 6.5% pa, in a unanimous call. The statement brings few but relevant changes compared with the previous edition. In particular, whilst keeping the message that monetary stimulus may be gradually withdrawn in case the inflation outlook and/or the balance of risks around it worsen, Copom members concede that risks have become less asymmetric, i.e. with lesser dominance of upside concerns. The authorities present a set of forecasts, in the baseline scenario, with a constant Selic rate at 6.5% pa and the exchange rate at 3.70, that is fully consistent with the targeted path: 4.4% for 2018 (against a 4.5% target), 4.2% for 2019 (vs. 4.25%), and 4.1% for 2020 (vs. 4.0%). Under these circumstances, there is apparently no case for lifting the base rate in the near term, and it should end the year at 6.5% pa. We will learn more about the Copom´s thinking with the release of the meeting minutes on Tuesday, November 6, at 08:00 AM Brazil time.

Unemployment declines in September

Brazil’s nation-wide unemployment rate fell to 11.9% in September from 12.1% in August, printing in line with the median of market estimates and slightly below our call (12.0%). Compared to 3Q17, unemployment receded 0.5 p.p. Using our seasonal adjustment, employment advanced 1.1% qoq in the quarter ended in September and 1.5% yoy. Informal jobs resumed their influence on employment gains. Importantly, the performance of formal jobs surveyed by PNAD has not yet shown the improvement captured by the Ministry of Labor’s CAGED registry in recent months. The labor force grew 0.8% qoq and 0.8% yoy. The participation rate (ratio of the labor force to the working-age population, both seasonally adjusted) went up to 61.7% from 61.6% in the quarter ended in August, printing above its historical average (61.4%). As higher employment offset a higher participation rate, the seasonally-adjusted unemployment rate fell 0.2 p.p. to 12.0% in the quarter ended in September vs. the quarter ended in August.

Nominal wages advanced 1.6% qoq in the quarter ended in September and 5.0% yoy. The average real wage remained stable during the quarter and increased 0.6% yoy. With gains in employment, the real wage bill expanded 0.8% qoq and 2.2% yoy. 

Retail sales perform strongly in August, while industrial production extends its decline

Core retail sales climbed 1.3% mom/sa in August, printing significantly above the median of market expectations (+0.2%) and breaking a string of three consecutive monthly declines. Compared to August 2017, core sales climbed 4.1% (-1.0% in July). Broad retail sales (including vehicles and construction material) increased 4.2% mom/sa, also beating the median of market expectations (+2.4%). Compared to August 2017, broad retail sales grew 6.9% (up from 3% in July). Nine out of 10 broad retail components posted monthly increases in August, with motor vehicles climbing 5.4%. The better-than-expected performance was probably driven by withdrawals from accounts held under PIS/PASEP programs (social contributions by employers). Real revenues from services also performed positively in August, rising 1.2% mom/sa, partially offsetting the 2% slide of the previous month. The stronger reading was influenced by professional and administrative services (+2.2% mom/sa), and the transportation subcomponent (+3.2% mom/sa, recovering some of the 3.9% drop in July). Compared to the year-earlier period, the indicator rose 1.5% (quarterly moving average: +0.5%), significantly above market expectations.

On the other hand, industrial production fell 0.3% mom/sa, disappointing expectations and remaining stagnated at levels seen before the truckers’ stoppages. Falling oil output and its impacts on the production chain are behind most of the slide. Segments unrelated to the oil & gas chain also receded in August (textiles, food, beverages, information technology equipment). The downward trend extended into September, when industrial production tanked 1.8% (-2.0% yoy). The negative reading reflects worsening financial conditions in August and September. 

Consumer price index IPCA accelerates in September and is expected to rise further in October

The IPCA climbed 0.48% in September, in line with our estimate and somewhat above the median of market estimates (0.44%). The mid-month consumer price index IPCA-15 rose 0.58% in October, printing below our estimate (0.66%) and the median of market expectations (0.64%). The biggest deviation from our call was caused by food consumed at home, as the result was lower than other price surveys suggested. The index increased 0.09% in September and 0.34% in October 2017. Year-to-date inflation reached 3.83%, while the year-over-year change accelerated to 4.53% from 4.28% in the previous month. Transportation (0.30 p.p.), food and beverages (0.11 p.p.), and healthcare and personal care (0.08 p.p.) provided the largest upward contributions during the month. Fuels gave a noteworthy contribution of 0.27 p.p. in the transportation group. Our preliminary forecast for the headline IPCA in October is a 0.55% increase driven by food and transportation, pushing the year-over-year rate up to 4.66%.

Consolidated public sector posts a primary deficit of BRL 24.6 billion in September

The consolidated public sector posted a primary deficit of BRL 24.6 billion in September, which slightly disappointed our expectation (-23.0 billion) and market consensus (-22.0 billion). Regional governments had a deficit of BRL 0.8 billion, while state-owned companies had a surplus of BRL 0.5 billion, printing close to our expectations. The main difference vs. our forecast was caused by a greater distortion between the result published by the National Treasury last week (“above the line,” with a deficit of BRL 23.0 billion) and the result published by the Central Bank (“below the line,” with a deficit of BRL 24.2 billion). The consolidated primary deficit accumulated over 12 months widened to 1.3% of GDP in September from 1.2% in August. The latest monthly reading confirms the outlook for a better primary result than the target set for the deficit in 2018.

The public sector’s net debt increased to 52.2% of GDP in September from 51.2% in August, while the general government’s gross debt slid to 77.2% from 77.3%. A favorable fiscal scenario depends strictly on the approval of reforms (such as the pension reform) that would signal a gradual return to primary surpluses that are compatible with structural stabilization in public debt.

Financial assets

In October, the Ibovespa climbed 18.7% in dollars and 10.2% in local currency. Country risk measured by the CDS fell 59 bps and ended the month at 204 bps. The exchange rate appreciated to 3.72 reais per dollar.

What’s next

Some names in the new economic team, as well as new Ministers, will probably be announced in November. Discussions about the possibility of approving reforms (such as the pension reform) will also be closely monitored.



[1] Left wing parties (except PT): PSB, PDT, PCdoB, PSOL, Rede.

[2] Big center: PP, PR, PSD, PRB, SD, Podemos, PTB, Pros, PSC, PPS, Avante, PHS, Patriota, PRB, PV, PMN, PTC, PPL, DC, PRTB.

 



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