Itaú BBA - Lower House approves impeachment

Brazil Review

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Lower House approves impeachment

mayo 2, 2016

The Lower House voted to approve the impeachment of President Dilma Rousseff. The motion now advances in the Senate.

The Brazilian economy in April 2016

Brazil’s Lower House has approved the impeachment motion, which now advances in the Senate. Meanwhile, Vice-President Michel Temer is already working in what could be the next government. The economy remains in a recession, and the labor market continues to deteriorate. The central bank held interest rates at 14.25%, but we expect rate cuts in the second half of the year as inflation expectations show further signs of retreating.  Market sentiment has improved, giving the central bank an opportunity to reduce its stock of FX swaps. Worse-than-expected primary deficit in March reinforces that the fiscal outlook remains challenging.

Lower House votes for impeachment, and the process moves to the Senate...

The Lower House voted to approve the impeachment of President Dilma Rousseff, with 366 votes in favor, 135 against and 7 abstentions. The motion now advances in the Senate. The Senate is likely to decide whether impeachment is admissible on May 11, according to Senator Raimundo Lira, chairman of the Senate’s special commission. If approved (by a simple majority) the president will step down for up to 180 days until the Senate takes a final vote.

... and the Vice-President is already working on what could be the next government. 

As the impeachment motion moves through Congress, Vice-President Michel Temer and his party, the PMDB, are building what might be the next administration. According to the media, one of their priorities is selecting the new economic team. The PSDB, the largest party opposing President Dilma Rousseff, has indicated it is likely to take part in a future Temer administration.  

The economy is still in a recession...

The central bank’s monthly economic activity indicator (IBC-Br) retreated 0.3% in February on a further drop in industrial production. This result reinforces forecasts that first-quarter GDP is likely to shrink. Retail sales were positive in February, but coincident indicators suggest a March reversal.

... and the labor market continues to deteriorate

The nation-wide unemployment rate rose to 10.9% in January, a 3 pp increase compared with the previous month. According to the Ministry of Employment, January saw a net loss of 118.8 thousand formal jobs throughout the economy.  

Inflation continues to decline

The IPCA-15 registered a 0.51% increase in April.  This means the 12-month rate has now fallen to 9.34%, after hitting 9.95% the previous month. Service inflation and core inflation are showing additional signs of slowing down. The market also expects inflation to decelerate. We expect this trend to continue because of the prolonged recession, the end of the relative price adjustment process and the likelihood of greater exchange rate stability.

The central bank held the interest rate at current level; we expect to see rate cuts in the second half of the year

The central bank held the Selic benchmark rate of interest stable, at 14.25%.  The statement accompanying the decision indicated that a brighter outlook for inflation is still insufficient to justify a rate cut in the near future. However, we believe actual and projected inflation measures will continue to gradually decline, creating an opportunity to cut rates in the second half.

CMN maintained constant the TJLP 

The National Monetary Committee (CMN) held constant the Long-Term Interest Rate (TJLP), which is used as a parameter for most BNDES loans, at 7.50% p.a. The decision came after a cycle of five consecutive hikes that began last year, totaling 2.5 pp.

Central bank accelerated the reduction of FX swaps

In April, Brazilian markets were driven by factors at home and abroad that allowed the central bank to accelerate efforts to reduce its stock of FX swaps.  Because the central bank did not roll over existing swaps or issue reverse swaps throughout the month, stocks fell from USD 102 billion at the beginning of March to USD 69 billion at the end of April.

The fiscal accounts continue to deteriorate

On a consolidated basis, the government recorded a primary deficit of BRL 10.6 billion in March, which was worse than expected. The surprise was due to worsening results for state and municipal governments, which recorded a deficit of BRL 900 million. Over 12 months, the consolidated government primary deficit was 2.3% of GDP, and the nominal deficit was 9.7% of GDP.  Public debt represents 67.3% of GDP.

Markets continued to improve

Brazilian assets continued to make gains in April.  The exchange rate improved 3.0%, ending the month at 3.45 BRL per dollar. The Ibovespa gained 7.7% in BRL and 11.1% in USD, while country risk, measured by the five-year sovereign CDS, fell 26 bps and ended the month at 340 bps.

Upcoming events

All eyes will be on President Rousseff’s impeachment process, which is now being debated by the Senate.  Additionally, the minutes from the latest Copom meeting will be released on May 5, shedding further light on the next steps in monetary policy. 



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