Itaú BBA - Market improves, economy recedes

Brazil Review

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Market improves, economy recedes

mayo 4, 2015

Markets improved with the perception that adjustments are moving forward.

The Brazilian Economy in April 2015

Markets improved with the perception that adjustments are moving forward. The downturn in the economy affected more sectors, reaching the service sector. The labor market weakened further. Under pressure from regulated prices, inflation exceeded 8%. The Brazilian Central Bank hiked the monetary policy rate to 13.25%. Public spending remained contained, but revenues have decelerated. The government restored the PIS/Cofins on financial income and initiated studies on taking Caixa Seguridade public. The current-account deficit continued to recede. An opinion poll confirmed a drop in government approval. Vice President Michel Temer was put in charge of the government’s political coordination.

Markets improve with adjustments moving forward

The exchange rate reached 2.99 reais per dollar by the end of April, a 6.7% appreciation over the previous month. The Ibovespa also appreciated, both in reais (9.9%), and in dollars (17.8%). The country risk measured by the 5-year CDS fell by 49 bps, to 234 bps.

Downturn in the economy spreads... 

In February, industrial production fell by 0.9%. All major categories declined, especially capital goods, which dropped 4.1%. Broad retail sales also declined, by 1.1%. Seven out of the ten analyzed sectors posted declines. Sales remain at a low level compared to the past few months.

...reaching the service sector

In February, the services sector’s gross revenue expanded by 1.8% yoy in nominal terms (-4.7% in real terms), the lowest result since 2012, when the series started. Out of the five segments considered, only two, information and communication, are growing.

The labor market weakened further

In March, there was a net destruction of 49 thousand jobs according to CAGED data, seasonally adjusted. Over the past twelve months, 250 thousand jobs were destroyed, net. According to IBGE, the unemployment rate of the six main metropolitan areas increased to 5.7% in March, the highest rate since June last year, according to our seasonal adjustment. The participation rate has stopped falling, which contributes to the increase in the unemployment rate. The slowdown in the labor market is also visible in wages, which are 3% lower than last year, adjusted for inflation.

Inflation: above 8%, pressured by regulated prices

The IPCA-15 posted a variation of 1.07% in April. The largest upward contributions in the month came from housing – especially electricity – and food. With this result, the 12-month rate of IPCA-15 rose to 8.2%, from 7.9% in March. A year ago, the rate was 6.2%. The core measures of the IPCA-15 rose slightly, reaching an average of 7.3% (7.0% in March).

Brazilian Central Bank hikes monetary rate to 13.25%

The Copom once again hiked the Selic rate by 0.50 pp to 13.25% per year. The continuing high level of inflation probably justified the decision to maintain the hiking pace, despite the weak economic activity. The statement accompanying the decision was short and similar to the previous ones.

Fiscal result shows spending cuts, but also deceleration in revenues

The public sector posted a primary surplus of BRL 239 million in March. There were significant spending cuts, showing commitment to the fiscal adjustment. The problem is that tax collection is also declining, due to the slowdown in economic activity. Over 12 months, the primary result fell from -0.6% of GDP in February to -0.7% of GDP in March.

Government increases PIS/Cofins on financial income; studies to take Caixa Seguridade public start

The government announced the reinstatement of the PIS/Cofins tax on corporations’ financial income. According to the federal revenue office, the measure will lead to an increase in tax revenues of BRL 2.7 billion this year. In addition, the government initiated studies to take Caixa Seguridade, the insurance unit of Caixa Economica Federal, public.

Current-account deficit continues to decline

The current-account deficit in March added up to USD 5.7 billion. The downward trend persists, as the annualized three-month average declined from USD 98 billion in February to USD 89 billion in March, after seasonal adjustment. In the capital account, direct investments, portfolio investments and other net investments have been sufficient to cover the current-account deficit, ensuring a positive balance of payments. These figures already reflect the new external accounts methodology initiated this month by the central bank.

CNI/IBOPE poll shows decline in government approval 

According to a CNI/IBOPE poll, government approval dropped to 12%, compared with 40% in December. The poll was conducted between March 21 and 25 and released on April 1. The result is similar to the Datafolha poll conducted on March 16 and 17, which showed an approval rate of 13%.

Michel Temer in charge of political coordination

Vice President Michel Temer, of PMDB, was put in charge of the government’s political articulation. Temer replaced Pepe Vargas, of PT, who assumed charge of the Secretariat of Human Rights. In addition, Henrique Eduardo Alves, also of PMDB, was appointed Minister of Tourism, replacing Vinicius Lages.

Upcoming Events

Fiscal adjustment bills in Congress will be the highlight, in particular provisional measures 664 and 665, concerning changes in unemployment insurance, wage bonuses and pension in case of death. The deadline for voting on these measures is June 1.



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