Itaú BBA - Political uncertainty returns

Brazil Review

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Political uncertainty returns

diciembre 1, 2015

The government had some victories, but again it faces an uncertain environment in Congress

The Brazilian Economy in November 2015

The government had some victories, but again it faces an uncertain environment in Congress. The adjustment in the external accounts continues, and foreign direct investment already fully covers the current account deficit. Public accounts continue to post a deficit. The economy is still struggling, with rising unemployment and inflation. GDP posted a significant decline again in the third quarter. The central bank maintained the interest rate unchanged at its latest meeting, but two directors voted for a rate hike.

The government has had some victories, such as the approval of presidential vetoes...

Congress upheld 12 of the 14 presidential vetoes that were submitted by the government. Among those approved is the veto that removed the adjustment of up to 78% for judiciary officials and the veto that prevented the extension of the minimum-wage correction policy to benefits paid to retirees and pensioners. The government estimates that if these vetoes had not been approved by Congress, it would have created an additional expense of around BRL 50 billion in the public accounts between 2015 and 2019. In addition, the Senate approved a provisional measure that transfers the hydrological risk of power generation to the end-user, which was important for the success of the auction of 29 hydroelectric power plants. The government managed to raise BRL 17 billion from the auction.

... but it once again faces a more uncertain environment in Congress.

The government must approve the change in the fiscal target for 2015 and for the 2016 budget. In addition, it is working to get the capital repatriation project approved in the Senate (it was already approved by the Lower House). However, the environment is clouded by uncertainty, especially after the arrest of Senator Delcídio Amaral, the government leader in the Senate, and the case against the Speaker of the House, Eduardo Cunha, in the Ethics Committee.

Direct investment in the country fully covers the current account deficit for the year

The current account deficit in October amounted to USD 4.2 billion. Year to date, the deficit fell to USD 53.5 billion (from USD 83.4 billion last year), and it is fully covered by foreign direct investment in the country, which also declined, but less steeply (from USD 81.1 billion to USD 54.9 billion). Thus, the external financing is less dependent on portfolio flows, which are typically more volatile.

Government posts a new deficit in October              

The consolidated government posted a primary deficit of BRL 12.3 billion in October. The main contribution to this deficit was an expense of BRL 10 billion, which corresponds to the year-end bonus salary for retirees, a payment that had been postponed in previous months. The result is weak for the month, as October is a seasonally favorable month.

Unemployment remains high 

According to the “PNAD Contínua” survey by IBGE, the national unemployment rate reached 8.9% in the third quarter of 2015, higher than the level posted in the same period last year (6.8%). The increase is in line with data from the Monthly Employment Survey (PME), which only measures large metropolitan regions. Starting in March 2016, the IBGE will replace PME unemployment data by data from the "PNAD Contínua," covering the national territory.

GDP contracts 1.7% in the third quarter, seasonally adjusted

The shortfall was worse than our estimate of -1.0%. The major negative surprise on the demand side was from investment, which fell 4.0% quarter over quarter. On the supply side, the Service sector underperformed the most, falling 1.0%. Year over year, GDP fell 4.5%, and the statistical carry-over in 2015 is a contraction of 3.5%.

IPCA-15 reaches 10.3% in 12 months

The IPCA-15 rose 0.85% in November, in line with the median of market expectations and slightly below our estimate. Thus, inflation increased to 10.3% in 12 months, the highest level since November 2003. The largest upward contribution during the month came from transportation, food and housing. The individual highlight was fuels, up 5.9% and contributing 0.30 pp to monthly inflation.

The central bank maintains the Selic rate unchanged, at 14.25% in a split decision 

The Monetary Policy Committee of the Brazilian Central Bank (Copom) maintained the Selic rate at 14.25%. Although the decision was in line with expectations, there was disagreement within the committee. Two (out of eight) members of the board voted for a hike of 0.50 pp in the Selic rate, to 14.75%. The Copom has been signaling that it will adopt the necessary measures to bring inflation to the target center (4.5%) by the end of 2017. Despite the recent currency appreciation, political and fiscal uncertainties continue to pressure inflation expectations and bring risk to the monetary policy. However, activity remains very weak, which helps contain the second-order effects of FX depreciation and regulated price adjustments.

Market worsens again at the end of the month

With increased political uncertainty, the Brazilian real depreciated 0.3% during the month, closing at 3.87 reais per dollar. Also, the country risk measured by the five-year CDS rose 5 bps, ending the month at 445 bps. The Ibovespa declined 1.6% in reais during the month, and it fell by 1.4% in dollars terms.

Upcoming events

The Copom's minutes will be released on December 3, and these will reveal more details about the risk of a possible rate hike. In congressional voting, the highlight will be the change in the 2015 budget target and the approval of the 2016 budget. Additionally, the government is trying to push through a vote on the capital repatriation project in the Senate.



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