Itaú BBA - Reducing Again the Fiscal Target

Brazil Review

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Reducing Again the Fiscal Target

octubre 30, 2015

The economy continues to struggle, with rising unemployment and inflation.

The Brazilian Economy in October 2015

Another month of negative news on the fiscal situation. The government reduced its budget target once again this year, suffered another credit-rating downgrade and had its 2014 fiscal account unanimously rejected by the Federal Accounts Court (TCU) . The economy continues to struggle, with rising unemployment and inflation. The central bank decided to extend the inflation convergence horizon beyond 2016, while inflation is approaching the 10% mark. Meanwhile, the adjustment in the external accounts continues. In politics, the trial over irregularities in the 2014 elections has resumed, and government approval remains at low levels. Two parties requested to rescind the Lower House speaker’s mandate for breach of decorum.

Government reduces its fiscal target further

The fiscal target for 2015 went from a primary surplus of 0.15% of GDP to a primary deficit of 0.8% of GDP. The government reduced its estimate for net revenues to BRL 58 billion, but it did not propose an additional reduction in spending. The decline in revenues is due to a revision of economic growth forecasts and the recognition that certain extraordinary revenues will not materialize this year, such as those arising from the capital repatriation project and the Caixa Seguridade IPO. Additionally there is more than BRL 50 billion in past spending still left to recognize.

Fitch downgrades Brazil's credit rating

The credit-rating agency Fitch Ratings downgraded Brazil's sovereign debt from BBB to BBB-, with a negative outlook. The country's rating is still a notch above investment grade. Fitch noted the worsening in public debt dynamics, the difficult implementation of fiscal adjustments and the decline in economic activity.

TCU rejects the federal government's fiscal accounts in 2014

The Brazilian Court of Audit (TCU) unanimously rejected the 2014 fiscal accounts. Now the government must present its defense within 45 days. Then the TCU's report will be submitted to the assessment of the Joint Budget Committee and subsequently the National Congress. In addition, the TCU filed a suit to investigate irregularities in the 2015 public accounts.

Labor market continues to deteriorate

In September, there was net destruction of 96 thousand jobs, according to seasonally adjusted CAGED data. The job destruction is evenly spread across sectors. According to IBGE, the unemployment rate reached 7.6% in September, and according to our seasonal adjustment, it increased to 7.5% from 7.4% in August. The deterioration in the labor market is also reflected in wages, as the wage bill decreased 6.1% yoy.

Inflation approaches 10%

The IPCA-15 rose 0.66% in October. With this result, the year-over-year index rate increased to 9.77%. The largest upward contribution in the month came from the groups with the largest weight in the household budget: housing, food and transportation.

Copom extends the inflation convergence horizon

The Monetary Policy Committee of the Brazilian Central Bank (Copom) held the Selic rate at 14.25% at its October meeting. The decision was unanimous and in line with expectations. The Copom amended the statement accompanying the decision, changing the target of inflation convergence from "the end of 2016" to "the relevant monetary policy horizon". Abandonment of explicit mention of a 2016 target supports the perception that the central bank will focus on 2017 inflation. Furthermore, the Copom included a sentence highlighting that it will remain vigilant to achieve this target. We do not interpret this statement as a signal of a future timely interest rate adjustment, unless there are significant changes in the Copom's inflation forecasts for 2017. Thus, we continue to believe that the Selic rate will remain unchanged, at 14.25%, until the end of 2016.

Current account deficit continues to recede

The current account deficit receded again and now stands at USD 79.3 billion (4.2% of GDP) accumulated over 12 months in August, compared with USD 103.6 billion at the end of 2014 (4.4 % of GDP). Direct investment in the country also fell in this period, to USD 71.8 billion (3.8% of GDP), compared with USD 96.9 billion (4.1% of GDP) in 2014.

Government approval remains at low levels

According to the CNT/MDA survey conducted from October 20-24, government approval marginally rose from 7.7% in July to 8.8% this month. The number is significantly lower than the average approval rating of President Dilma's government since 2011, which has been at 32.9%.

TSE resumes trial on the presidential campaign

The Superior Electoral Court (TSE) decided to continue the analysis of alleged irregularities in President Dilma's campaign in the 2014 elections. The next step is the appointment of a new rapporteur.

Two parties request that the Lower House speaker be removed

Two political parties, the PSOL and Rede Sustentabilidade, requested to rescind the mandate of Eduardo Cunha due to alleged breach of decorum. However, the Ethics Committee of the Lower House has not initiated the procedure yet.

After high volatility in September, markets improved in October

The exchange rate appreciated by 2.9% in October, closing the month at 3.86 reais per dollar. The country risk measured by the 5-year CDS fell by 26 bps, ending the month at 441. The Ibovespa rose 1.8% in reais and 4.8% in dollars.

What’s Next?

The Lower House postponed a vote on the capital repatriation bill until the first week of November. The next meeting of the Monetary Policy Committee on interest rates is scheduled for November 25. 


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