Itaú BBA - The Lower House weighs impeachment

Brazil Review

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The Lower House weighs impeachment

abril 1, 2016

Impeachment proceedings against President Rousseff have begun.

The Brazilian economy in March 2016

Impeachment proceedings against President Dilma Rousseff have begun in the Lower House. Following a national convention, the PMDB, the largest party in Congress, announced that it is quitting the government coalition, but its cabinet members have not yet resigned from their positions. March saw large street demonstrations. The appointment of former president Lula to the cabinet has been temporarily suspended by the Supreme Court. GDP fell significantly in 2015, and the job market continued to weaken. The central bank held interest rates at 14.25%, but the market is anticipating rate cuts ahead as inflation starts to show signs of declining. The adjustment of external accounts continues to advance rapidly, and the central bank has been reducing its stock of swaps. The public deficit kept deteriorating.

Impeachment process moving through the Lower House

The Lower House’s 65-member special commission that will consider the motion of impeachment has been created; among the deputies on the commission, Rogerio Rosso has been chosen to preside and Jovair Arantes will act as rapporteur. The impeachment process is at the stage where President Dilma Rousseff presents her defense. Subsequently, the rapporteur will submit his opinion on the case, which will then be voted on by the Special Commission. The motion will then move to the floor of the Lower House for a vote, where it will need 342 votes for approval. If the motion passes, the impeachment process will then move on to the Senate.

PMDB leaves the governing coalition, but cabinet members have not yet resigned from their positions

After holding a convention on March 29, the PMDB has decided to pull out of the governing coalition. The PMDB is the largest party in the Lower House and the Senate and holds six top ministerial posts. The party made the decision by acclamation, without a vote count. However, the cabinet members have not yet resigned their positions.

Large protests held throughout the country

March was marked by street protests in Brazil. Anti-government protests were held on March 13 and pro-government demonstrations were held on March 20. According to the Datafolha research institute, the anti-government protest in São Paulo attracted 450,000 people, while counter-demonstrations in São Paulo in support of the government drew 95,000.

Former president Lula is appointed chief of staff, but the supreme court temporarily suspends the appointment

Former president Luis Inácio Lula da Silva was appointed chief of staff for the federal government, but the decision has been suspended temporarily by Brazil’s Supreme Federal Court, which has yet to issue a final decision on the matter. Jacques Wagner stood down as chief of staff and Eva Chiavon has been appointed on an interim basis.

GDP shows significant decline in 2015

GDP fell by 1.4% on a quarterly basis in the fourth quarter of 2015. There was a broad-based contraction in domestic demand and significant 4.9% drop in investment. On the supply side, industrial and services growth slowed, while agriculture grew by 2.9%. Compared with 2014, annual GDP fell by 3.8%.

Job market deterioration continues

According to CAGED figures from the Ministry of Labor, Brazil’s economy suffered a net loss of 105,000 formal jobs in February, or 189,000 jobs in seasonally adjusted figures. Meanwhile, unemployment continues to rise. Based on figures from the Continuous PNAD, which measures national unemployment, the jobless rate rose to 9.5% in January.

The central bank holds Selic benchmark rate stable, but the market anticipates cuts ahead…

As expected, the Central Bank of Brazil’s monetary policy committee (Copom) held the Selic benchmark interest rate steady at 14.25%. Following the pattern seen in previous meetings, this was a split decision, with two members voting to raise interest rates by 0.50 pp. In its quarterly inflation report, the Copom emphasized that the current conditions “do not allow working with the assumption of monetary flexibilization,” but stated that the output gap “is more disinflationary than initially forecasted.” In our view, the report is consistent with our view that the Selic is likely to decline only in the second half of this year.

…as inflation shows sign of slowing

The IPCA-15 came in surprisingly low in March, at 0.43%, below even the lowest market expectations. This means the 12-month rate has now fallen to 9.95%, after hitting 10.84% the previous month. For the most part, the drop in inflation was driven by a drop in regulated prices; home food and service prices rose less than expected. Over the past month, inflation expectations for the next 12 months have declined from 7.05% to 6.50%, according to the Focus survey.

The adjustment of external accounts continues to advance rapidly, and the central bank is reducing its stock of swaps

The accumulated 12-month current account deficit fell once again in February, dropping to USD 46 billion (2.7% of GDP) from USD 52 billion in January, even if the deficit beat expectations (USD 1.9 billion, compared with the consensus figure of USD 0.1 billion). Direct investment in Brazil over the past 12 months amounted to USD 78 billion, well above the current account deficit. In the currency market, the central bank reduced its USD swap-contract rollovers and has announced reverse currency-swap auctions.

Public deficit keeps deteriorating

The government recorded a consolidated primary deficit of BRL 23 billion in February, which was worse than expected. The biggest unwelcome surprise was expenditure, particularly spending on unemployment insurance (BRL 4 billion) and social security (BRL 2.3 billion) and discretionary expenditures (BRL 4 billion). The consolidated government primary deficit for the past 12 months was 2.1% of GDP, while the nominal deficit was 10.8% of GDP. Public debt stands at 67.6% of GDP.

Markets improve during the month

Brazilian assets made significant gains throughout March. The exchange rate improved by 10.6%, ending the month at BRL/USD 3.56. The Ibovespa gained 17.0% in BRL and 30.8% in USD, while country risk, measured by 5-year sovereign CDS, fell by 94 bps, ending the month at 366 bps.

Upcoming events

All eyes will be on the Rousseff impeachment proceedings, currently playing out in the Lower House . Apart from that, the next monetary policy meeting is on April 27.


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