Itaú BBA - Waiting for the elections

Brazil Review

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Waiting for the elections

octubre 1, 2014

Waiting for the elections

The Brazilian economy in September 2014

Attention is focused on the elections next Sunday. Industrial production and retail sales remained weak, while the unemployment rate increased but remained close to its historically low levels. Inflation exceeded expectations and reached 6.6%. In its quarterly report, the Brazilian Central Bank emphasized the convergence of inflation toward the target, but the exchange rate is a risk. Foreign direct investment was a positive surprise. The public sector posted a primary deficit in August. The real depreciated during the month.

Elections on Sunday: poll shows Rousseff with 40%, Marina, 25%, and Aécio, 20%

Attention is focused on the elections next Sunday. The latest Datafolha showed Dilma with 40%, Marina Silva with 25% and Aécio with 20%. In the runoff simulation, Rousseff has 49% of votes, while Marina has 41%. In another scenario, Rousseff would get 50% and Aécio Neves, 41%. The elections will also be for governor, senator, federal and state congressman.

Industrial production rises in July, but level remains low

Industrial production rose 0.7% in July, interrupting a sequence of five declines over the past months. Despite the improvement, growth recovery has been moderate, failing to offset the drop of 1.4% posted in June. Industrial production remains below the average for 2012. Looking forward, the indicators released and statistical carry-over suggest stagnation in the third quarter. For example, the production of vehicles reported by Anfavea showed some growth  in August, but remains well below the level posted in 2013 (drop of 18% year-to-date). Despite the lower production, inventories in the sector remain at historically high levels.

Retail sales below expectations

Core retail sales fell by 1.1% in July, disappointing our expectations and the market consensus. Broad retail sales (including vehicles and construction materials) posted an expected result, with an increase that failed to offset the decline of the previous month.

Unemployment rate increases 0.4 pp from April to August

The IBGE again disclosed its Monthly Employment Survey (PME) data for all six metropolitan areas, which last occurred in April. Between April and August, unemployment increased to 5.0%, from 4.6%, with our seasonal adjustment. Still, the unemployment rate remains close to its lowest level since 2002. The real wage bill continues to slow down due to weak growth of the working population.

IPCA-15 for September came in higher than expected

The IPCA-15 index rose 0.39% in September, above our forecast (0.31%) and the upper level of market expectations of 0.37% (median of 0.35%). Thus, the 12-month-rolling rate advanced to 6.62% from 6.49% in August. The food, transport and communications components posted higher-than-expected rates, which explains the deviation from our forecast.

Copom emphasizes convergence of inflation, but exchange rate is a risk

The Monetary Policy Committee of the Brazilian Central Bank (Copom) kept the Selic rate at 11.00% per year, in line with expectations. In its Inflation Report for the third quarter, the Copom repeated that “if monetary conditions are maintained – that is, taking into account strategy that does not contemplate reduction in the monetary policy instrument – inflation tends toward a path converging to the target in the final quarters of the forecast horizon.” The forecasts contained in the Inflation Report support this analysis, but consider a more appreciated exchange rate than the levels currently observed in the market. The depreciation of the exchange rate now underway may require additional tightening of monetary policy.

Foreign direct investment surprises in August

The flow of foreign direct investment (FDI) amounted to USD 6.8 billion in August, above our estimates (USD 4.3 billion) and the market consensus (USD 4.4 billion). The 12-month-accumulated FDI reached USD 67 billion, growing to 3% of GDP from 2.8% of GDP. The current-account deficit, on the other hand, stood at USD 5.5 billion in the month, in line with estimates. This result represents a small improvement over the USD 6 billion deficit posted in July and was in line with the USD 5.5 billion posted in August 2013. Accumulated over twelve months, the deficit remained stable at USD 78.3 billion or 3.5% of GDP.

The public sector posted a primary deficit in August.

The public sector posted a primary deficit of BRL 14.5 billion in August, despite having received revenues of BRL 7.1 billion from Refis and BRL 5.4 billion in dividends paid by state-owned banks. The conventional primary surplus accumulated over 12 months decreased from 1.2% of GDP in July to 0.9% of GDP in August, while our estimate of the recurring primary result showed a decrease from 0.3% to -0.1%, moving into negative territory for the first time since the beginning of the series (2002).

Sharp depreciation of the real

The exchange rate ended the month of September at 2.45 reais per dollar, a depreciation of 9.4%. The country risk as measured by the 5-year CDS rose 49 bps to 176 bps. The Ibovespa index dropped by 11.7% in reais and 19.3% in dollars.

Upcoming events

Candidates for president and governor who succeed in gaining over 50% of valid votes (excluding blank and null votes) are elected in the first round. Otherwise, the top two will compete in the runoff, scheduled for October 26.

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