Itaú BBA - Truckers’ strike on the spotlight

Brazil Scenario Review

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Truckers’ strike on the spotlight

junio 1, 2018

The government approved several measures to end the truck driver’s strike, with negative fiscal impact

The Brazilian economy in May 2018

The government approved several measures to end the truck driver’s strike, with negative fiscal impact. GDP advanced 0.4% in 1Q18, extending a gradual recovery. The Monetary Policy Committee kept the benchmark Selic interest rate at 6.5%. Unemployment reached 12.9% in April. IPCA-15 rose 0.14% in May, below the bottom of market expectations. Polls show a large percentage of blank/null votes in this year’s elections.

Government announces several measures to end truck driver’s strike

Diesel prices will be cut by 0.46 BRL / liter, with a BRL 13.5 billion fiscal cost until year-end. Part of this reduction will be done by cutting taxes worth 0.16 BRL / liter (0.05 through CIDE and 0.11 through PIS/Cofins), with a fiscal cost of BRL 4 billion until year-end. The remaining 0.30 BRL / liter will be achieved through a “temporary subsidy program” from the government to Petrobras and other suppliers, including importers. This program will have a fiscal cost of BRL 9.5 billion until year-end. The government also announced compensation measures to reduce the negative fiscal impact, such as the reversal of payroll tax breaks for some industries, the reduction in the rate applied under Reintegra (tax incentive program for exporters), and discretionary spending cuts. Thus, the net fiscal impact in 2018 will be negative by about 6 billion reais.

GDP advances 0.4% in 1Q18, extending gradual recovery

GDP expanded 0.4% qoq/sa in 1Q18 and 1.2% yoy, slightly above our estimate and the median of market expectations (both at 0.3% qoq/sa). The breakdown shows a slightly better picture for domestic demand than the headline result suggested. Household spending and fixed capital investments advanced 0.5% and 0.6% at the margin, respectively. We forecast 2.0% growth in 2018, contemplating monetary policy, corporate balance sheets, the external background and uncertainties regarding the evolution of reforms. We have not yet incorporated the eventual impact of cargo transportation stoppages, which may have effects in the short term (due to halted production and supply chains) and in the second half (due to a lasting impact on confidence).

Copom maintains Selic rate at 6.5%

In its latest meeting, the Central Bank’s Monetary Policy Committee (Copom) decided to end the easing cycle, keeping the Selic rate unchanged at 6.5% p.a. (we had expected a final 25bp-cut). In the minutes, the committee signaled that it would be adequate to maintain the rate unchanged at 6.5% p.a. in upcoming meetings, given the current balance of risks and inflation forecasts at comfortable levels. The Copom pointed out that recent FX depreciation will pass on to inflation to an extent that depends on many factors, such as the degree of slack in the economy and how anchored inflation expectations are. Hence, the next decisions will contemplate the behavior of many measures of FX pass-through, and whether there is need to implement monetary policy actions to fight the secondary effects of the depreciation. In our baseline scenario, the Selic will remain stable at 6.5% until year-end, but the monetary policy stance will still depend on FX dynamics and, especially, its impact on inflation readings and inflation expectations, particularly for 2019.

Unemployment reaches 12.9% in April

According to the national household survey (PNAD Contínua - IBGE), Brazil’s nation-wide unemployment rate receded to 12.9% in the quarter ended in April from 13.1% in the quarter ended in March. Using our seasonal adjustment, unemployment fell to 12.3% from 12.5%, driven by the decline in the participation rate and the increase in informal employment. The real wage bill shrank 0.3% on a seasonally-adjusted quarterly basis, but the gain in year-over-year terms picked up to 2.5% from 1.8%. The labor market continues to advance slowly, reinforcing one of the factors behind our decision to reduce our forecast for GDP growth in 2018 to 2.0% from 3.0%.

CAGED: 116,000 formal jobs created in April

According to the Ministry of Labor’s CAGED registry, 116,000 formal jobs were created in April, slightly above our forecast (108,000). Seasonally-adjusted figures point to 21,000 positions opened during the month, pushing the quarterly moving average down to 21,000 from 25,000. The decline has been observed since the beginning of the year and helps to explain why economic growth has been weaker than anticipated.

IPCA-15 rises 0.14% in May, below the bottom of market expectations

The mid-month consumer price index IPCA-15 rose 0.14% in May, below our estimate and the lowest of market expectations (0.20%). The index increased 0.21% in April and 0.24% in May 2017. Year-to-date inflation reached 1.23%, while the year-over-year change slid to 2.70% from 2.80% in April. The truckers’ strike will pressure inflation in the second half of May, but this effect will likely be temporary and normalized in June and July. Our 2018 inflation forecast remains at 3.7%.

Consolidated public sector posted a primary budget surplus in April

The consolidated public sector posted a primary surplus of 2.9 billion reais in April, below our forecast (6.5 billion) and the median of market estimates (7.1 billion). Accumulated over 12 months, the consolidated primary deficit deteriorated to 1.8% from 1.6% of GDP. According to the National Treasury, the central government posted a surplus of 7.2 billion reais (compared to our expectation of 5.5 billion). The result included an anticipation of a payment of 11 billion reais in judicial deposits (the so-called "precatórios"), which last year occurred in June. Regional governments and state-owned companies posted a deficit of 2.5 billion reais and a balanced result, compared to our expectation of a 0.5 billion surplus and a 0.2 billion deficit, respectively.

Large percentage of blank/null and undecided votes in CNT/MDA poll

The CNT/MDA poll on presidential voting intentions, carried out on May 9-12, showed that none of the main candidates advanced after Joaquim Barbosa (PSL) left the race. In the scenario without Lula (PT), the main candidates’ voting intentions declined, and the percentage of blank/null and undecided votes (46%) increased when compared to recent polls done by other institutes. Compared with the previous CNT/MDA poll (March), the percentage of blank/null and undecided votes also increased. In the scenario with Lula, the former president obtained 32% of voting intentions. In a third scenario with only five candidates, Bolsonaro (PSL) reached 20%, Marina Silva (REDE) followed with 15%, Ciro Gomes (PDT) with 11%, Geraldo Alckmin (PSDB) with 8% and Fernando Haddad (PT) with 4%. The percentage of blank/null and undecided votes stood at 42%.

Ibope poll in São Paulo shows increase in voting intentions for Jair Bolsonaro (PSL)

In the scenario without Lula, Bolsonaro’s voting intentions rose to 19% from 16% a month earlier, while Geraldo Alckmin’s remained stable at 15%. Marina Silva was also stable at 11%, while Ciro Gomes increased to 7% from 4%. In the scenario with Lula, the former President leads with 23% of voting intentions, up from 20% in April.

Financial assets 

In May, the Ibovespa dropped 17% in dollars and 10.9% in local currency. Country risk measured by the CDS increased and ended the month at 226 bps. The exchange rate weakened to 3.74 reais per dollar.

What’s next

Election news will be closely monitored. The most macroeconomic event will be the Central Bank’s interest rate decision, on June 20.


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