Itaú BBA - Polls highlight election uncertainty

Macro Brazil

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Polls highlight election uncertainty

mayo 2, 2018

The Datafolha poll updated the election scenario in Brazil, which remains undefined

The Brazilian economy in April 2018

The deadline for party affiliation and resignation from government posts for candidates interested in running in the 2018 elections was April 7. The Datafolha poll updated the election scenario in Brazil, which remains undefined. Economic activity indexes disappointed expectations. First-quarter inflation was the lowest on record. The consolidated public sector posted a primary deficit of 25.1 billion reais in March, close to the market consensus.

Datafolha poll updates the election scenario

According to Datafolha, if Lula ran for the presidency, he would get 31% of all votes in the first round, followed by Jair Bolsonaro (15%) and Marina Silva (10%). Geraldo Alckmin is technically tied with Ciro Gomes (margin of error: +/- 2 p.p.), with 6% and 5%, respectively. In a scenario without Lula and featuring Fernando Haddad as the Workers Party candidate, Bolsonaro leads with 17%, followed by Marina (15%) and Joaquim Barbosa (10%). Ciro Gomes would have 9% of all votes and Geraldo Alckmin, 8%, while Álvaro Dias would get 5% and Fernando Haddad, 2%.

Central Bank activity index rises 0.1% in February

The Central Bank’s activity index, IBC-Br, rose 0.1% in February, in a modest advance that reflected weaker readings for industrial production and real service revenues. Compared to February 2017, the indicator climbed 0.7%. The latest figures added downside to our GDP forecast for 2018 (3.0%).

Confidence indicators decline in April

Confidence indicators published by FGV showed negative results in April. Confidence among industrial entrepreneurs fell 0.7% during the month, as the component related to expectations for the future slid 1.3% and the component related to the current situation was virtually flat (-0.1%). Likewise, consumer confidence dropped 2.8%, partly reversing the 5.3% increase seen in March. Confidence indicators in the retail, construction and service sectors also declined in April, all of them dragged down by corrections in the components related to expectations for the future.

Seasonally-adjusted unemployment is flat at 12.5%

According to the national household survey (PNAD Contínua), Brazil’s nation-wide unemployment rate climbed to 13.1% in the quarter ended in March from 12.6% in the quarter ended in February, driven mostly by labor market seasonality. Using our seasonal adjustment, unemployment remained stable at 12.5%, as the decline in the participation rate offset falling employment. The many labor market indicators (PNAD, CAGED, DIEESE/SEADE, surveys) show that the advance in employment and real wages is not firm, affecting the outlook for household spending this year and reinforcing the downside to 2018 GDP growth (our estimate is 3.0% at the moment).

First-quarter inflation is the lowest in the historical series 

The consumer price index IPCA moved 0.09% in March, somewhat below the median of market expectations (0.12%). The year-over-year change decelerated to 2.68% from 2.84% in February.  In 1Q18, the IPCA advanced 0.70% (0.96% in 1Q17), the lowest first-quarter reading in the historical series. Overall, current inflation figures remain low and with good composition. Our preliminary estimate for the IPCA in April is a 0.35% advance that would push the year-over-year rate up to 2.9%. Our inflation forecasts are 3.5% in 2018 and 4.0% in 2019. The main risks to this scenario are still related to domestic politics and the evolution of the international scenario.

Strong trade surplus in 1Q18

The trade surplus reached $6.3 billion in March, slightly below market consensus. The trade balance over 12 months was virtually stable, at $67 billion, but the seasonally-adjusted annualized quarterly moving average expanded to $75 billion from $70 billion, driven by stronger exports in 1Q18. Compared to March 2017, exports increased 9.6% and imports climbed 16.9%. We maintain our expectation of smaller trade results than in 2017 in the next years due to the rebound in economic activity. However, readings for the beginning of 2018 mean some upside to our call due to rising exports.

Primary deficit of 25 billion reais in March

The consolidated public sector posted a primary deficit of 25.1 billion reais in March, close to the market consensus (-24.5 billion). Accumulated over 12 months, the consolidated primary deficit deteriorated to 1.6% of GDP from 1.4%. The central government’s result, as published by the National Treasury last week, was a deficit of 24.8 billion reais. Discretionary expenses increased after being several months at low levels and 10 billion reais in payments in judicial payments (the so-called “precatorios”) were anticipated relative to last year, in which they occurred in May. Regional governments posted a surplus of 0.6 billion reais, while state-owned companies had a deficit of 0.2 billion reais. Despite this weak reading, meeting primary targets in 2018 should be less challenging than in recent years. The public sector’s net debt climbed to 52.3% of GDP in March from 52.0% in February, while the general government’s gross debt expanded to 75.3% of GDP from 75.1%. In 2018, despite still-negative primary results, the upward trend in public debt is set to moderate, reflecting the cyclical rebound in economic activity, historically-low interest rates and BNDES repayments to the National Treasury. 

Financial assets 

In April, the Ibovespa dropped 3.7% in dollars and increased 0.9% in local currency. Country risk measured by the CDS increased and ended the month at 174bps. The exchange rate weakened to 3.48 reais per dollar.

What’s next

Election news will be closely monitored. The main economic event is the Central Bank’s monetary policy decision, on May 16.



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