Itaú BBA - Political uncertainty affects investment decisions

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Political uncertainty affects investment decisions

junio 29, 2017

Companies are focusing efforts on reducing indebtedness levels.

With information through June 21, 2017

This report summarizes anecdotal information on current economic conditions received from key business contacts, economists, market experts, and other sources outside Itaú. Apart from the “our view” section, it is not a commentary on the views of Itaú’s Macroeconomic Research team.

Contents:

Consumption and Production of Goods and Services
Rising unemployment continues to negatively affect sales, albeit less sharply than during 2015/16. The improvement in consumer purchasing power may provide some support to sales ahead. There are reports of negative impacts on consumption of durable goods arising from the recent surge in political uncertainties.

Investment
Before the uncertainty shock, incipient investment plans were observed in various sectors of the economy. Post-shock, investments are being postponed. The exception is the auto industry, where companies continue to renew their fleets, having gone a long time without doing so.

Labor Market, Production Costs and Prices
Post-shock currency depreciation is considered moderate, with no expectations of pressure on costs. Personnel reduction continues to be the main source of cost-cutting. In most segments, companies are focusing efforts on reducing indebtedness levels.

Commodities
The sector remains detached from the rest of the economy, with strong agricultural harvest growth this year.

Our View
Heightened turbulence in the political scenario will likely delay the reforms, hindering fiscal rebalancing and consequently impacting confidence levels and asset prices. The complexity of the scenario, the uncertainties regarding reforms and a possibly slower pace of interest rate cuts, coupled with higher risk premiums, constitute a challenging scenario and will likely weigh on activity. Thus, we reduced our growth forecast to 0.3% this year and 2.7% in 2018.


Consumption and Production of Goods and Services

According to indications from the consumer sectors, rising unemployment continues to negatively affect sales, both in terms of total volume and product mix (consumers continue to demand cheaper products). However, this negative impact has been more moderate than in 2015/2016.

The improvement in consumer purchasing power, resulting from falling inflation and higher consumer confidence levels, may provide some support to sales ahead, but this trend is not yet observed and there is risk of renewed decline in confidence, due to a cloudier political environment.

In addition, there are reports of negative impacts on the consumption of durable goods following the surge in political uncertainty in the second half of May. Relevant companies in this sector mentioned store traffic 30% below expectations in June.

Investment

Before the recent political uncertainty shock, incipient investment plans were observed in various industry and service sectors of the economy. Post-shock, investments are being postponed.

The current focus is to take advantage of the drop in interest rates to reduce indebtedness. In this sense, the scenario is quite different from that observed in 2015/2016, when interest rates rose amid the recession.

The exception is the auto industry. Companies continue to renew their truck fleets, having gone a long time without doing so. Sales continue to grow, including in the second half of May and in June.

Labor Market, Production Costs and Prices

Post-shock currency depreciation is considered moderate and, therefore, there is no expectation of pressure on costs. Personnel reduction continues to be the main source of cost-cutting.

Falling interest rates generate relief in financial costs, and companies are focusing efforts on reducing indebtedness levels.

Commodities

The sector remains detached from the rest of the economy, with strong agricultural harvest growth this year. There is also a long-term positive outlook for the agricultural sector. Reports that the country has great potential, still untapped, are frequent. Recent technological improvements stand out and pave the way to future expansion.

In the corn segment specifically, prices are already estimated as excessively low, with product supply outpacing current demand.

Our View

Heightened turbulence in the political scenario will likely delays the reforms, hindering fiscal rebalancing and consequently impacting confidence levels and asset prices. The complexity of the scenario, the uncertainties regarding reforms and a slower pace of interest rate cuts constitute a challenging scenario and will likely weigh on activity. Thus, we reduced our growth forecast to 0.3% this year and 2.7% in 2018.


 



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