Itaú BBA - Brazilian Lower House approves the “war-budget”

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Brazilian Lower House approves the “war-budget”

Abril 6, 2020

The bill now heads to the Senate

Talk of the Day 


Last Friday the Lower House approved the so called “war-budget” constitutional amendment. The bill creates a separate budget, with the purpose of expediting fiscal relief measures to companies and workers during the pandemic, while also helping to prevent that emergency expenditure measures undertaken this year do not perpetuate over time. Additionally, the bill gives more instruments for the Central Bank to act in the crisis, such as the authorization to buy and sell government and corporate debt securities (limited to the state of public calamity period). The bill now heads to the Senate. 

Other than that, last Friday the Supreme Court suspended the change in the rule of eligibility to the BPC benefit (minimum income for the elderly and people with disabilities). That change has been approved by congress a week ago and increased the eligibility ceiling of the benefit to ½ of the minimum wage (BRL 523) from January 1st (2021) onwards. Thus, the eligibility ceiling will remain at its current value, at ¼ of the minimum wage (BRL 261). With this decision, the government will avoid spending about BRL 12 billion per year, according to our estimates.

The Datafolha Institute released on Friday a survey on president Bolsonaro's administration regarding the reaction to the coronavirus pandemic. The poll shows that his approval rate remained virtually stable at 33% (from 35% in the previous poll, from March 20), while his rejection rate increased 6 p.p. to 39%. Meanwhile, the Ministry of Health’s approval rate rose strongly to 76% (from 55% in the previous poll), and its rejection rate declined 7 p.p. to 5%. The survey was conducted between April 1 and 3, with 1511 people.

Day Ahead: March’s auto production (Anfavea) data will be released at 11:20 (SP time). This is an important coincident indicator for the industrial production.

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 11,130 confirmed cases (up by 852, from 10,278 yesterday), with 486 confirmed deaths (up by 54, from 432 yesterday).


The government deferred payments on USD bonds under Argentine law until 2021. The Treasury will not pay hard currency interest or coupons this year for these bonds unless it finishes the restructuring of the foreign law debt before (debt service of local law foreign currency bonds totaled USD 8.4 billion this year). The more sizable payments were for Bonar 24 and Bonar 2020 in May. Minister Guzman said, one week ago, that Argentina was running out of international reserves to continue making payments. Bonds under Argentine law do not have cross default with Global bonds (under NY law bonds). The government plans to make an offer to the external debt holders soon but so far has not announced any date. The original self-imposed deadline (March 31) was missed. We expect protracted negotiations as the Argentine proposal will likely be rejected due unconvincing fiscal consolidation efforts, weak growth outlook, and pending negotiations with IMF. Argentina will likely ask creditors a significant debt relief during the next 4 years, in line with the debt technical analysis released recently by the IMF. 


The central bank of Mexico (Banxico) published on Friday the minutes of March 20th extraordinary meeting (originally scheduled for March 26th), when four out of five members voted to cut the policy rate by 50-bp (to reach a rate of 6.50%). The minutes revealed deputy governor Javier Guzman was the member voting for a 25-bp cut, given the challenges surrounding monetary policy exerted by opposite directions of inflation pressures and rising uncertainty (reflected in the currency depreciation). Most board members highlighted that monetary policy stance may not have such an ample margin due to a higher risk premia. Some members argued that it should be taken into account the high level of sensitivity of the currency to lowering the short-term rate. Likewise, one member mentioned that a greater interest rate spread is needed given an environment of foreign exchange instability. In contrast, one board member noted that countries with high interest rates spreads suffered the sharpest currency depreciation, which is evidence against a small relative monetary policy margin. Despite the cautious tone, we expect Banxico to continue easing its monetary policy stance. The widening of output gap and loose monetary policy abroad supports the central bank continue cutting the policy rate. However, the depreciation for the currency may turn the majority of the board reluctant in delivering a more front-loaded easing cycle. We currently expect the policy rate to end this year at 5.5% but risks are tilted towards a lower interest rate. ** Full story here.

Day Ahead: The Statistics Institute (INEGI) will announce January’s gross fixed investment, which we expect to decrease 9.3% YoY (from -3.0% in December). 


Following the social unrest late last year, new car sales were showing signs of normalization by February. However, in March, when mobility restriction were installed in response to COVID-19, a significant plummet in sales was recorded with the outlook only worsening for April as the crisis sets into the Chilean economy. New car sales dropped 36.5% yoy (10.3 drop in February; 10.6% fall in 2019) to 19,177, the lowest amount since early 2010. After adjusting for seasonal factors, car sales slumped 9.8% qoq/saar, with the monthly drop from February to March at a much more striking 28.9% (20.1% was the decline in October, the month of social unrest). Private sentiment near historical lows, a loosening in labor market, and the impact of the recent depreciation on domestic-currency prices for imported vehicles and other consumer goods is in line with our expectation that the Chilean economy contracts this year.

Consumer confidence came in close to historical minimums in March, retreating below the readings in the aftermath of the October social events. The GFK consumer confidence index dropped 14.5pp over twelve months to 27.8 points. All five sub-indexes deteriorated and added a seventh consecutive month in pessimistic territory, with the main drag coming from household goods consumption expectation, which deteriorated 27.7 points over one year, to record 24.7 points. The current economic situation also dropped 18.7 points to 27.6, while the 1-year economic outlook retreated 16.1 points from 48.1 in March 2019. Despite just decreasing only 0.2 points from last year to 23.1 points, the lowest sub-index remains that of the 5-year economic outlook. While activity and sentiment improved following the social events last year, the impact of the global pandemic will lead to an activity contraction this year, a loosening of the labor market and keep consumer confidence depressed ahead.


Total exports contracted in February as coal exports were hampered by falling prices. Total exports contracted 5.2% year over year in February (+11.5% in January; -5.7% in 2019), reflecting the effects of low commodity prices and weak global demand. Coal exports contracted 24.3% (+81.1% in January; 23.9% drop in 2019), while oil exports dropped 1.6% yoy (+5.1% in January; 5.2% fall in 2019). The further drop in oil prices in March would increase the export drag from oil. Containing export decline in the month was the 3.4% coffee rise (-4.0% previously), partly favored by a weaker currency. In the quarter ending in February, exports expanded a mild 1.2%% (8.7% decline in 4Q19), lifted by oil exports (3.6% vs. 12.4% fall in 4Q19), while coal exports moderated its decline to 3.6% yoy (11.1% fall in 4Q19). At the margin, exports increased 34.3% qoq/saar, up from 1.4% in 4Q19, driven by a coal export rebound. Going forward, deteriorating terms-of-trade and slowing global activity means Colombia’s external account imbalances would persist. However, the expected implosion of internal demand along with a weakened currency would lead to some narrowing of the current account deficit from the 4.3% of GDP recorded last year.

The Week Ahead in LatAm


Manufacturing and construction data for the second month of the year will see the light on Tuesday. According to leading indicators, both indexes showed year-over-year drops in February. The industrial index (IPI), published by OJF consulting firm, fell 1.0% from February 2019 (-0.2% mom/sa), while construction activity, according to Grupo construya, fell 5.9% yoy.  


COVID-19 cases in Brazil are set to accelerate during the coming days. Other than the evolution of the surge itself, it will also be important to keep an eye open for additional economic measures that the government and the Congress may take to complement those already announced in recent weeks. See more details here.

On economic activity, retail sales (PMC) (Tue.), service sector revenue survey (PMS) (Wed.), and IBC-Br monthly activity index (likely on Thursday), all related to February, will be released. We expect broad retail sales to advance 0.3% mom/sa, with a positive contribution of the rebound in vehicle sales in February, while the core index is expected to recede 0.3% mom/sa. These estimates may change given that supermarket sales data (ABRAS) have not been released yet (supermarket sales represent around 30% of broad retail sales). Regarding PMS, we forecast a 0.1% mom/sa drop, which may also be revised according to retail sales numbers.  For IBC-Br, we forecast a 0.3% mom/sa increase, and this estimate depends on the retail sales and service sector revenue results. Traffic of heavy vehicles (ABCR), paper cardboard dispatches (ABPO), both without a scheduled date, and Anfavea auto production (today) for March will also come out this week. Given the current scenario, data for March are more relevant than those for February, because they may provide signals on the initial impacts of the coronavirus epidemic on economic activity.

March’s IPCA inflation will be released on Thursday. We forecast a 0.10% monthly increase, leading the 12-month reading to 3.33% (from 4.00% in February). We expect all core inflation measures to remain on a benign path, while food items will likely post the largest upward contribution in the month. Importantly, this reading will already have part of its data collected by non-presential means, such as calls or on the web, due to the coronavirus lockdown.


The March trade balance will be released on Tuesday. Another large trade surplus was registered in February (USD 821 million versus USD 226 million last year). While both exports and imports dropped sharply, the impact from lower fuel prices and weakened consumer goods imports (on the back of a CLP depreciation) outweighed the hampered mining and manufacturing sales. As a result, the rolling 12-month trade balance rose to a USD 4.9 billion surplus, up from the USD 4.2 billion last year. For March, we expect to see clearer effects from the global trade disruption with both imports and exports shrinking significantly. Nevertheless, the sharp drop in fuels and capital goods imports would lead to a USD 1.1 billion surplus in the month (USD 565 million last year). The quick correction of Chile´s external imbalances is a favorable development that could alleviate part of the pressure on the CLP.

Nominal wage growth for February will be released on Tuesday. Nominal wages grew 4.7% YoY in January (4.5% in December), resulting in some moderation of real wage growth, to 1.2% (1.6% previously), amid increasing inflation. The challenging activity outlook will lead to labor market loosening ahead, weakening wages.

On Wednesday, the institute of statistics (INE) releases inflation for March. Inflation increased further in February as tradable inflation accelerated. Annual inflation picked up to 3.9% (3.5% in January), the highest since mid-2016, while core inflation was a still-low 2.7% (up a milder 0.2pp). For March, we expect consumer prices to gain 0.4% from February (0.5% last year), lifted by the food division and the seasonal education rise while lower transportation prices would limit the gain. As a result, annual inflation would remain near the upper bound of the central bank’s tolerance range around the target, at 3.8%. 


On Tuesday, INEGI (the statistics institute) will publish CPI inflation figures corresponding to the full-month of March. We expect headline and core inflation at -0.01% MoM (from 0.39% a year ago) and 0.31% (from 0.34% a year ago). We expect pressure from non-core agro prices, possibly associated to higher demand in a context of uncertainty over the effects of coronavirus outbreak on supply, was more than offset by lower gasoline prices. Assuming our forecast is correct, headline and core CPI would grow 3.29% YoY (from 3.70% in February) and 3.79% (from 3.82%), respectively.  

In the middle of the week, the Statistics Institute (INEGI) will publish January’s industrial production. We estimate industrial production fell by 2.30% year-over-year (from -1.6% in January). We expect a moderation in the growth rate of the manufacturing sector, in line with February’s manufacturing exports soft expansion. In turn we expect some improvement in construction output, associated to better public capital expenditure execution in February.

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