Itaú BBA - Confidence indicators bounce back in Brazil, but remain at very low levels

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Confidence indicators bounce back in Brazil, but remain at very low levels

Maio 18, 2020

Despite the rebound, the confidence level is still low

Talk of the Day


FGV has published preliminary confidence indicators for May, with the survey being conducted between May 1st and 13th (the original publication calendar remains as scheduled, with the final confidence releases at the end of the month). The report shows a slight rebound in the overall confidence level in the month, with the aggregate business confidence increasing 7.7 p.p., driven almost exclusively by the expectation component (+9.8 p.p.), given that the current condition component remained virtually unchanged (+0.1 p.p.). Services (+9.0 p.p.), retail (+4.7 p.p.), construction (+2.0 p.p.) and consumer (+6.5 p.p.) indexes picked up in the month, while the industrial sector (-1.2 p.p.) printed the only decline in May so far. Despite the rebound, the confidence level is still low. The current level of the aggregate business confidence index is consistent with a 175k formal job loss, seasonally-adjusted.

Moody’s rating agency maintained Brazil’s ratings at Ba2 and reaffirmed the stable outlook. The agency highlights as key drivers behind this decision: i) Recent debt dynamics and more favorable interest rate environment, which provide an adequate buffer to manage increase in indebtedness due to pandemic-related economic shock; ii) Improved policy effectiveness, which will support economic performance and fiscal consolidation post crisis; iii) Limited exposure to external debt, and a strong foreign exchange reserve position. However, Moody’s also emphasized that the economic fallout from the spread of coronavirus will delay the reform agenda and lead to a significant buildup in government debt this year. Looking ahead, the agency considers that it will be important to monitor how the authorities will balance the need for an effective policy response to the economic and health crisis, against the need to resume fiscal consolidation next year.

Last Friday, Health Minister Nelson Teich submitted his resignation. Mr Teich took office on April 17th, after the dismissal of his predecessor, Luiz Mandetta. According to local news, deputy minister Eduardo Pazuello will be in charge of the Health Ministry until a new minister is chosen.

Itaú Daily Activity Index: Our Daily Activity Index has increased 6.2 p.p. in the last available day (to 78.9), while the 7-day moving average increased 0.1p.p., to 76.4. The index is down 21% when comparing the first half of March with the last data available (Tuesday, May 12th).

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 241,080 confirmed cases (up by 7,938 vs 14,919 yesterday), with 16,118 confirmed deaths (up by 485, vs 816 yesterday).


Despite an upbeat start to the year, the March onset of the coronavirus outbreak in Colombia and the oil price collapse meant activity disappointed in 1Q20. Activity increased by a mild 1.1% yoy (3.5% in 4Q19), well below the Bloomberg market consensus of 1.5% and our 2.2% estimate, reaching the lowest recording in two years. The seasonal and calendar adjusted series shows growth at an even lower 0.4% yoy. Activity in the first two months of the year was growing at just over 4%, while shrinking 4.6% yoy in March, according to the coincident indicator ISE. The bulk of the quarterly surprise to us came from weaker-than-expected construction and mining. While the consumption slowdown was moderate, the drop in investment and export activity dragged growth down. With the nationwide lockdown extended through to the close of May, investment dynamics would deteriorate further, while consumption would implode, in line with the confidence slump to historic lows in April. We expect activity to contract 4.7% this year (+3.3% last year), with risk tilted to a deeper decline if the social distancing measures are further extended, confidence fails to recover and corporate balance sheets falter. With the risks so great, we expect the central bank to continue enhancing liquidity measures to ease the functioning of the financial system and to protect business operations and employment. ** Full story here.

Receding inflation expectations pave the way for additional monetary stimulus. Inflation expectations for 2020 decreased to 3.01% (3.45% previously; Itaú: 2.50%), following the demand side-driven consumer price slowdown in April amid a nationwide lockdown. The 1-year inflation outlook also fell to 3.10% (3.40% previously), while the 2-year horizon inflation expectations remained broadly stable from April at 3.08%. More importantly, expectations for inflation excluding food prices, closely related to the output gap evolvement, fell below the target to 2.63% for a 1-year horizon (3.23% previously), while for the 2-year horizon they remained close to the Central Bank’s target. On the monetary policy front, analysts expected stable rates at 3.25% in May, as the survey was conducted prior to the Central Bank’s announcement that it will consider monthly rate adjustments. Accordingly, the monetary easing was expected to continue in June with a 50bp cut, followed by another 25bp decrease in July, taking the interest rate to 2.50%, where it would stay until at least May 2021 (previously rates were seen reaching a minimum of 3.0% by the yearend). The rate normalization cycle would start in June 2021 (delayed by 3 months from the previous survey) with interest rates reaching 3.25% by January 2022 (previously, seen reaching 3.75%). Regarding activity, the dual shocks affecting the Colombian economy led respondents to reduce the 2020 forecast to -3.0% for this year (+0.3% as of April), still above our call of a 4.7% contraction. Overall, disappointing activity data in 1Q20, alongside falling inflation expectations, justify our call of additional easing this month.


Monthly GDP contracted sharply in March, reflecting the outbreak impact (including the social distancing measures). The monthly GDP proxy contracted 16.3% year-over-year in March (from 3.8% in February), above our forecast of -18.9% and below market expectations of -14.2% (as per Bloomberg). The figure implies the GDP quarterly annual rate for the 1Q20 was -3.5% (from 1.8% in 4Q19). The deterioration in economic activity was widespread. The negative shock in the economy from the outbreak started being reflected since March, month when the distancing measures initiated. The non-natural resource sectors were dragged by commerce (-6.2% year-over-year in 1Q20, from 3.6% in 4Q19), construction (-13.0%, from -4.6%) and non-primary manufacturing (-12.0%, from -0.3%). In turn, non-natural resource sectors were driven down by a contraction in fishing (15.3% year-over-year in 1Q20), mining (5.3%) and primary manufacturing (0.9%) output. We expect GDP to contract 3.7% in 2020, affected by a negative shock from COVID-19 in the 1H20. The recovery in the 2H20 will be supported by an expansionary monetary policy and a substantial fiscal stimulus. ** Full story here.


Day Ahead: The central bank will release the 1Q20 GDP data. The first quarter of 2020 started with signs of an economic recovery from the 4Q19 social unrest, but ended off with the implementation of COVID-19 social-distancing measures that took the economy to a standstill. On the basis of the monthly GDP proxy (Imacec), we expect the economy contracted 0.1% yoy in 1Q20, building on the 2.1% contraction in 4Q19. At the margin, activity likely posted a partial recovery with growth of 2.7% qoq/sa from 4Q19 (4.1% drop previously). The central bank will also publish the 1Q20 current account balance. The 4Q19 current account deficit of USD 2.4 billion was USD 1.7 billion narrower than in 4Q18 due to a rise of the trade surplus for goods as imports amid the rise in domestic uncertainty, while the income deficit related to FDI shrunk. In 1Q20, the more rapid weakening of imports amid distressed domestic demand led to a significant rise of the trade surplus that will support a narrowing of the current account deficit. Overall, we expect the current account deficit to be USD 50 million in 1Q20 (USD 1.9 billion deficit in 1Q19), as shock absorbers (the flexible exchange rate) aid a swift correction of external imbalances.  

The Week Ahead in LatAm


The INDEC will publish the EMAE (official monthly GDP proxy) for March on Wednesday. Leading and coincident indicators showed a significant drop on sequential basis for that month due to the lockdown imposed to mitigate the spread of the COVID-19 pandemic. The manufacturing index fell 17% mom/sa, while construction output plummeted 32.2% mom/sa. We forecast a 6.9% mom/sa decline, leading to a 7.9% year-over-year drop in March. 

Also on Wednesday, the fiscal balance for April will be published. We estimate that the12-month rolling primary deficit as of March increased to 1.1% of GDP, from 0.6% in February. We expect a significant deterioration of fiscal accounts in 2Q20 due to the measures announced to mitigate the impact of the lockdown on income. Recently, we have revised significantly our forecast for primary fiscal deficit for this year to 4.3% of GDP from 2.4%.


In an almost data-empty week, focus will rest on the evolution of the coronavirus outbreak and political events regarding policy measures to contain the impacts of the surge. Potential announcements by regional governments regarding isolation rules will continue to be closely monitored. Furthermore, according to the media, president Bolsonaro may decide on whether to veto the salary freeze exemptions approved by Congress as part of the financial aid to states and municipalities (PLP 39). Additionally, the Senate may resume the session to discuss the bill on limits to credit card and overdraft interest rates. The institution may also decide on whether to put the bill regarding increases to the taxes on banks (CSLL) to a vote in the next days.

On economic activity, FGV business confidence survey on the industrial sector (second preview) for May will be released on Thursday. 


On Friday, the minutes of the May monetary policy meeting will be published. The minutes will build on the message of the necessity for significant monetary stimulus to aid the economic recovery ahead, consolidating the signal low-for-long rates. Additionally, it will also likely reiterate the preparedness to respond through boosting QE tools if risks for the economy increase even further.


Ending the week, INEGI will publish the inflation figure for the first half of May. We expect bi-weekly CPI to fall by 0.02% (from -0.30% a year ago), while core inflation likely stood at 0.17% (from 0.09% a year ago). We expect headline inflation to be pulled down by a sharp decline in electricity prices due to seasonal “summer” subsidies to electricity tariffs amid gasoline prices recovering and upward pressure from non-core agro prices. Assuming our forecast is correct, headline and core CPI would grow 2.50% yoy (from 2.21% in the second half of April) and 3.68% (from 3.61%), respectively.

The same day, the statistics institute (INEGI) will announce March’s retail sales, which we expect to slow down to 0.4% yoy (from 2.4% in February). We expect the deterioration in labor market indicators due to COVID-19 to weigh on private consumption, despite lower inflation and a temporary recovery in remittances in March. 


The monetary policy meeting is scheduled for Thursday. The central bank has cut the reference rate by a cumulative 275 bps between March and April to 1.25% to boost credit and mitigate the impact of the lockdown on the economy. In its latest meeting, the BCP cited the low inflation environment and the weak internal demand to justify the size of the rate cut. We expect the BCP to keep its policy rate at 1.25%.


On Thursday, the statistics institute (INEI) will announce GDP growth for 1Q20, which we estimate at -3.5% yoy. We expect the demand-side breakdown of GDP to show a broad-based deterioration, associated to distancing measures implemented since March to contain the outbreak.

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