Itaú BBA - Evening Edition – Brazilian Senate approves base text of War-budget

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Evening Edition – Brazilian Senate approves base text of War-budget

Abril 15, 2020

The Senators are currently voting the amendments to the bill

Talk of the Day 


The Senate has just approved the base text of 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. The Senators are now voting the amendments to the bill.

Paper cardboard dispatches advanced 1.3% mom/sa (+10.7% yoy) in March (our seasonal adjustment). The 3-month moving average increased by 0.4%. This is an important coincident indicator for March’s Industrial production. 

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 28,320 confirmed cases (up by 3058, vs. 1832 yesterday), with 1736 confirmed deaths (up by 204, vs 204 yesterday). Find our weekly monitor for Covid-19 here.


Activity indicators in February remained solid, still led by private consumption, although calendar effects amplified the headline numbers. Retail sales rose 13.2% yoy (7.5% in January), above our 7.2% call (Bloomberg market consensus: 6.9%), as almost all the categories posted double-digit growth. Core retail sales (excluding fuels) increased 14.6% yoy (8.5% in January). Being a leap year, the month of February had a favorable calendar effect with one additional Saturday. After adjusting for seasonal and calendar effects, core retail sales posted a much milder acceleration (to 8.0% from 7.3% in January). Meanwhile, manufacturing increased 4.6% yoy (3.7% previously), outperforming our call of 3.0% and the market consensus of 3.3%, but slowed to 2.2% yoy after adjusting for seasonal and calendar effects (3.8% in previously)Despite strong activity at the start of the year, we expect the dual shocks (coronavirus and oil prices) to have a significant impact on the Colombian economy and lead to a growth contraction of 1.4% this year (+3.3% in 2019). 

According to the central bank’s monthly analyst survey, controlled inflationary pressures and a growth slump provide space for additional monetary stimulus. Despite the food component accelerating, inflation expectations for 2020 remained broadly stable at 3.45% (Itaú: 3.70%). However, after excluding food prices, yearend inflation expectations moderated 13bps to 3.23%, likely reflecting the expected internal demand drop amid the oil price collapse and coronavirus shock. Headline inflation expectations for 2021 inched down to 3.20% from 3.24% in March. Additionally, the median of the 2-year horizon inflation expectation also receded to 3.10% (from 3.3% previously). Expectations for inflation excluding food prices fell to 3.15% for a 1-year horizon (3.36% previously), while for the 2-year horizon they remained close to the 3.0% target. On the monetary policy front, analysts now foresee another 50bps cut in April to 3.25% and an additional 25 bps cut in July to 3.00%. The rate normalization cycle would start in March 2021 taking the interest rate to 3.75% by 1Q22. Prior to the headwinds, market analysts saw the policy rate stable at 4.25% throughout the year. Regarding activity (surveyed quarterly), the dual shocks affecting the Colombian economy led respondents to reduce the 2020 forecast to +0.3% for this year (3.3% as of January), although it remains far more optimistic than our call of a 1.4% contraction and the 1.5-2.0% expected drop from the Finance Ministry. Overall, we see an additional rate cut this month to 3.25%, with further easing to 2.75% before yearend.


The CPI increased by 3.3% mom in March, from 2.0% mom in February and 2.3% in January. Even so, annualized inflation decelerated to 35.2% in 1Q20, from 37.1% in February. Annual inflation fell to 48.3% in March, from 50.3% in February. Core inflation also accelerated in the month. Core item prices rose by 3.1% mom, up from 2.4% in February, led by meat prices (affected by supply restrictions at the end of the month, as the government began to implement measures to control the spread of COVID-19). The core inflation reading decreased to 36.8% (annualized) in 1Q20, from 40% in February. Regulated prices rose by 3.3% mom, mostly fueled by adjustments in education services and tuitions. Energy, fuel and transportation tariffs remained under control, implying an annualized increase of 22.3% in the first three months of the year.  Prices for seasonal products rose by 4.9% mom, as the distribution of vegetables was also affected by the COVID-19 lockdown. We forecast inflation of 35% for this year, with risks tilted to the upside given that the planned fiscal expansion to deal with the negative effects of the COVID-19 pandemic is likely to be financed by the Central Bank.


Monthly GDP was above market expectation in February. The monthly GDP proxy grew 3.8% year-over year in February (from 3.0% in January), above our forecast of 3.3% and market expectations of 2.8% (as per Bloomberg), taking the quarterly annual growth rate to 2.5% in February (from 2.0% in January).

Economic activity grew at solid pace pre-coronavirus outbreak, supported by natural resource sectors.  Non-natural resource sectors, which account for three quarters of the economy, stood at 3.0% year-over-year in February (from 3.1% in January), taking the quarterly annual growth rate to 2.8% in February (from 2.4% in January). Looking at the breakdown, while construction output grew at solid pace (5.1% year-over-year in February, practically unchanged from January), associated to an improvement in public capital expenditure execution, services and commerce sectors slowed down slightly to 2.5% (from 2.7%) and 3.7% (from 3.8%), respectively.  In turn, natural resources sectors recovered to a strong 6.9% year-over-year in February (from 2.6% in January), taking the quarterly annual growth rate to 1.6% in the month (from 0.3% in January). Natural resources sector was supported by fishing output (19.3% year-over-year in February, from -32.7% in January), while primary manufacturing and mining output expanded 24.1% (from 2.1%) and 5.3% (from 0.8%), respectively.

We forecast a GDP contraction of 1.3% in 2020, as activity deteriorate sharply due to the negative shock from the coronavirus outbreak. We expect the economy to recover during the second half of the year, supported by an expansionary monetary policy (lowest policy rate on record) and a substantial fiscal stimulus.


Tomorrow’s Agenda: The central bank will release the minutes from the March 31 meeting at which the policy rate was lowered by 50bps to its technical low of 0.5%. The minutes, in line with the Inflation Report that was released the day after the meeting, would show that the expected sharp widening of the negative output gap justifies maximum stimulus for a prolonged period. Additionally, they will confirm that the options of cutting rates by 25bps and 50bps were discussed by the board.

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