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Mid-month inflation rate decelerates in Brazil

Fevereiro 20, 2020

February’s IPCA-15 underscores the deflationary contribution from the beef-price-related shock and show well-behaved core inflation measures

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February’s IPCA-15 inflation came in at 0.22% mom, slightly above our call (0.18%) and virtually in line with market expectations (0.23%), and decelerating from 0.71% in the previous month. The reading was the lowest for the month of February since 1994. In year-over-year terms, inflation receded to 4.21% (our call: 4.17%; mkt: 4.23%), from 4.34% in January. Importantly, this was the first inflation reading under the new weight structure from the updated version of the household budget survey (Pesquisa de Orçamento Familiar – POF). Looking at the breakdown, apparel (-0.83% mom) and health & personal care (-0.29%) posted the major negative contributions to the monthly headline (both contributing with -0.04 p.p. each). The food & beverage prices also receded in the month (-0.1% mom, -0.02 p.p. contribution to the headline), driven by the 5.52% deflation in beef prices (from a 4.52% increase in January). In all, February’s IPCA-15 inflation numbers underscore the deflationary contribution bias from the beef-price-related shock, and, more importantly, show deceleration in core inflation measures. ** Full story here.

According to FGV’s monthly survey, consumer confidence decreased 2.6 p.p. to 87.8 in February. The breakdown shows that the increase in the current conditions (+2.2 p.p., to 80.9) component was offset by a sharp deterioration of the expectations component (-5.7 p.p, to 93.2) in the month. The official note by FGV suggests that this result was mostly due to a revision of consumers’ expectations regarding the economy for the next months, as well as a lower optimism with the labor market and household financial conditions.

Tax collection came in at BRL 175.0 billion in January, in line with our call (BRL 174.7 bn) and better than consensus (BRL 167.2 bn). Tax collection increased 4.7% yoy in real terms. The strength came particularly from revenues related to corporate profits (IRPJ/CSLL), which increased 16.5% yoy in real terms, while those related to the wage bill increased 1.0% yoy and to consumption decreased -0.7% yoy. Excluding revenues from the REFIS/PRT, tax collection increased 5.0% yoy in real terms, with the 3mma rate increasing to 2.2% yoy (from 0.4% in December), representing some improvement at the margin.

The BC reduced the reserve requirement rate on time deposits from 31% to 25%, which represents BRL 49 billion in terms of reserves, effective as of March 16. The measure is part of the BC# Agenda, in the competitiveness pillar, within the scope of the action “structural reduction of reserve requirements”. Additionally, the Central Bank increased the share of reserve requirements considered in the LCR (Short-Term Liquidity Indicator), which means an estimated reduction of another BRL 86 billion needed for institutions to maintain high-quality liquid assets necessary to comply with the LCR.

Tomorrow’s Agenda: January’s current account will be released at 10:30 AM. We expect the indicator to post a USD 11.0 billion deficit in the period, higher than the USD 8.9 billion deficit observed in the same month of the previous year, mostly due to a weaker trade balance. With this result, the current account deficit over 12 months would add up to USD 52.8 billion, or 2.9% of GDP (from USD 50.8 or 2.7% of GDP billion in December). Additionally, FGV’s confidence indicators for the construction and retail sectors will be released at 8:00 AM.


IMF staff sees Argentina’s debt as unsustainable. Debt service capacity have deteriorated markedly given the large share of foreign currency public debt combined with the weakening of the peso and the sharp contraction of GDP, according to the statement issued by the IMF team that visited Argentina. As the necessary primary surplus to reduce public debt and gross financing needs is not economically nor politically feasible in IMF’s view, the staff concluded that a definitive debt restructuring — yielding a meaningful contribution from private creditors — is required to help restore debt sustainability. The government targets to restructure public before the end of March. In our view, the self-imposed deadline is ambitious given the complexity of using the collective action clauses embedded in global bonds (calling assemblies and getting needed majorities to change the financial conditions of the bonds) and the unwillingness to deliver further fiscal consolidation until 2023. As Argentina will likely need a significant haircut the odds of entering in a protracted negotiation and missing payments before a deal is reached is high in our view.  

New cut in reference interest rate. The central bank cut the Leliq rate to 40% from 44% supported by tough capital controls and downward revisions of inflation forecasts for February to around 2% from 3% mom in the latest central bank expectation survey. In a short statement, the central bank said lower interest rates will help the economy to recover. In addition, the monetary authority set a cap on credit card interest rates at 55% and froze bank fees for 180 days.

Tomorrow’s Agenda: The INDEC will publish the EMAE (official monthly GDP proxy) for December. Leading and coincident indicators showed mixed signals for that month. The manufacturing index rose 1.2% yoy, while construction output dropped 6.4% yoy. We forecast a 3.0% yoy drop in December. Additionally, the trade balance for the first month of 2020 will also be released tomorrow. We forecast a surplus of USD 1.2 billion in January (up from USD 0.4 billion surplus registered in the same month of 2019) due to a weaker ARS and internal demand. If our forecast is correct, the trade surplus accumulated over the last 12 months would rise to USD 16.8 billion from USD 16 billion in December 2019.


Tomorrow’s Agenda: The statistics institute (INEI) will announce GDP growth for 4Q19, which we estimate at 1.8% (from 3.2% in 3Q19). The demand-side breakdown of GDP will likely show gross fixed public investment deteriorated (associated to weak public investment expenditure execution). In turn, private consumption likely moderated its pace. On the external side, we expect exports weakened in 4Q19 (mainly metallic exports, associated to softness in mining output), while imports decelerated.  

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