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Mixed results for confidence indicators in Brazil

Fevereiro 28, 2020

In all, confidence indicators showed a mixed trend in February

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Confidence indicators showed mixed results, with the services sector receding 1.7 p.p., to 94.4, while the industrial sector confidence increased 0.5 p.p., to 101.4. According to FGV monthly survey, the drop in service confidence was driven by a decrease in both the expectation (-2.0 p.p., to 98.9), and the current situation components (-1.3 p.p to 90.2). The industrial sector, on the other hand, advanced in the current conditions component (+1.2 p.p to 100.9) while the expectation component receded 0.2 p.p to 101.8. In all, confidence indicators showed a mixed trend in February, with consumer, construction and service confidences deteriorating in the month, while industrial and retail confidences showed improvements.

After two consecutive days of interventions in the FX market, which totaled USD 1.5 billion, the BCB announced that will intervene again today during the morning. According to local news, the intervention is scheduled for 9:30 AM (SP time), and will amount USD 1 billion. Yesterday BRL ended the session at 4.47/USD, after reaching an intraday high of 4.50/USD.

The central government posted a BRL 44.1 billion primary surplus in January, close to our call (44.8 bn) and better than market’s estimate (40.4 bn). Compared to our call, the surprise came from lower revenues, despite also lower mandatory expenditure, especially with subsidies. The higher surplus for the month is mostly explained by increasing budget rigidity that blocks the government to spend in the first months of the year. Accumulated over 12 months, the central government deficit reached BRL 81.0 bn in January (or -1.1% of GDP), and we expect it to end 2020 around BRL 90 bn (-1.2% of GDP).

The Brazilian Central Bank released yesterday the credit figures for January. New non-earmarked decreased 1.4% in real terms and seasonally adjusted compared to the previous month, while earmarked loans advanced 6.6%. Overall delinquency remained virtually stable in seasonally adjusted terms, at 3.0%. ** Full story here.

Day Ahead: The national unemployment rate (January), will be released at 9:00 AM, which we expect to reach 11.4% in the month (stable at 11.6%, seasonally-adjusted). Also, the consolidated primary result (including regional governments and state-owned companies) will be released at 9:30 AM (SP time), for which we expect a BRL 55.1 bn surplus. 


The Banxico published the minutes of February’s meeting, when the Board voted unanimously to cut the policy rate by 25-bp (to reach 7.00%). The general tone of the minutes is cautious. Although two board members still see the monetary policy stance at the time of the meeting as still “too tight”, two other members see the balance of risks for inflation as tilted to the upside and most of them mentioned wage inflation as a factor behind core inflation stickiness, in a context of strong minimum wage hikes that are likely to keep wage inflation high. Despite a widening output gap the majority of board members downplayed the capacity of the central bank to boost the economy through lower interest rates. Looking ahead, we expect the policy rate to end this year at 6.00% (currently at 7.00%), with the next rate cut of 25-bp in March’s policy meeting. The widening of slack conditions and the performance of the Mexican peso (assuming the recent depreciation is transitory) support gradual rate reductions. However, the cautious tone adopted by Banxico means that policy rate decisions will be contingent on the evolution of inflation data (while activity numbers will likely play a less important role). ** Full story here.

Day Ahead: INEGI will announce January’s trade balance at 9:00 AM (SP time), which we expect to post a deficit of USD 0.1 billion. We expect a soft recovery in internal demand to support some improvement in non-oil imports.


Moody’s rating agency reaffirmed Chile's ‘A1’ credit rating and the stable outlook. The stable rating outlook reflects Moody’s assessment that Chile’s credit profile encompasses important strengths, including the high institutional strength. Although the government remains committed to resume fiscal consolidation after 2020, the significant increase in social pressures has affected the degree to which government efforts move forward, delaying debt stabilization until at least 2024. Nevertheless, the government's very strong balance sheet and substantial financial buffers continue to provide strong support to Chile's credit profile. However, Moody’s noted that an increase in government debt metrics with no indication of debt stabilization could result in a negative rating action, while challenges in sustaining GDP growth close to Chile’s potential rate could also lead to a downgrade. Recently, Moody’s also mentioned that the drafting of a new constitution and the upcoming presidential elections (2021) pose medium-term risks. The rating confirmation follows Fitch’s December update (unchanged at ‘A’, but with an improved outlook to stable) which acknowledged that while the government’s fiscal and economic policy response to the current unrest would erode the strength of the sovereign balance sheet, it would do so from a relatively strong position compared to rating peers. Finally, S&P (‘A+’, stable) has been less forthright, noting just that its analysis going forward will focus on the long-term impact of recent developments on GDP growth and public finances. We note that the speed at which Chile can alleviate domestic uncertainty and return growth to its potential in a bid to stabilize debt and tax revenue to GDP ratios would play a key role as to whether the sovereign can avoid rating action ahead.

Day Ahead: The national institute of statistics (INE) will release activity indicators for January at 9:00 AM (SP time). Continued electricity generation growth hints at sustained manufacturing dynamism with a 2.4% growth. Meanwhile, with car sales still shrinking at a double-digit rate, tourism downbeat and confidence stabilizing at historically low levels, retail sales would continue to decline by 2.0%. Also at 9:00 AM, INE will release the national unemployment rate for the quarter ending in January. We expect the labor market to continue to show signs of weakening as downbeat private sentiment and weak growth result in adjustments to labor market. The Labor Ministry reported a loss of over 130 thousand jobs in the first month of the year, accumulating close to 300 thousand job losses since the start of protest action. We see the unemployment rate coming in at 7.2%, up 0.4pp from last year.


The treasury ran a primary deficit of ARS 3.8 billion in January, compared with a surplus of ARS 16.7 billion in the same month of 2019. We estimate that the 12-month rolling primary deficit as of January ticked up to 0.5% of GDP, from 0.4% in December 2019. The nominal deficit, which includes interest payments, is estimated at 3.6% of GDP. We forecast a primary deficit of 0.4% of GDP for this year. Higher export taxes, the suspension of scheduled tax cuts on corporate income and payroll, and new taxes on dollar purchases (savings, credit cards, travel, etc.) will likely keep the federal primary balance unchanged this year relative to 2019. Risks are still tilted to the downside, given that the new formula for tariff adjustments has yet to be announced and that the impact of energy subsidies could be significant following the temporary freeze. ** Full story here.


The new president Luis Lacalle Pou will take office on March 1. In our view, the new government will strengthen the pro-market policies that were implemented in Uruguay over the last years and that enabled the country to gain investment grade status. Reducing the fiscal deficit is the main challenge of the new administration, but aligning inflation with the target range and boosting economic growth are also relevant.


Day Ahead: The institute of statistics will release the unemployment rate for January at 12:00 PM (SP time). We expect the urban unemployment rate to come in at 14.1% (from 13.7% one year earlier). Despite the seasonal uptick at the beginning of the year, we expect the labor market to show some tightening as the year unfolds after a prolonged period of gradual activity recovery. Other than that, the central bank board will hold its first of four monthly meetings during the year at which the policy rate is not the topic of discussion. While, these meetings have led to decisions regarding FX intervention and liquidity measures in the past, we do not expect any significant news to emerge this month.

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