Brazilian GDP beats expectation in Q3 and grows 1.5% QoQ. But is that sustainable?

The result of the GDP may have shown some relief that the economy is still growing. However, this result is still not a guarantee that the situation is better and that the growth in the year will be higher than current expectations, around 2.5% YoY, the so called PIBinho, diminutive for GDP in Portuguese.

Manufacturing GDP should fall significantly this Q3, due to deceleration in the transformation industry and important slowdown in the building industry.

Inflation is also close to the top of the range targeted by the central bank: 2.5% – 6.5%. This is having them raise the interest rate index SELIC, which is already at 9% a year. The recent weakening of Brazilian real will cause inflationary pressures and will cause the central bank to keep raising rates and cooling down the economy growth.

Any military intervention in Syria would cause an even worse scenario for GDP growth, with investments flowing from emerging markets into US treasuries and other safe options in developed world. This will reduce the money available for investment in Brazil as well as get the Brazilian Real even weaker.

The good news is that sectors mainly focused on exports and sectors that compete heavily with imports are getting a relief from the current weaker Real. That is the case of steal, lumber, agriculture and manufacturing in general. This can in the mid-term help offset this down spiral caused by weak GDP/ High Inflation.

So, while the 1.5% QoQ growth was better than expected and a little bit of a relief, especially to the politicians, this number is looking at the rear-view mirror and should not continue to happen in the short term and even in the long term, if fiscal reforms are not adopted in the country.

IPCA, IGP-M, IPC, INCC. How to make sense of Brazilian Inflation indexes?

IPCA (Índice Nacional de Preços ao Consumidor Amplo) – Broad National Consumer Price Index: Equivalent to the CPI in the US. This is the official consumer inflation index. Federal government uses it to set inflation goals. Current target is 4.5% with a margin of 2% higher or lower. The 2.5% – 6.5% IPCA range is targeted by the central bank when defining the interest rate, SELIC. The index is calculated by IBGE (federal geography and statistics institute) and tracks continuous and systematic variations in consumer prices for families with income up to 40 minimum wages. Data is collected in the metropolitan areas of Belém, Recife, Fortaleza, Salvador, Belo Horizonte, Rio de Janeiro, São Paulo, Curitiba, Porto Alegre, Brasilia and Goiânia. Data is collected between the first and last day of the reference month, and is disclosed between the 8th and the 12th of the following month.

 IGP-M (Índice Geral de Preços do Mercado) – General Index of Market Prices: Considered equivalent to the PPI – Producer Price Index, in the US. From Fundação Getúlio Vargas (a private entity), it was created to correct some treasury securities and floating-rate bank deposits with maturities over one year. Later, it started to be used for corrections of contracts such as real estate rent and electricity. Disclosed at the end of the reference month since the collection is made from the 21st of the previous month and the 20th of the month to which it relates. It consists of IPA – Wholesale Price Index (60%), IPC – Consumer Price Index (30%) and INCC – National Index of Construction Cost(10%). Every 10 days, it is disclosed a partial number known as IGP-10.

IPC – aka IPC-FIPE – (Índice de Preços ao Consumidor) CPI – Consumer Price Index: This is the inflation index for the city of São Paulo, largest city in Brazil. FIPE (a foundation linked to USP – University of São Paulo) measures the IPC based on a consumer with income between 1 and 20 minimum wages. The basket of products and services tracked is based on the POF – Household Budget Survey from IBGE, constantly updated. The survey is conducted between the first and last day of the reference month and published between the 10th and 20th of the following month. It is the most traditional cost of living indicator for the families in São Paulo and one of the oldest in Brazil, since January 1939.

INCC-DI (Índice Nacional de Custo de Construção, Disponibilidade Interna) – National Index of Construction Cost, Internal Availability: From Fundação Getúlio Vargas (private entity) in partnership with Caixa Economica Federal (public company), measures the cost of new housing in 18 cities: Aracaju, Belem, Belo Horizonte, Brasilia, Campo Grande, Curitiba, Florianópolis, Fortaleza, Goiânia, João Pessoa, Maceio, Manaus, Porto Alegre, Recife, Rio de Janeiro, Salvador, Sao Paulo and Vitoria. This is one of three items that comprise the IGP – General Price Index, with 10% weight. It is measured between the first and last day of the month and released about 20 days later. There is another number (INCC-M), calculated between day 21 of the previous month and the 20th of the month in reference for the composition of the IGP-M.

Braskem: Largest Petrochemical in Latin America

Braskem is Brazil’s largest integrated petrochemical cracker and thermoplastics maker. The company produces a portfolio of petrochemical products including ethylene, propylene, butadiene, toluene, xylene, benzene, gasoline, diesel oil, liquefied petroleum gas (LPG), as well as thermoplastic resins, such as polyethylene (PE), polypropylene (PP) and polyvinyl chloride (PVC). As of December 31, 2011, the Company had 35 industrial units, including 28 in Brazil, five in the United States and two in Germany. Additionally, it is engaged in the import and export of chemicals, petrochemicals and fuels. The Company divides its activities into five sectors: Basic Petrochemicals, Polyolefins, Vinyls, International Businesses and Chemical Distribution. As of December 31, 2011, the Company had a number of subsidiaries in Brazil, the United States, Argentina, Chile, Netherlands, Germany, Cayman Islands, Mexico, the British Virgin Islands, Bahamas and Uruguay.

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