Category Archives: Inflation

Economists reduce Brazil inflation forecast for 2017 and the next 12 months

Market economists reduced their estimate for inflation by the Broad Consumer Price Index (IPCA) in 2017 and in the next 12 months, according to the average forecast in the Focus Bulletin, released on Monday by the Central Bank (BC) .

For this year, inflation bets were reduced from 3.03% to 2.88%, below the floor of the target for the calendar, of 3%. The center of the inflation target is 4.5%. In 12 months, the projection for the advance of prices increased from 3.96% to 3.91%. For 2018, the estimate was maintained at 4.02%.

Last Friday, the Brazilian Institute of Geography and Statistics (IBGE) reported that the IPCA slowed the rise to 0.28% in November, after rising 0.42% a month earlier.

The average estimate for economic growth had a new round of upward adjustments after the IBGE revised positively the Gross Domestic Product (GDP) figures for the first and second quarters of this year. Thus, the projections went from expansion of 0.89% to 0.91% in 2017 and advance from 2.60% to 2.62% in 2018.

For the basic interest rate, Selic, at the end of 2018, the projections were maintained at 7%

IPCA inflation index slows down in November, according to IBGE

Inflation measured by the National Extended Consumer Price Index (IPCA) slowed to 0.28% in November, from 0.42% in October, the Brazilian Institute of Geography and Statistics (IBGE) reported Friday.

In the same month of 2016, the increase had been of 0.18%. Therefore, official accumulated inflation accelerated in 12 months: from 2.70% in October to 2.80% in November, according to the institute.

The IPCA in November was below the average of 0.35% estimated by 27 consultancies and financial institutions. The range of projections was from 0.31% to 0.47%. For the accumulated 12-month period, the expectation was of an increase of 2.88% in the prices

In the 11 full months of the year, the IPCA accumulated a rise of 2.50%, the lowest inflation for the period since 1998 (1.32%). Thus, with just one month remaining in 2017, inflation is below the target floor of 3% – the center is 4.5%, with a margin of 1.5 percentage points up or down.

Brazilian stocks and Real fall amid difficulty in approving pension plan reform

Brazilian financial market reacts negatively again to the noise surrounding the pension reform. According to professionals, this morning’s news brought more negative elements about the possibilities of the government being able to approve the reform, which was reflected in the dollar, interest rate hikes and in the fall of the Ibovespa stock index at the opening of the trading session.

But, half an hour after business started, prices have worsened, reacting to comments from House of Representatives president, Rodrigo Maia, that would have expressed a more pessimistic reading regarding the number of votes to approve the reform.

This market behavior confirms the investors’ sensitivity to the pension plan reform news, something that has already been happening in the last sessions and that intensifies as the deadline for voting approaches.

The importance of this reform for the Brazilian stock, currency and interest markets has already been explained in this article from June in this blog.

Fitch keeps the Brazilian credit rating at BB, with negative outlook

Fitch Ratings reinforced Brazil’s credit rating on ‘BB’, with a negative outlook. That is, with the possibility of the classification being revised downwards in the future.According to the agency, the country’s ratings is limited by the structural weaknesses in public finances and high government debt, weak growth prospects and weaker governance indicators than the country’s peers, in addition to the recent history of political instability.

These weaknesses, Fitch added, are offset by the economic diversity of Brazil and consolidated civil institutions.

The negative outlook reflects the continuity of uncertainties related to the sustainability and strength of the Brazilian economic recovery, the prospects for medium-term debt stabilization and the progress of the legislative agenda, especially the pension reform.

Fitch expects a modest cyclical recovery in Brazil, with growth accelerating from 0.6% in 2017 to an average of 2.6% during 2018 and 2019. Consumption began to recover, sustained by lower inflation, which drives wage gains, stabilization of the unemployment rate and a recovery of consumer credit. A recovery in investment is also expected in the coming years.

According to the agency, the risks that can cause the government not to reach its fiscal goals in the short term include a weaker economic recovery and the difficulty in cutting public spending, especially in the election year. The implementation of the pension Reform and other adjustments will be necessary to ensure that expenditures meet the target in the medium term.

Fitch projects that Brazilian public debt will continue to grow during the forecasted period, even taking into account the impact of the National Treasury’s loan payments anticipated by the National Development Bank (BNDES) between 2017 and 2018. The agency projects that debt will reach 76% of GDP in 2017 (above the median of the “BB” countries, 45%) and advance to 80% in 2018.

Brazil’s current account deficit is expected to fall below 1% in 2017, according to Fitch projections, and should remain below 2% in the period projected by the agency. The deficit fell 80% during the first nine months of 2017, compared to last year, with the growth of the trade surplus.

Funding of Brazilian companies with debt and equity jumps to R$ 192 billion (US$ 60 bi)

The wind begins to shift to the capital market in the wake of falling interest rates to near historic lows and the contraction of bank credit after two years of deep recession. Since last year, the favorable environment has opened space and consolidates a trend of strong growth for corporate debt issues, along with capital openings and subsequent stock offers, which increasingly assume a major role as a source of financing for large companies .
Between January and September, data from the Brazilian Association of Financial and Capital Market Entities (Anbima) shows that the issuance of fixed income securities in Brazil and abroad by companies plus funding through variable income in the country reached R$ 176.3 billion, or three and a half times the volume of R$ 49.9 billion granted by BNDES in the same period, according to figures from the state bank itself.

For Sergio Goldstein, chairman of Anbima’s corporate finance committee, the expansion is expected to continue in 2018: “the economy probably accelerates next year and thus there’s no way the capital market does not come along.”

A singularly favorable situation fuels this movement of greater participation of the capital market as a source of funds: falling interest rates and prospects that it will remain close to historical lows for a prolonged period, low inflation, growth, albeit gradual, and a change in the policy of subsidized rates by the BNDES.

Brazil is out of recession. But should you buy it?

President Michel Temer and economic ministers will celebrate the growth of 1% of the Gross Domestic Product (GDP) in the first quarter of this year, compared to Q4 of 2016, excluding seasonal factors. When they do this, they will actually be celebrating the growth of agriculture and foreign demand (exports). Domestic demand – household consumption and investments – continued to fall and with worse results than expected.In the economists’ estimates, GDP would grow, on average, 0.9% in the first quarter of 2017 QoQ, in the seasonally adjusted series. Here, the recorded growth of 1% was slightly higher. But economists predicted 9.4% growth in agriculture and the GDP brought a rise of 13.4%. In industry, the result was also better, of 0.9% against a forecast of 0.8%. The services sector remained stable, but the expectation was a growth of 0.3%.

It is on the demand side that the GDP has been more frustrating. Economists projected the first increase (of 0.4%) after eight consecutive quarters of falling household consumption. The IBGE indicated, however, a further retraction of 0.1%, postponing the recovery. And the investment retreat was much deeper than expected. Estimates indicated a small decline of 0.3%, but the reality was cruel and the figure was negative at 1.6%. All comparisons are QoQ, minus the seasonal effects.

Weak domestic demand is also clear in trade data, down 0.6% from the end of last year.

The government may even celebrate the outcome, but from the standpoint of indicating a domestic recovery, GDP in the first quarter was worse than expected. And the political crisis and the signal issued yesterday by the Monetary Policy Committee (Copom) that the interest rate down trend will slow down, act to further delay the good news, so long awaited.

Brazilian IGPM shows second month of deflation

The General Market Price Index – (IGP-M) recorded deflation of 0.93% in May, after falling 1.10% a month earlier, according to the Getulio Vargas Foundation (FGV). It is the lowest rate for May months since the beginning of the indicator series in 1989. It is also the third lowest variation for all months of the series, with June 2003 and April 2017 being the lowest ones. In May 2016, the indicator, which serves as a reference for the readjustment of contracts such as rent, rose 0.82%.The fall in the fifth month of 2017 was driven by wholesale deflation, especially industrial products, and by the slowdown in consumer price hikes. The decline of 0.93% was higher than the 0.82%, on average, estimated by economists. The range of estimates was for a decline between 0.74% and 0.89%.

In the year, the IGP-M decreased by 1.29%. In 12 months, it rises only 1.57%, compared to analysts’ forecast of 1.69%.

How to make sense of Brazilian inflation indexes?

Brazilian Economy shrinks 0.51% in May, according to the Central Bank

The Brazilian economy has not confirmed the brief improvement in April. The Economic Activity Index Central Bank (IBC-Br) fell 0.51% in May, after growing 0.07% in April (revised), which was the first increase in 15 months. In the year, the decline was a significant 5.79%.

In the 12 months ending in May, the IBC-Br indicates a decrease of 5.43% in the series without adjustment and 5.51% in the adjusted data. Due to the constant indicator review, the IBC-Br measured for 12 months is more stable than the monthly measurement. Compared with May 2015, there was a low of 4.91% in the series without adjustment and 5.32% with adjustment.

The results came worse than expected by the market players. The average of forecasts made by 21 financial institutions suggested a decrease of 0.24% in the month. Estimates ranged from a decrease of 0.9% and increase of 0.1% for the monthly variation.

In the June Inflation Report, the central bank projected a drop of 3.3% in the GDP for 2016, against the previous forecast of a 3.5% decline. Analysts consulted for making the Focus Bulletin also point to a decrease of 3.3% for the Brazilian economy this year.

EWZ: Ibovespa has its best semester since 2009 and US$ drops 18.6% versus the Brazilian Real

Brazilian’s most traded stock ETF in the US, EWZ soared 46.5% in the same 6 months:

EWZ-6-Months

In the beginning of the year, the perspective for the Brazilian market was not good with the country in recession and inflation sky rocketing. However, in the middle of February, the inflection started fueled by a global recover in commodities prices and an improvement in the expectations for the economic policies, which became known as the impeachment rally.

Besides, the downside event of the semester, the Brexit, was followed by an unexpected help which were the speculations that central banks all over the world will stimulate their economies to face market volatility. On Friday, the president of England’s central bank, Mark Carney, said that the growth in the UK will slow down in the next months and additional interest rate cuts and other measures of monetary ease will be necessary.

Sure, Brazil is not out of the woods yet and the new government still has lots to do to recover the economy. However, the better economic climate has started to translate into improvements in the confidence:

Consumer and Industry Confidence in Brazil

Besides the more favorable political environment, what is also helping in this confidence growth is the fact that some economic indicators are improving, albeit still very bad: IBC-Br, Industry and Services.

What to Expect for Brazilian Interest Rate in 2016

Monetary Policy Committee (COPOM) has decided to keep the Brazilian interest rate benchmark in Brazil (SELIC) at 14.25% a year, unanimously. The central bank repeated the note issued with the previous decision, in which it says “we see advances in the inflation fighting but the still elevated cost of living and expectations are out of the target”.

Even with the repeated note, economists started to review their opinions about when the interest rate will go down again. The last meeting was still ran by central bank president Alexandre Tombini. Now, Ilan Goldfajn will be the one responsible  to deal with variables like economic recession and inflation. Inflation, by the way, that was showing signs of reduction but has again showed resilience.

According to newspaper Folha de São Paulo, despite inflation have shown acceleration in May, the interim government of Michel Temer believes that the fall in the US Dollar exchange rate and the credibility of the new economic team opens space for a reduction in the SELIC. The government is working under the assumption of inflation declaration by year end as well as a further drop in the US$. According to the report, Folha’s initial forecast was for a drop in the interest rate in July but now this may be postponed till August.

And that review in expectation was also followed by other investment banks, such as Goldman Sachs and Bradesco. Bradesco now believes the interest rate benchmark will end the year at 12.75% versus 12.25% before.