Tag Archives: Inflation

Brazilian Government Announces Economic Package with 12 Measures

President Michel Temer announced on Thursday (15) a new economic package with measures to stimulate the economy. Also taking part in the announcement were the house or representative’s president, Rodrigo Maia (DEM-RJ), Senate’s President Renan Calheiros (PMDB-AL), Finance Minister Henrique Meirelles and the Minister of Planning, Dyogo Oliveira.

Temer started the announcement saying that the goal is to stimulate growth and reduce unemployment. Before announcing the measures officially, the president commented on the approval of the PEC 241, which limits spending increases for the next 20 years, approved on Wednesday.

According to Temer, “these reforms aim to increase the growth of the Brazilian economy. We never ignored the difficulties that we would have when we took over the government, but we are succeeding in advancing these topics.”

Despite being positive for the economy, these 12 measures are seen as a desperate way to try and deviate the attention from the corruption investigations that are currently hitting Temer’s government right in the core. In any case, the measures are positive. To them:

Tax Debt Negotiation

Finance Minister Henrique Meirelles was responsible for giving more details on each of the measures. The first provides for tax debt negotiation for companies with debts due through November 30. Meirelles said that “any tax debt” is eligible, including social security. For debts that are being questioned in the Court, it is necessary to prove the desistance of the lawsuits.

“The program allows tax negotiations for companies that are preparing to grow again, as macroeconomic adjustment is under way,” said Meirelles.

Guaranteed Property Letter

Another measure, according to Meirelles, is the regulation of the “Letra Imobiliária Garantida”, an instrument of funding for real estate credit. The objective is to broaden the supply of long-term credit for civil construction.

Meirelles said that this type of bond, being both secure and long-term, is an “important alternative source for real estate lending and increases the supply of long-term lending to the industry.” This measure will have to go through public consultation and then be regulated by the National Monetary Council (CMN).

Improvement in the “positive register”

Meirelles also announced the improvement of the positive credit rating, which allows the creditor to analyze the person’s history. Membership becomes automatic, and exclusion has to be requested. The goal is to reduce credit risk and make room for lower interest rates for good payers.

Credit measures

Meirelles says another measure is to allow price differentiation according to the mode of payment. Such a change allows retailers to charge different prices depending on the payment mode used, ie different prices if the customer pays cash or credit card, which is currently prohibited by law. He recalled that it is common for stores to give discounts for purchases made in cash, but not the same on credit cards.

Reduction of card interest

Another measure presented by Meirelles is the reduction of interest rates on the credit card charged to the consumer and the term of payment to the merchant. The minister says the regulation should be submitted within 10 days.

Bank spread

According to the finance minister, the government is also proposing the creation of the electronic duplicate with the objective of reducing the so-called “spread” of the banks (difference between the rate of funding, close to the basic rate of the economy, at 13.75%/ year today, and the rate charged to bank customers).

“We want to create a central registry of duplicates, credit card receivables and allow the granting of credit with a lower guarantee, which increases the security for creditors and the supply of credit for small and medium-sized enterprises, with lower interest rates. “, he said.

Reduction of bureaucracy

On the issue of de-bureaucratization, Meirelles says that they will simplify the payment of labor, social security and tax obligations through a system called eSocial. The objective is to reduce the time spent by companies to fill declarations, forms and books and the redundancy of information provided to the tax authorities. The deadline for implementation in all companies would be July 2018.

Refund of taxes

Another proposal is to simplify the procedures for restitution and compensation of the taxes administered by Receita (Brazilian IRS), including the compensation between the social security contribution and other taxes.

Business Start-up

Meirelles says another measure will reduce the time to open ventures. A national network for simplifying the registration and legalization of companies and businesses will be implemented.

Competitiveness

The government also announced measures to speed up purchases and sales in foreign trade. According to Minister Meirelles, a single web-accessible portal will be created to forward all documents and data required for business transactions with other countries.

“The idea is to cut import and export procedures by 40 percent”, he said. The implementation period for exports is until March 2017 and for purchases from abroad until the end of next year.

BNDES

Following this, the Minister of Planning, Dyogo Henrique de Oliveira, spoke about other measures. The first deals with the increase from R$ 90 million to R$ 300 million the limit to access the BNDES credit for micro, small and medium enterprises.

Companies with up to R$ 300 million in revenues can also renegotiate debts of operations of up to R$ 20 million with the BNDES. Therefore, companies can seek cheaper interest rates, based on the Long-Term Interest Rate (currently at 7.5% per year).

According to him, the total volume of refinancing is estimated at R$ 100 billion, which will “increase the liquidity of companies”.  “Today, companies are suffering from a great deal of liquidity,” said the Planning Minister.

For large companies, with revenues above R$ 300 million per year, operations included in the Investment Support Program (PSI) may be refinanced. “These refinanced amounts will be with BNDES’ own resources, but with funds with TJLP (Long-Term Interest Rate) funding, with a lower cost”, he said.

FGTS

Another measure announced is the distribution of half of the profits in the FGTS to the workers. “That is to say, when there are profits, part of them will continue to be deposited and the other half will be made available to the worker to pay debts or make a different use”, he said.

Still on the FGTS, he announced the gradual reduction of the additional fine of 10% – which is paid by employers at the time of dismissal of employees, on top of the 40% that goes to employees. According to him, the idea is to reduce that 10% at the rate of one percentage point a year to relieve the entrepreneurs.

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.

Brazil Bull Who Got It Right in 2002 Says This Time No Different

The selloff punishing Brazilian markets in recent months isn’t fazing Jerome Booth. He’s seen it before and says just like then, it’s way overdone.Yes, Brazil has serious problems. The country’s “a mess,” he says, with a massive corruption investigation at state-run oil company Petroleo Brasileiro SA, a worsening fiscal outlook, the steepest recession in 25 years and a political system so fractured that needed reforms just aren’t getting done. That’s not to mention a credit-rating cut to junk and the currency’s plummet to a record low.

But there’s no chance the government is going to default, and politicians eventually will find the will to push through measures to shore up the budget and restore growth, Booth said in an interview in New York. The panic among investors is excessive, just like 13 years ago when bond prices collapsed along with the currency amid concern the front-runner in presidential elections would repudiate the government’s debt, said Booth. He was then head of research for Ashmore Investment Management, at the time one of the biggest dedicated emerging-market sovereign bond holders.

“You’ve got the classic ‘everything’s as bad as it can possibly be’” situation, said Booth, the chairman of New Sparta Asset Management, an investment company he started after leaving Ashmore in 2013. “But it’s all priced in now.”

Brazil’s overseas bonds are close to reaching bottom, according to Booth, after losing investors 8.3 percent this year. Only Zambia has posted worse returns among more than 60 emerging-market countries tracked by JPMorgan Chase & Co. indexes. Brazil’s currency, which gained 0.7 percent Monday as of 2:03 p.m. in New York, is still down 32 percent against the dollar this year, the most among major emerging markets.

After three sovereign rating cuts in the past three months, one of which cost Brazil its investment-grade rating, the government will put a “proper economic program” in place and restore investor confidence, Booth said.

“I would think it’s months rather than a year,” he predicted.

What makes Booth confident even as shops from BlackRock Inc. to Federated Investors Inc. and RBC Capital Markets see reasons to avoid Brazil?

Because he thinks most investors have overestimated the risk, just like in 2002. Back then, a selloff hit ahead of the presidential election as Luiz Inacio Lula da Silva gained in the polls. The concern was that the former union leader and founder of the Workers’ Party would declare Brazil’s debt illegitimate. Observers worried the country was slipping backward just a decade after shaking off a legacy of hyperinflation and political instability to become one of the world’s brightest stars among developing nations.

The real plunged to a record low, average yields on the country’s bonds soared to more than 25 percent and the benchmark stock gauge tumbled 40 percent ahead of the vote.

“The hedge funds at that point had this view that there’s a thing called a self-fulfilling prophecy,” Booth said. “They knew one thing: If all their peers in New York were negative,” then Brazil “would fall over. I thought that was just nonsense.”

In fact, when Lula won, investors were rewarded. From his inauguration at the start of 2003 until he left office at the end of 2010, Brazil’s dollar-denominated bonds returned 256 percent, more than double the emerging-market average. Real-denominated notes advanced 520 percent in dollar terms, almost three times the average for peers. The currency more than doubled in value against the dollar, and stocks surged 500 percent.

While Booth had money at stake when he made his call in 2002, this time around he’s not investing in Brazil’s markets. After leaving Ashmore in May 2013, he established London-based New Sparta, through which he manages investments in U.K. phone company New Call Telecom and a magazine publisher, among other businesses. New Sparta funded the Drew Barrymore comedy “Miss You Already,” which premiered at the Toronto International Film Festival last month.

Still, from his vantage point, Booth says investors are too worried about developing countries. Emerging-market assets have dropped for most of this year amid concerns the Federal Reserve will raise rates and as the Chinese economy shows signs of deceleration.

“1998 was the last time when you had a systemic crisis which could have led to serial defaults over emerging markets,” Booth said. “We haven’t had that, and we’re not likely to have that again.”

Brazil downgrade leaves little choice but austerity for Rousseff

Brazil’s government scrambled yesterday to reassure investors it will impose austerity measures to put public finances in order after its credit rating was downgraded to junk status.

President Dilma Rousseff called an emergency cabinet meeting to brainstorm on policies to bridge a fiscal shortfall and how to win their approval by a Congress that has been reluctant to sign off on unpopular belt-tightening measures.

“The plan is to come up with something in the next couple of weeks that we can work on with Congress,” Finance Minister Joaquim Levy told journalists.

The Standard & Poor’s rating agency on Wednesday stripped Brazil of its hard-won investment grade rating, downgrading it to “junk” sooner than the government and investors had expected.

The downgrade appeared to strengthen Levy’s position. He has been the government’s face of austerity but his push for deeper spending cuts to improve Brazil’s finances and avoid a downgrade faced resistance inside the cabinet and Congress.

Read more: Unlike S&P, Fitch still sees elements supporting Brazil’s investment grade

Brazil downgraded by S&P – loses investment grade

Standard & Poor’s stripped Brazil of its investment-grade credit rating on Wednesday, making it even harder for President Dilma Rousseff to regain market trust and pull Latin America’s largest economy out of recession.

The faster-than-anticipated downgrade, which will likely hit Brazilian financial markets on Thursday, is a major setback for Rousseff as she tries to kick-start the economy and shore up public finances.

S&P cut Brazil’s rating to BB-plus, which denotes substantial credit risk, from BBB-minus. The outlook on the new rating remains negative, which means additional downgrades are possible in the near term.

The stripping of investment grade status, which Brazil won in 2008, represents the loss of a key imprimatur that solidified Brazil’s emergence as an economic power during a decade-long commodities boom that reverted in recent years.

The downgrade is expected to increase borrowing costs for the government and, worse, Brazilian companies. It will also cause Brazilian assets to lose valuable funding because many institutional investors are not allowed to buy or hold onto investments that are not rated investment grade.

S&P said its decision was based on the mounting political problems that have muddled economic policy.

These problems, S&P said, have been weighing on the government’s “ability and willingness” to submit a 2016 budget consistent with the significant policy fixes Rousseff promised after she won re-election last year.

Even though some measures are being taken by pro-marked ministry Levy, he still lacks the political support to make all the needed changes.

When Brazil first got the coveted investment-grade stamp from S&P, after decades of financial volatility, it was considered a star among developing nations.

Leveraging soaring export and tax revenue at the time, the ruling Workers’ Party broadened generous social welfare programs and encouraged lending by public banks, fueling a prolonged consumer boom.

Combined, the measures lifted 40 million people out of poverty. Once Rousseff took office, however, the economy began to slow down sharply and last quarter it officially entered a recession. (Reporting by Walter Brandimarte; Editing by Cynthia Osterman and Kieran Murray)

What is yet to be seen is how much of the downgrade was already priced into the exchange rate and asset prices. Both the Brazilian reais and stock markets are down pretty significantly in the last 12 months so a lot of analysts believe it may be a case of “sell the rumor, buy the fact” but time will tell if this is really the case.

Brazil’s GDP contracted 2.6% in Q2 2015 from a year earlier, worse than expected

The Brazilian GDP (Gross Domestic Product) fell by 1.9% in the second quarter of 2015 compared to the first quarter of 2015, according to IBGE (Brazilian Institute of Geography and Statistics) announced on Friday (28). On an year-over-year basis, the decline was 2.6%. The GDP in the 1st half of 2015 decreased by 2.1% compared to the same period 2014, following the negative growth of 0.4% in the six months ended in December 2014.

Analysts estimated a decline of 1.7% in the second quarter 2015 compared to the first quarter, taking into account the average of Bloomberg survey estimates. In the annual comparison basis, it was expected a drop of 2.1%.

Accumulated in the four quarters ending in the second quarter of 2015, GDP decreased by 1.2% compared to the immediately previous four quarters, also the number recorded in the accumulated result of the year until the month of June was 2.1% over the same period of 2014. In absolute number, GDP in the second quarter of 2015 reached R$ 1.43 trillion (Aprox. US$ 400 billion).

In the quarterly contraction, agriculture had contraction of 2.7%, while the industry fell by 4.3% and services showed 0.7% contraction. In industry, the largest decrease occurred in construction: a decrease of 8.4%. The manufacturing industry, with (-3.7%) and electricity activities and gas, water, sewage and urban cleaning (-1.5%) also fell in the second quarter. On the other hand, mining registered a positive variation of 0.3%.

In services; administration, health and public education (1.9%) and real estate activities (0.3%) showed positive results. The other activities suffered retraction compared to the previous quarter: trade (-3.3%), transport, storage and postal services (-2.0%), information services (-1.3%), other services (-1,0%) and financial intermediation and insurance (-0.2%).

From the perspective of expenditure, gross fixed capital formation recorded the eighth consecutive quarter of decline in this comparison: 8.1%. The households’ consumption expenditure (-2.1%) fell for the second straight quarter. However the government consumption expenditure grew by 0.7% compared to the previous quarter. In regards to the external sector, exports of goods and services increased by 3.4%, while imports of goods and services fell 8.8% in the first quarter 2015.

All components of domestic demand fell, comparing the second quarter of 2015 against the same period in 2014. The households’ consumption expenditure (-2.7%) registered the second consecutive decrease. This result can be explained by the deterioration in the inflation indicators, interest rates, credit, employment and income over the period.

The gross fixed capital formation suffered contraction of 11.9% in the second quarter of 2015, the highest since the first quarter of 1996 (-12.7%). This decline is explained mainly by the fall in imports and domestic production of capital goods, and also by the negative performance in construction, says the IBGE. The government consumption expenditure, in turn, fell 1.1% in the second quarter of 2014. In the external sector, exports of goods and services expanded by 7.5%, while imports of goods and services fell by 11.7%, both influenced by the currency devaluation of 38% in the period.

The investment rate in the second quarter 2015 was 17.8% of GDP, lower than in the same period last year (19.5%). The savings rate was 14.4% in the second quarter of 2015 (compared to 16.0% in the same period of 2014).

Copom raises interest rate in 0.5% to 14.25% per year and indicates an stable rate in the near future

As expected by the majority of the economists, the decision of the Central Bank was to raise the SELIC to 14.25% per year. The 0.5% increase is the seventh in the tightening cycle started last october.

The raise was expected because the inflation is currently at the dangerously high levels, with the IPCA, the official inflation index at 8.89% inflation accumulated in the last 12 months. The reduction in the fiscal saving target from 1.1% of the GDP to 0.15% announced last week left the hard part of the inflation combat to the monetary policy.

The monetary committee indicated, however, that the SELIC will probably remain at this level in the next meetings. “The committee understands that the maintenance of this level for the interest rate benchmark for a period long enough is necessary to bring the inflation the the target at the end of 2016”, said the central bank in its note. The Brazilian inflation target is 4.5% per year plus or minus 2%, so from: 2.5% to 6.5%.

After Two Months of Contraction, Brazilian GDP Remains Stable in May

After two months of contraction, the Brazilian economy remained stable in May. According to the metric from the Central Bank (IBC-Br), the activity had a modest rise of 0.03% in May compared with April, when it had shrunk 0.88% (revised from 0.84%), in the seasonally adjusted series.

May result was below the estimated by analysts. The average forecast suggested a high of 0.1% in May.

bancocentralIn the 12 months ending in May, the IBC-Br shows a decrease of 1.68% in the adjusted series and fall of 1.72% in the observed data. Due to the constant indicator reviews, the IBC-Br measured in 12 months is more stable than the monthly measurement, like the Gross Domestic Product (GDP). In the year, the IBC-Br decreased 2.78% without adjustment and 2.64% without adjustment for seasonality. Compared to May 2014, the activity shows contraction of 4.75% without adjustment and 3.08% in the adjusted data.

The Central Bank (BC) continues to add to its data the new methodology adopted by the Brazilian Institute of Geography and Statistics (IBGE). Thus, revisions are made steadily in the historical series. Data for December 2014 went from 0.97% to 0.95% contraction. In February, the growth was 0.71% instead of 0.7%; in March, there was a decrease of 1.53% instead of 1.51%.

Although it is known as “the BC GDP”, the IBC-Br has different calculation methodology from the official GDP calculated by IBGE. The IBC-Br takes into consideration the estimated production for the three sectors plus tax. But the GDP calculated by the IBGE is the sum of all goods and services produced in the country for a certain period.

In the June Inflation Report, the central bank projected a fall in GDP of 1.1% in 2015. Analysts consulted for making the Focus bulletin estimated contraction of 1.5%.