The highlights from March 27 to 31 were the releases of the Brazilian Central Bank’s Quarterly Inflation Report, which gave some further clues for the direction of monetary policy, public accounts, activity data and unemployment (all showing no signs of recovery). The pessimism continues and Brazil is still going sideways – can it get worse?
The Quarterly Inflation Report confirms the acceleration of monetary easing.
Investors are now almost certain there will be a Selic rate cut of 100 basis points in April after the release of the Central Bank’s Quarterly Inflation report. With an interest rate of 12.25% and an exchange rate of R$ 3.28/$, the reference scenario puts inflation at 3.9% at the end of the year, 4.0% in 2018 and 4.1% in the first quarter of 2019, all below the Central Bank’s target.
At the same time, inflation expectations were also reduced in the Focus Report projections for the Selic rate (9% per year in 2017 and 8.5% in 2018) in addition to the exchange rate (R$ 3.28/$ this year and R$ 3.4/$ in 2018). The report forecasts inflation at 4.0% in 2017 and 4.5% in 2018.
In addition, the Central Bank also stated in the Quarterly Inflation Report that there is an increased possibility of intensifying the pace of monetary policy. This signals confidence that the disinflation process will continue. Finally, the median estimates for 2020 and 2021 are 4.30% and 4.25%, respectively.
“Since February, the consolidation of the more widespread disinflationary process, encompassing inflation components that are most sensitive to the business cycle and monetary policy reinforces the possibility of a moderate intensification of the pace of monetary easing, in comparison to the pace set in the two latest Copom meetings.” – Central Bank of Brazil, Quarterly Inflation Report
During February, the consolidated public sector (Central Government, States, municipalities and state organisations, with the exception of Petrobras and Eletrobras) were in deficit of R$ 23.46 billion, according to the Central Bank. In January, there was a primary surplus of R$ 36.71 billion, and the same month of last year a deficit of R$23.04 billion.
The breakdown of the result of February is made up of a deficit of R$28.76 billion of the Central Government. On the other side, regional governments were in surplus of R$ 5.22 billion, while state enterprises were in surplus of R$ 46 million. In the 12 months until February, the consolidated public sector accounts have a primary deficit of R$ 147.419 billion – the equivalent of 2.23% of GDP.
The consolidated public sector registered a nominal deficit of R$ 54.24 billion in February. In January, the nominal result was positive at R$ 299 million, and in February 2016 was in deficit of R$ 52.82 billion. Last month, the central government had a nominal deficit of R$ 52.44 billion, while regional governments were in a deficit of R$ 1.4 billion. State companies were positive by R$ 378 million. In the 12-months up to last month, the nominal deficit corresponded to 8.49% of GDP with a negative balance of R$ 535.62 billion.
Brazilian Finance Minister Henrique Meirelles announces budget cuts of R$ 42.1 billion; scraps payroll tax exemptions.
Finance Minister, Henrique Meirelles reveals plans for the Brazilian Federal government to plug a gap of R$ 58.2 billion in its budget. The plan aims to cut R$ 42.1 billion to reach the fiscal target of a deficit if R$ 139 billion for the year.
The government is also scrapping payroll exemptions for almost all sectors of the Brazilian economy. Effective since 2011, payroll exemptions benefitted 56 sectors of the economy, which pay 2.5% or 4.5%, depending on the sector, in social security taxes, instead of 20%. In addition, there will be a financial transaction tax (IOF) on credit union operations.
Data remains unimpressive
Retail sales started the year with a fall of 0.7% by volume and 0.8% in nominal revenue, in relation to December, in seasonally adjusted terms, according to the Brazilian Institute of Geography and Statistics (IBGE).
This is the second negative month for the volume of sales, after an increase of 0.9% in November last year. In comparison with January 2016, the volume of Brazilian retail sales retreated 7.0%, marking the 22nd consecutive negative result for this indicator. In the 12-month measure, sales fell by 5.9%, maintaining its negative sequence since May 2015.
Concerning nominal revenue, there was a fall of 2.3% in relation to January 2016, and an increase of 4.2% in the 12-month measure. The negative result was widespread, but highlights were negative results for supermarkets and books, newspapers and magazines, falling 7.0% and 17%, respectively.
Proxy GDP data declines
The January IBC-Br decreased by 0.79% compared to the same month last year, against 0.26% in December. Both measures came below the median of market projections and points to a slow recovery for the domestic economy.
Unemployment in Brazil reaches 13.5 million people – the highest level since the series began.
Compared to the last quarter, the number of people out of work grew by more than 1.4 million (11.7%). In comparison with February 2016, the number of unemployed people is 3.2 million. For the national household survey (PNAD), the unemployment rate was at 13.2%, also the highest level since the sample began.
In the private sector, the number of employees with a formal contract totalled 33.7 million, around 337,000 fewer than in November 2016. In relation to February 2016, 1.1 million fewer people with a formal contact. Private sector workers without a formal contract totalled 10.3 million in February – 531 thousand more than in the same quarter of 2016. There are 2.2 million self-employed people in Brazil, decreasing by 1.1 million against February 2016.
That was last week, but let’s not dwell on the past, make sure you click here to see what is happening in the first week of April.