Brazil Update:Eyes on the Inflation Report
Tuesday highlights:
The BCB will publish its quarterly Inflation Report, which could provide newly-appointed BCB president Ilan Goldfajn an opportunity to reveal his opinions about inflation, monetary policy and FX policy. As a matter of fact, Goldfajn will participate in the press conference to discuss the report, which is not customary (usually, only the director of economic policy participates in the press conference). While we expect the report to project inflation at the 4.5% target for 2017 and below 4.5% for the following quarters, we believe Goldfajn will act cautiously and reinforce the BCB commitment to make inflation converge to the center target over the relevant time horizon of monetary policy, thus excluding the possibility of a rate cut at the next COPOM meeting in July, but keeping the door open for easing at subsequent meetings. The National Treasury could release the central government’s primary fiscal balance for May. We forecast a primary deficit of BRL16.0bn, compared to a deficit of BRL8.1bn in May 2015, due to the adverse effect of the recession on tax revenues and spending rigidity.
Consumer confidence rose in June
After climbing by 3.5 points in May, the FGV index of consumer confidence rose by 3.4 points to 71.3 in June. Although the current conditions remained stable at 65.5, the expectations index jumped 6.0 points to 77.1, the highest level since January 2015 (81.7). While consumers remain very concerned about current economic conditions amid rising unemployment rates, they are gradually becoming less pessimistic about the future. We believe this improvement in expectations has been mainly driven by the ongoing process of President Dilma Rousseff’s impeachment and appointment of a new economic team by acting president Michel Temer. Since the labor market is likely to deteriorate further in the next months, we believe consumer confidence will not improve further without further reduction in political uncertainty.
Credit remains very weak as NPLs rise
Total bank loans grew only 0.1% MoM and decelerated to 2.0% YoY in May from 2.6% YoY in April. Directed loans rose 0.1% MoM, as BNDES loans declined 0.1% MoM (-1.2% YoY), and mortgage lending grew 0.7% MoM (+10.2% YoY). Loans in the “free market” rose 0.2% MoM (-0.2% YoY), as consumer loans climbed 0.5% MoM (+1.4% YoY), and corporate loans fell 0.1% MoM (-1.9% YoY). Interest rates declined to 30.6% from 31.1% in the corporate market (although spreads increased, funding costs declined), but climbed further to 71.7% from 71.0% in the consumer segment. Credit delinquency rose slightly to 6.3% from 6.2% in the consumer segment, and rose further to 5.4% from 5.1% in the corporate market. We note that the BCB data on non-performing loans do not include re-negotiated loans, which tends to underestimate delinquency. We expect NPLs to increase further due to the recession and rising unemployment. Both the demand and supply of credit have decelerated amid the ongoing recession, and, in light of the very high level of interest rates, the deterioration in labor market conditions and political uncertainty, we do not expect a recovery in credit growth anytime soon.
BCB survey shows smaller interest rate cut this year
According to the BCB’s “Focus survey” of market participants, the consensus forecast for the IPCA consumer price index for 2016 rose to 7.29% from 7.25%, as the median forecast for the inflation of administered prices rose to 7.00% from 6.99%. The median forecast for the 2017 IPCA was unchanged at 5.50%. The consensus forecast for the IGP-M inflation climbed to 8.47% from 8.34% for 2016, and to 5.63% from 5.60% for 2017. The year-end exchange rate forecasts remained at BRL3.60/USD for 2016 and BRL3.80/USD for 2017. The consensus forecast for the year-end SELIC overnight rate climbed to 13.25% from 13.00% for 2016, but fell to 11.00% from 11.25% for 2017. The consensus GDP forecasts remained at -3.44% for 2016 and at 1.00% for 2017.
The National Treasury’s debt grew 2.8% MoM to BRL2,879bn in May
The domestic debt rose 2.8% MoM to BRL2,744bn and the external debt grew 3.9% to BRL135bn (mainly due to BRL depreciation). The Treasury expects to keep its total debt within the targeted interval between BRL3,100bn to BRL3,300bn at the end of 2016. Regarding debt composition (without taking the BCB repos into account), the share of prefixed bonds in the Treasury’s debt climbed to 35.3% in May from 34.5% in April. The share of inflation-linked bonds fell to 34.0% from 34.6%, and floating-rate bonds fell to 25.8% from 26.1%. The public debt’s average maturity declined to 4.67 from 4.75 years, while the share of public debt maturing over the next 12 months rose to 20.4% from 18.9%. The public debt’s average cost remained unchanged at 14.25% in the year to May. The share of domestic debt held by foreign investors fell to 16.6% (BRL455bn) from 17.4% (BRL464bn) in April.
The trade balance posted a surplus of USD1.1bn in the fourth week of June
The trade surplus totaled USD3.4bn in the first four weeks of the month, as exports fell 8% from May, led by a 17% decline in soybean shipments and a 31% drop in transportation materials. Daily imports increased 9% from the previous month, led by mechanical equipment. The trade balance has posted a surplus of USD23.1bn so far this year, compared to a surplus of USD1.9bn in the same period last year, as exports fell 5.8% but imports plunged 29.3% YoY, mainly due to the domestic recession and weaker FX. We forecast a trade surplus of USD50.0bn for 2016 compared to a surplus of USD19.7bn in 2015 (SECEX data).