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Ariane Dwyer cta
Classification: Public
Brazil raised rates 50bps. An outlier economy... Since early 2015 we saw over 18 economies cutting rates
globally.
Original Message
Sent From Bloomberg Mobile MSG
---- Original Message ----At: 3/4/2015 23:34
The COPOM raised the SELIC rate by 50bps to 12.75%, as expected
The decision was unanimous and was in line with market expectations, as, despite the gloomy economic outlook,
inflation remains significantly above the target and short-term inflation expectations continue to deteriorate due
to the ongoing adjustment in administered prices (especially electricity). As we expected, the COPOM repeated
the previous meeting's communiqué: "Assessing the macroeconomic scenario and the perspectives for inflation,
the COPOM decided, unanimously, to raise the SELIC rate by 50bps to 12.75% per year, without bias." In our
opinion, this statement does not signal anything for the next meeting, keeping the door open for another 50bp
rate hike, a smaller 25bp hike, or no action at all. While we currently expect no further tightening, we must admit
that the relentless pressure on the currency has increased the likelihood of another rate hike in April. The
COPOM minutes to be published next Thursday could indicate whether the authorities are contemplating further
tightening or not.
Political crisis jeopardizes fiscal adjustment
On Tuesday, Attorney General Rodrigo Janot submitted a request for the Supreme Court (STF) to indict 54
people, including congressmen and former congressmen, who allegedly benefitted from the Petrobras bribery
scheme. The names were brought up by defendants who testified in exchange for plea-bargain agreements. The
Supreme Court must decide on the indictments because congressmen have a privileged legal status. While the
names have not been revealed yet (the STF may decide to lift the secrecy on the process and publish the names),
newspaper Estado de S5o Paulo yesterday reported that Lower House Speaker Eduardo Cunha and Senate
Speaker Renan Calheiros, both of the PMDB party, were among the 54 names.
Less than two hours after the press reported the inclusion of Cunha and Calheiros in the list, Calheiros rejected
Provisional Decree 669, which aimed at reducing the payroll tax rebates and save BRL5.3bn this year, an
important component of Finance Minister Joaquim Levy's fiscal adjustment plan. Calheiros argued that the
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provisional decree was unconstitutional because it modified another provisional decree approved a few months
ago. He also claimed that the government had to submit its proposal through an ordinary bill instead of a
provisional decree.
The government reacted by issuing an ordinary bill with constitutional urgency introducing the same measures as
the rejected provisional decree. The urgency means that each house in Congress will have 45 days to vote on it,
or it will block the entire voting schedule. Consequently, in the best-case scenario, it will take more time for the
measures to become effective (tax changes require a 90-day period — which starts at the date of publication of a
provisional decree, but only after the approval of an ordinary bill by Congress). Moreover, the risk that Congress
will not pass these measures has increased. The risk to the other provisional decrees changing the rules on
pensions and unemployment benefits has increased as well.
According to newspaper Valor Economico, Calheiros' unexpected decision to reject the provisional decree was a
reaction to the inclusion of his name in the Petrobras bribery list. There has been enormous political speculation
about this list and behind-the-scenes moves by government officials (especially Justice Minister Eduardo
Cardozo) lately, and, according to newspaper O Globo, Calheiros believes that the government worked to include
their names in the list in order to neutralize their growing political influence in Congress. Regardless of the
motivations that led Calheiros to refuse the government's provisional decree, the resulting political crisis
certainly increases the risk of political rejection of Levy's fiscal adjustment plan. Consequently, the Finance
Minister may be forced to rely more on spending cuts than on tax hikes to meet the fiscal target.
Increase in industrial production in January does not indicate recovery
Industrial production rose 2.0% MoM in January, in line with market expectations. The increase in January was
mainly a payback to the sharp decline registered in the previous two months (-3.2% MoM in December, revised
from -2.8%, and -1.1% MoM in November) and does not signal any recovery in our view. At this point, although
the weaker FX tends to help the industrial sector, high interest rates, depressed business confidence, and the risk
of energy rationing continue to hurt manufacturing activity. The increase in industrial output in January was led
by a 9.1% MoM jump in the production of capital goods, following three consecutive monthly declines
(including an 11.5% MoM plunge in December). Intermediate goods rose 0.7% MoM, after falling 0.6% in
December and 0.3% in November. Durable goods fell 1.4% MoM (car production fell 0.6% MoM), and non-
durable consumer goods declined 0.3% MoM. On a year-on-year comparison, industrial production fell 5.2%, as
capital goods plunged 16.4% YoY, durables plummeted 13.9% YoY, non-durable consumer goods declined 5.3%
YoY, and intermediate goods fell 2.4% YoY.
The FX market posted a deficit of USDI.lbn in February
The last week of the month registered a large net outflow of USD3.3bn, mainly due to an increase in financial
outflows. In February, the commercial market posted a net inflow of USD0.6bn (as daily import outflows fell
more than export inflows) and the financial market posted a deficit of USDI.7bn (as financial inflows fell 17%
from January and outflows declined 6%). Although the net FX flow shifted from a USD0.3bn deficit in 2M14 to
a USD2.8bn surplus in 2M I5, there is a risk of further deterioration this year due to the negative economic
outlook and increasing political turbulence.
Thursday highlights:
FIPE will release S5o Paulo's inflation index for February, and we expect 1.20%. The ANFAVEA carmaker
association could release data on car sales and production for February.
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performance is not indicative of future returns. Price and availability are subject to change without notice.
Additional information is available upon request.
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