Bolsonaro Administration: First words, first acts

What can Brazil expect from the new Bolsonaro Administration when it comes to economic policy? Plenty. Perhaps the most telling indication came from the fact that the new Economy Minister, Paulo Guedes, spoke for 50 minutes after taking the oath of office while the President spent only ten. Not only that—Guedes didn’t dwell on generalities; he spelled out the government’s economic priorities. They are, in descending order of importance: pension reform, privatization, foreign trade liberalization, and tax simplification. Guedes, and aides, even offered details—the administration will send a pension proposal to Congress in February, incorporating some aspects of the reform proposed in 2016 by former President Michel Temer while adding others; trade liberalization will be gradual; privatization and concession auctions will be scheduled quickly; and tax simplification will be part of a new “national pact” designed to make government accounts sustainable. More details followed in the days after the inauguration. Guedes, for example, said the administration will pursue additional labor code liberalization designed, as he described it, “to bury the fascist-era labor laws still on the books.” In a reversal of campaign rhetoric, Mines and Energy Minister Bento Albuquerque said privatization of the Eletrobras utilities holding company is back on the table. Bolsonaro himself, in a statement, said the administration will speed up existing concession sales for railroads, airports and ports, with the first auctions scheduled for March. He estimated the likely take for government coffers at R$7 billion. Guedes, meanwhile, offered a hint of the administration’s political strategy, saying failure by Congress to adopt a meaningful pension reform would force the government to cut spending in vital areas such as health and education. Guedes also outlined some of the government’s tax reform plans, embracing the idea of eliminating whole classes of taxation, focusing on a single value-added tax and redistributing revenues to bolster state and municipal finances. The ultimate goal, he added, is to reduce Brazil’s tax burden from the current 32% of GDP to about 20%. The new administration’s first act, largely symbolic, was to scale back this year’s increase in the minimum monthly salary, choosing a 4.6% hike to R$998 rather than breaking the R$1,000 barrier as proposed by Temer in his tentative 2019 budget. In another symbolic action, the government fired 300 political appointees in the federal hierarchy as part of a plan to streamline government. Subsequent executive actions in January, ahead of the congressional session due to convene early next month, are likely to include measures reducing trade bureaucracy and business regulation. Bolsonaro summed up his administration’s main theme in brief remarks before Congress, saying: “We will replace the entanglements of ideology with respect for markets.”

Brazil-U.S. Business Council

The emerging shape of the new administration

Can the incoming administration of President-elect Jair Bolsonaro lead Brazil out of the doldrums? Bolsonaro offered some clues this week. One clue—he acted quickly.

Lack of details keeps banks cautious about Bolsonaro’s plans

Despite the financial market’s initial euphoria with the first-round results of the elections, executives at retail banks are cautious about a possible administration of Jair Bolsonaro (Social Liberal Party, PSL). They consider that, even though the candidate’s proposals for the economy point to the direction they consider correct, there is still little clarity about how they will be implemented.

Mr. Bolsonaro has the benefit of the doubt, even because the sector rejects the economic policy adopted in the administration of Dilma Rousseff, who is of the same Workers’ Party (PT) of runoff contender Fernando Haddad. Yet six bankers who spoke with Valor — especially those linked to the lending market — expect more details of the measures and reckon the real economy will take time to react in a more consistent way.

Inflation trending higher amid stronger dollar, oil prices

Some economists already expect inflation to come in slightly above the target this year due to the effect of a stronger dollar on the real and higher oil prices. The Brazilian Institute of Geography and Statistics (IBGE) reported Friday a 0.48% rise in official gauge IPCA in September, following a 0.09% decline in August. The index advanced 4.53% in the 12-month period ending in September, while the Central Bank’s official target is 4.5%. Itaú Unibanco says the weaker exchange rate is affecting wholesale prices more intensely and may put additional pressure on consumer prices over the next few months.

IPCA up 0.48% highest rate since September 2015

The IPCA inflation index closed the month of September up 0.48%.
In 12 months the IPCA rose 4.53%, higher than the 4.19% up to last month. The expectation was for a rise of 4.45%. This year's inflation target is 4.5%, plus or minus 1.5%.

What the Rating Agencies are saying about Brazil

Two unusual developments emerged recently in the often fraught relationship between Brazil and the big three international credit rating agencies; first, the agencies are in rare agreement about Brazil, and; second, they are saying mostly nice things about the country.

Foreign investors bet on future but cut exposure to short-term assets

With two weeks before the presidential election, foreigners show confidence in the Brazilian economy’s future but are nervous about the short term. Figures show that in August the country received $10.6 billion in direct investment, one of the ten best monthly performances since the launch of the Real Plan in July 1994 — in the 12 months through August, investors injected $70 billion in Brazil. Meanwhile, short-term fixed-income and equity investments saw last month the largest capital outflow in almost four years. In fixed income, net outflow reached $7.75 billion; as for equities, investors have already withdrawn $1.88 billion in September.

Copom keeps base rate at 6.5% but hints at future hikes

In its last meeting before the October presidential elections, the Monetary Policy Committee (Copom) kept base rate Selic stable at 6.5% for the fourth consecutive time. 

Recession Risk is Low for 2019

The Brazilian economy’s recovery is slow and fragile but the risk today of a new recession is “very low,” says economist Marcelle Chauvet, of the University of California, Riverside.

"The factors of uncertainty, which are several, do not cause a recession; they act as if it were a brake on production and consumption," says Ms. Chauvet, a member of the Brazilian Economic Cycles Dating Committee (Codace) of Fundação Getulio Vargas (FGV).

For 2019, she sees an open scenario for the Brazilian economy but cannot rule out a recession or a stronger growth of activity depending on the electoral outcome.

Copom likely to keep Selic unchanged until 2019

Emerging markets seem to have won some respite from recent tailwinds, but base interest rate Selic remains at a record low of 6.5%.

Oil Rig Trades Distort Current Account Indicators

As a result of changes in the oil industry’s tax regime, oil rigs boosted imports and exports this year and distorted some foreign-trade indicators.

From January to August, purchases of oil platforms from abroad totaled $7.3 billion, compared to only $1 million in the same period of 2017. Without the oil rigs, imports grew 15.8% through August, and not 23% as shown in the overall figures.

Finance minister prepares business tax cut proposal

The economic team has intensified discussions around a proposal to reduce the Corporate Income Tax (IRPJ) as a way to follow the changes made in the US.

Finance Minister Eduardo Guardia told President Michel Temer that as soon as the model to compensate for the cut of this tax is ready he will present him with the proposed bill to be sent to Congress, say people familiar with the matter.

Guardia urges pension reform still in 2018

Eduardo Guardia

In meetings with the advisers of the leading presidential candidates, Finance Minister Eduardo Guardia and Central Bank president Ilan Goldfajn have said that the pension reform that is in Congress can and should be passed right after the elections, still in the months of November and December, as long as the president to be elected in October is in agreement. The reform is the passport to a gradual adjustment of public accounts. And without it “there is no way,” Mr. Guardia said and repeated.

“It is a luxury, at this point in the race, to be able to speak still of gradual adjustment. Most countries were not able to do it. Look at what happened in Argentina! We will be able if the reform bill passes and there is commitment to the spending cap,” Mr. Guardia assured to Valor. Then, if the new president wants to make more changes in the pension regime, he or she can do it, but having already approved a minimum.

Taxation of investment funds: the new intended regime

The Brazilian government again intends to change the taxation of investments in certain Brazilian funds, especially FIPs and closed-end funds, effective January 1st, 2019.

Similar changes had already been attempted via Provisional Measure (“PM”) No. 806, of October 30, 2017, which was not timely converted into law by Congress and thus expired. Now President Michel Temer has submitted a new bill to Congress (Bill No. 10,638/2018) with similar contents.

Closed-end funds, which currently are taxed only upon amortization or liquidation, would be subject to biannual Withholding Income Tax (“WHT”) collection, with past-accumulated gains being taxed at once, which may be challenged on Constitutional grounds.

Citing brighter prospects, Moody's revises Brazil outlook to stable

Moody’s surprised the market and revised Brazil’s outlook to “stable” from “negative,” citing economic stabilization, lower inflation, improving fiscal prospects and a healthier Petrobras. The rating remains at “Ba2,” two steps below investment grade. Samar Maziad, chief analyst for Brazil, doesn’t rule out further political turmoil linked to the Petrobras scandal hurting the outlook. Nonetheless, the impeachment seemed to have cleared the path for wider reforms, she says. Banco Votorantim economist Roberto Padovani says the credit-rating agency only consolidated a market perception that had already been priced in as the Michel Temer government reached power.

Copom seen as leaving options open for faster rate cuts

Economists told Valor the Monetary Policy Committee (Copom) of the Central Bank left open the possibility of accelerating the pace of monetary easing in upcoming meetings. The Copom lowered policy rate Selic by 75 basis points to 12.25% on Wednesday. Maurício Molon, chief economist of Santander, says the market tends to react as soon as Thursday by pricing in the possibility of a 100bp cut in the next meeting, in April, if inflation trends remain favorable or the economic recovery proves even harder.

Local debt market poised to become viable funding source again

The local debt market is likely to show growth in 2017 and become a source of funding for companies again, after last year’s drought. With falling interest rates, companies begin to see positive effects both on their debt cost and in their bottom lines and banks start lending to smaller and riskier businesses.

Felipe Wilberg

Experts who structure debt sales expect the pace to continue strong for tax-exempt securities, meant for individual investors, and to improve for corporate debt, focus of institutional investors. “The year will begin strong, especially for tax-exempt securities. Our expectation is that we will have maintenance or marginal growth in the issuance of certificates of agribusiness receivables [CRAs] and we have a long pipeline of infrastructure bonds, especially for the power industry,” says Joel Schimchak, head of debt issuance at Santander.

Treasury expects Brazil to regain investment grade in 2018

National Treasury Secretary Ana Paula Vescovi says that recovering Brazil's investment grade rating is possible and viable as soon as 2018. The secretary was presenting the Annual Financing Plan (PAF) for 2017 and admitted the fiscal scenario is still adverse for this year despite improvements since the change of government last May.

BNDES offers R$13bn to accelerate recovery

Maria Silvia Bastos Marques

The Brazilian Development Bank (BNDES) will take an unprecedented role as provider of working capital to Brazilian companies. Through December 31, the bank will make R$13 billion available in its BNDES Progeren line, to bolster the capacity of creating jobs and income, of which R$5 billion will be offered directly, something that so far had never occurred in a broad way, and R$8 billion through financial agents.

The offering of working capital without the intermediation of agents is part of the new operational policies BNDES announced Thursday in the biggest revamp of the bank’s financing terms in nearly a decade. The last change was made nine years ago.

Copom forecasts below-target inflation in mid-2017

If Central Bank forecasts are right, inflation will fall below the target of 4.5% in the middle of this year, something that hasn’t happened since 2009. It will be a temporary fluctuation of the price index, absolutely normal in inflation-targeting regimes, but enough to fuel accusations of monetary policymaking overreach.

According to forecasts presented by the Central Bank’s Monetary Policy Committee (Copom) in the December Inflation Report, the Extended Consumer Price Index (IPCA) could reach 4.1% in the 12-month period ending in September. By the end of the year, inflation will rise to 4.7%.