Seasonal effects pushed up Brazil’s unemployment rate for a second straight month in February, highlighting the labor market’s slow and uneven recovery from a deep recession.

The jobless rate rose to 12.6 percent in the three months through February from 12.2 percent in January, government statistics agency IBGE said on Thursday.
Unemployment in Brazil tends to rise in the first quarter of the year as temporary contracts signed during the year-end holiday season expire, said IBGE economist Cimar Azeredo.

The two months of gains follow nine months of declines that brought the unemployment rate down from all-time highs.

Even that improvement, however, showed signs of weakness as nearly all employment gains involved informal jobs. The number of formal workers fell in February to the lowest levels since 2012, IBGE said.

With wages adjusted for inflation stagnating, the central bank may struggle to lift inflation back to its targeted range after undershooting it for the first time ever last year.

Earlier this month, the bank surprised observers by hinting at an additional interest rate cut in May even as the benchmark Selic rate was at an all-time low. Double-digit unemployment, as well as widespread idle capacity at companies, have kept a lid on inflationary hikes.

Source: Reuters

Shrinking borrowing costs bring relief to government debt

Brazil’s budget deficit narrowed in February, the central bank said Wednesday, as shrinking borrowing costs bring relief to government debt.

The 12-month deficit was 7.34% of gross domestic product, narrower than the 7.49% of GDP shortfall recorded in January.

The so-called primary budget result, which excludes interest payments, was a deficit of 1.43% of GDP in the 12-month period through February, compared with a deficit of 1.53% of GDP in the year ended in January.

Brazil’s gross debt was at 75.1% of GDP in February, up from 74.5% of GDP in January.
Source: The Wall Street Journal

Brazil’s central bank may take “some time” to evaluate the economic outlook before halting interest rate cuts, the minutes of its last policy meeting showed on Tuesday, suggesting its forecast for a final reduction in May may be premature.

The bank last week cut the benchmark Selic rate by 25 basis points to 6.50 percent as a string of underwhelming price figures kept a lid on inflation expectations for both this year and next.

In a statement, the bank said it would likely pursue another 25 basis-point reduction in May and then keep them steady in June, as long as the economy develops as expected. But the minutes of that meeting showed some policymakers preferred to take a more cautious stance.

“Some members expressed a preference for indicating that it should be necessary to wait for a few Copom meetings, until sufficient information is gathered to assess the behavior of the economy,” the minutes said, referring to the central bank’s regular policy meetings.

This raises the prospect that the most dramatic cycle of interest rate cuts in a decade, which brought the Selic rate down from a 10-year high of 14.25 percent to an all-time low, could continue for longer than expected.

For months, inflation has been stagnant below the lower bound of the official target range of 4.5 percent plus or minus 1.5 percentage points, amid double-digit unemployment rates and widespread idle capacity.

Source: Reuters

Pro-business candidates may be trumped by populist contenders in Brazil’s presidential election this year, frustrating investor expectations and the country’s economic potential, house speaker and presidential hopeful Rodrigo Maia told Bloomberg News.

 “You have candidates who believe in increasing expenditures as a way to stimulate the economy, and these candidates have a chance of winning,” Maia said in an interview in his official residence in Brasilia. “It’s a risk.”

So far, investors assumed that one of the centrist hopefuls would gain traction, win, and carry on with President Michel Temer’s pro-market reform agenda. But so far, all of them are stuck with single-digit voter intentions. In fact, the two candidates leading opinion polls both would mark a radical departure from the current administration — retired army Captain Jair Bolsonaro and former President Luiz Inacio Lula da Silva.

One difficulty, said Maia, is that campaigning for fiscal responsibility or small government is a challenge in Brazil, particularly with voters who are still reeling from the worst recession on record.

“We need to make people aware of the fiscal situation the country faces, and many don’t understand this,” said the 47-year-old career politician from Rio de Janeiro. “We have to understand that the Brazilian state has by far exceeded its spending ability.”

But the problem as Maia see it is not only with the message but also the messengers: More articulate and charismatic candidates outshine the relatively lackluster mainstream hopefuls such as Sao Paulo state Governor Geraldo Alckmin and Finance Minister Henrique Meirelles.

While the field is wide open, Maia sees former Ceara Governor Ciro Gomes as one candidate who’s standing out. “Ciro has support, speaks well, is articulate, has experience, knows Brazil.”

Noting that fiscal consolidation has gone a long way toward restoring investor confidence in Brazil, Maia says electoral uncertainty has begun to take a toll, citing recent capital outflows and lack of long-term investment. The Sao Paulo stock exchange has lost steam after hitting a record in February and credit default swap prices are up over the past two months.

In the run-up to the October election, legislators also appear to be distancing themselves from a pro-market reform agenda. After shelving proposed plans to cut pension outlays, efforts to privatize the state-owned utility Eletrobras are also sputtering in Congress, Maia said.

“Everyone is looking for a road to re-election,” Maia said.

Source: Bloomberg

Brazil’s central bank cut its benchmark interest rate Wednesday for the 12th consecutive time and surprised markets by signaling readiness to trim the rate again at its next meeting, as price increases remain below expectations.

The monetary policy committee cut the bank’s Selic short-term rate to 6.5% from 6.75%, a record low. The bank began the current rate-cut cycle in October 2016, when the Selic was at 14.25%.

The Selic is already at the lowest since the bank adopted inflation-targeting in 1999, and it could go even lower at the next meeting on May 16.

At this time, the monetary policy committee “views an additional moderate monetary easing as appropriate [and] this additional stimulus mitigates the risk of delayed convergence of inflation toward the targets,” the statement announcing Wednesday’s cut said.

The bank hedged itself by saying it could hold the Selic at the current level “if risk mitigation proves unnecessary.” It also indicated rates are likely to hold after the next meeting.

 The rate cuts have been fueled by a sharp drop in inflation, to a 12-month rate of 2.8% in February from 10.7% in January 2016.

The indication of another cut in May was a surprise, and one that could be risky, said economist André Perfeito, from Gradual Investimentos brokerage firm.

“It means inflation dynamics are weaker than the bank had thought,” he said. “Rates will need to go up next year, so maybe keeping the current level could soften the upswing.”

Brazil’s central bank has a 4.5% inflation rate target, with a tolerance range of 1.5 percentage points in either direction. The target is set to fall to 4.25% in 2019 and 4% in 2020. Economists surveyed by the central bank have forecast inflation accelerating to 3.6% by the end of this year and to 4.2% in 2019.

Brazilians will elect a new president and Congress in October, and it is unclear if the new government will include leaders willing to take on a gaping budget shortfall equal to 7.5% of gross domestic product and ballooning debt now at 74.5% of GDP.

If they don’t, economists say investors could punish the local currency, making imports more expensive and fanning inflation. The central bank has echoed those concerns.

“Frustrating expectations about reforms…could lift inflation’s trajectory in the relevant horizon for monetary policy,” the bank’s president, Ilan Goldfajn, said in a presentation last week.

Meanwhile, Brazil is only slowly recovering from a deep recession. After stalling in 2014, the economy contracted 3.5% in each of the two following years, before expanding just 1% in 2017. Thanks in part to lower borrowing costs, economists forecast 3% growth this year.

Source: The Wall Street Journal

Brazil’s growing economy, lower interest rates and leaner companies are leading investors to believe there is more upside for the Ibovespa — even after a record number of the companies beat fourth-quarter earnings estimates.

Sixty percent of the companies on the benchmark index that have released results reported better-than-expected sales, according to Bloomberg data. And at least 16 of the 64 groups that comprise the index had record quarterly revenue, signaling the worst may be behind in Latin America’s largest economy. The good news should keep flowing, investors say.

“The companies did whatever they could to be more cost-effective during the recession and therefore have super-efficient margins,” William Landers, a managing director at BlackRock Inc., said in an interview in Sao Paulo. “Any top line growth will be accretive to margins. You also have a benchmark interest rate that is less than half of what it was last year. If that doesn’t lead to earnings growth, I don’t know what will.”

The Ibovespa, which is near a record level in local currency, is still 40 percent below its peak in dollar terms, which may mean it still has room to rise. Foreign investors have hesitated to return to Brazil ahead of the October presidential election, which could result in positive inflows after the fact.

 “A place where you still haven’t had a lot of positive flow, with strong earnings momentum and where local investors will migrate to stocks out of need is positive for a few years, not just a few months,” said Landers, who has $2.5 billion under management.

About 66 percent of Landers’s portfolio is allocated in Brazil. His most recent move was to increase exposure to consumer discretionary stocks, including retail and e-commerce companies.

Santander analysts have raised their Ibovespa year-end target to 97,000, a 15 percent upside from the current level. The Ibovespa is up 10 percent year-to-date in local currency and U.S. dollar terms, compared with 1.7 percent for the S&P 500 and 6.8 percent for the Nasdaq composite.

The lingering question is whether the winner of the presidential election will maintain structural reforms that President Michel Temer has fought for, Landers said. There’s no clear front-runner, assuming former President Luiz Inacio Lula da Silva is unable to run, as expected.

“Brazil’s recovery is as good as, maybe even better than we expected,” he said. “The big mystery now is who will be the next president.”

Source: Blooomberg

The Brazilian central bank is likely to cut interest rates once again to a new low on Wednesday as stubbornly muted inflation derailed its plans to halt monetary easing.

The bank’s monetary policy committee, known as Copom, is widely expected to reduce the benchmark Selic interest rate by 25 basis points to 6.50 percent at the end of a two-day-meeting, according to a Reuters poll of economists.

The decision is expected to be announced at 6 p.m. local time (2100 GMT) on Wednesday.

Investors will watch the bank’s policy statement closely for clues on the possibility of a further cut at its May meeting.

While most expect this week’s reduction to be the last in the deepest easing cycle in a decade, the bank may choose to keep its options open after getting caught on the backfoot by a string of weak inflation figures.

“In the February minutes, the committee stated that low and falling core inflation could open room for additional monetary easing, and we believe this is exactly what most recent indicators have been showing,” Santander Brasil economists wrote in a report.

“Copom will probably, in our view, leave the door open for an additional cut in May should inflation expectations continue to fall”.

The bank had strongly hinted that it intended to halt interest cuts at its last policy statement but the minutes to that meeting suggested some disagreement over that message.

Earlier this month, central bank chief Ilan Goldfajn acknowledged that policymakers were surprised by the slow pace of price hikes, stoking bets on further rate cuts.

After ending last year below the bottom-end of the government’s target range, inflation continues to underwhelm this year amid double-digit unemployment rates and widespread idle capacity.

Economic growth has picked up following the deepest recession in decades, but the recovery has been more uneven than expected. As the most wide-open and hard-to-predict elections in over twenty years fast approaching, the case for easy monetary policy is not a hard sell.

Source: Reuters

While Bank of England Governor and Financial Stability Board chair Mark Carney may not see cryptocurrencies as an immediate threat to the global financial system, the head of Brazil’s central bank still sees plenty of reason for concern.

In remarks to Folha de Sao Paulo, a Brazilian newspaper, ahead of the 2018 G20 Summit in Buenos Aires, Ilan Goldfajn articulated that that cryptocurrencies still lack the stability needed to be a safe and legitimate exchange of value.

Rather, Goldfajn noted that he prefers to think of them as “crypto-assets” rather than “cryptocurrencies.”

 I don’t refer to them as money because money has to have stability in its value and be able to facilitate payments,” he explained. “I see them more as an asset, and a risk, because they don’t have the support of a central bank.

The topic of cryptocurrencies is on the docket for several summit meetings this week, presumably where regulatory aspects will be discussed. Goldfajn explained that the goal will be to “look at what each country is doing and what are the benefits, because all of us are in favor of the technologies.”

He also reiterated warnings of the potential use of cryptocurrencies for financing illicit activities. While the extent to which bitcoin and other large-cap cryptocurrencies are being used in this manner at a global scale appears, he explained that the risk, however small that may be, of that occurring in Brazil’s borders is too large to tolerate.

 “We cannot show complacency in regards to tax evasion and money laundering,” he emphasized. “If this new channel were to be used for these purposes, we must act how we act in response to other illicit movements.”
Source: Forbes

U.S. President Donald Trump’s decision to increase the tariffs on steel and aluminum announced last week moves world trade into uncharted waters and could lead to the possibility of a commercial war, says the general director of the World Trade organization (WTO), Roberto Azevêdo.

The scenario could worsen as the capacity for action of the main arbitration body of global trade to deal with the effects of the measure is still unknown. President Trump now threatens to call on national security as a justification and the WTO regulation is vague on the agency’s margin to question Trump’s argument, Azevêdo told Folha in an interview on Tuesday evening, March 13, as he was preparing to take part in the World Economic Forum on Latin America held in São Paulo.

That could make proceedings at the WTO against the new tariffs, such as that Brazilian President Michel Temer threatened to issue in the following morning, lose force.

“There is the economic risk. And there is the systemic risk, as other countries believe that the measure is not compatible with multilateral rules and are making threats. There is always the risk that escalating retaliations could lead to a trade war. And we are making efforts to avoid that,” he said.

Azevedo, however, does not believe that will occur in the short term, and cites the possibility of mitigating the effects. He believes that Brazil is trying hard to be among those not affected by the new rules.

Source: Folha de S. Paulo.

The World Economic Forum on Latin America is the regional version of the Davos Economic Forum, held biannually in various Latin American countries. This year, it took place on March 13-15, for the 13th time, in São Paulo, the largest city of South America. It was the second time that Brazil hosts the forum – in 2011, it was held in Rio de Janeiro. The title of the forum is “Latin America at a Turning Point: Shaping the New Narrative.”

The peculiarity of the current forum is that it was held on the eve of an unusual election marathon in Latin America. This year, presidential elections are expected in a number of the biggest Latin American countries – Brazil, Mexico, Venezuela, Colombia, as well as in Costa Rica and Paraguay. Moreover, in March, a new president, who was elected at the end of last year, comes to power in Chile. These events can significantly change the situation in the region, which has experienced a three-year economic slowdown and is clearly in need of reforms.

In these circumstances, the issues of improving public governance and carrying out reforms which could help meet the challenges of the region’s modern development were at the center of the forum participants’ attention, including over 750 global and regional leaders from government, business and civil society. These challenges include distrust of voters toward leaders and state institutions after a series of corruption scandals, which have shocked most Latin American countries over the past 3 years, the most famous of them leading to the impeachment of Brazilian President Dilma Roussef. Other critical issues facing Latin American governments are technological and innovative development gaps, the lag in labor productivity levels compared to the advanced countries, including in Asia, and inequality in income distribution, where Latin America ranks first among the regions of the world with underdeveloped social and economic infrastructure.

The main issues at the forum were: is Latin America ready for the fourth industrial revolution which is taking place in the world, how new technologies, including blockchain, can help strengthen public control over government activities, giving it greater transparency, how robotization of production can influence the regional economies and how the traditional models of the development of Latin American states should be changed.

In particular, the problem of training qualified personnel for national companies was discussed, as well as attracting foreign firms, which are currently not interested in investing in countries with a low level of skills and salaries. In this regard, the importance of investment in the development of digital infrastructure for employees of Latin American enterprises was emphasized. The importance of this problem also increases due to robotization process, which displaces unskilled labor.

In connection with the problem of the region’s readiness for a new industrial revolution, the participants discussed the need to reduce the scale of the informal economy, where more than half of the Latin American labor force is employed. Shifting workers to the modern formal sector will help improve skills, productivity and reduce inequality. It was also noted that the role of the private sector in resolving these problems and social responsibility of entrepreneurs should be increased.

There were also some new topics: harassment in the workplace and gender equality, but they were not connected with the “new narrative,” mentioned in the title of the forum. The meaning of these words was clarified by Marisol Argueta de Barillas, member of the Executive Committee of the World Economic Forum and Head of its Regional Agenda for Latin America: “The region needs a new narrative that places responsible leadership and people’s well-being at the centre; one that embraces technology and innovation as key drivers to modernize economies and advance economic progress for all.”

Source: Valdai Club