Brazil’s central bank is focused on keeping inflation under control, not targeting growth, even though the economic recovery has undershot expectations and risks remain to the downside, central bank chief Roberto Campos Neto said on Wednesday.

Speaking at a conference in New York, Campos Neto said he expects pension reform will be approved, and if it is done properly, Brazil’s currency, the real, will probably strengthen “not because we want to, but as a consequence.”

“The mission of the central bank is not to achieve growth, it’s to achieve inflation,” Campos Neto told an XP Investimentos conference on Brazil.

Annual inflation at 4.58% in March was well above forecasts and the highest in two years, figures on Wednesday showed.

“For us, the main job is to keep prices stable and expectations well anchored. We are not going to take a risk on that, but I understand there is a balancing act happening,” he said.

Campos Neto also said he expects Congress to pass social security reform, which the government hopes will save over 1 trillion reais ($261.23 billion) over the next decade, restore public finances and revive economic growth.

The fiscal challenges facing Brazil are threefold, he said: passing pension reform, capping public sector salaries, and reducing the interest rate burden on the country’s debt load.

If fiscal reforms are done “properly”, the real will likely strengthen as a result. But asked if this means the central bank will sell FX reserves to slow any currency appreciation, Campos Neto said policymakers will have to analyze the impact on reserves policy.

He also reiterated that the central bank has no target for the real, but said it monitors liquidity and market functioning. The central bank is working toward simplifying the foreign exchange market to make it easier and quicker for foreigners to transact in Brazil, and that the aim is to see the currency become fully convertible in time.

 

Source: Reuters

Brazilian Economy Minister Paulo Guedes on Wednesday put up a vigorous defence of the government’s proposed pension reform, insisting it is critical to fixing the country’s “doomed” social security system but opening the door to some concessions.

In often heated and combative exchanges with lawmakers at Brazil’s Constitutional and Legal Affairs Committee (CCJ), Guedes said the proposals were progressive, would reduce inequality, and were urgently needed to address Brazil’s “inescapable” fiscal problems.

The hearing’s confrontational atmosphere, however, weighed on Brazilian markets, on fears political infighting may hold up deliberations on the bill. Stocks fell 0.9 percent, the real weakened and interest rates futures rose.

Elmar Nascimento, lower house whip for the DEM party, the government’s main ally in Congress, said in a tweet that Guedes may have to come back to the committee to fully explain what the impact of the new rules will be.

“The government needs to intensify its efforts to convince lawmakers and the public that reforms must reduce (pension) benefits,” Nascimento said.

Guedes recognised that proposed changes to rural, elderly and disabled workers’ pensions are a sensitive issue, adding that the role of Congress would be to weigh those concerns and act on them.

He also defended the introduction of private retirement accounts, which he called fairer and more helpful for boosting economic growth, citing the example of Chile’s system.

“It’s important to understand that our system is financially doomed, no matter the government in power,” Guedes told the CCJ.

President Jair Bolsonaro’s plans aim to save over 1 trillion reais ($260 billion) over the next decade through a range of reforms including raising the minimum retirement age and making workers contribute to the system for longer.

Bolsonaro and Guedes have been heavily criticized for not reaching out to lawmakers to build the political consensus needed to secure the bill’s passage through Congress.

Guedes has tried to strike a more conciliatory tone lately, but that was not in evidence on Wednesday.

“Venezuela’s better! Venezuela’s good!” Guedes responded sarcastically in a heated exchange with deputies who had shouted down his praise for Chile.

“Speak up! I can’t hear you!” Guedes goaded ironically, before shouting and finger-pointing later in the session.

Guedes insisted that his role in pension reform is only to put forward the proposals, not to enter the political debate.

The government needs at least 308 of the 513 lower house deputies to approve the reforms, sending them to the Senate. A survey run by transparency group Atlas Politico on Wednesday showed that the government currently has the support of 171 deputies.

 

Source: Reuters

Brazil posted a trade surplus of $4.99 billion in March, the Economy Ministry said on Monday, significantly smaller than the same month a year ago thanks to a strong rise in imports.

The trade surplus last month fell 22.3 percent to $4.99 billion from $6.42 billion a year ago, although that was up more than a third from February’s surplus of $3.67 billion.

Exports totaled $18.12 billion, down 1.0 percent from March last year, while imports totaled $13.13 billion, up 5.1 percent from the same month last year, Economy Ministry figures showed.

All else being equal, a shrinking trade surplus is a drag on economic growth. Last week, Brazil’s central bank cut its 2019 growth forecast to 2.0 percent from 2.4 percent, noting that net trade is expected to shave 0.2 percentage points off overall growth.

Foreign trade secretary Lucas Ferraz said on Monday he expects Brazil’s trade surplus this year to total $50.1 billion, on exports of $245.9 billion and imports of $195.8 billion.

That would be the third largest surplus on record, Ferraz noted, but crucially it would be some 15 percent down from last year’s surplus of $58.66 billion, and 25 percent down from the year before that.

The data for March showed a 13.0 percent jump in imports of capital goods, including autos, while commodities exports rose 7.9 percent. Exports of manufactured goods fell 6.5 percent.

 

Source: Reuters

Emerging markets have started 2019 well due to a sharp U-turn in monetary policy around the globe and an easing of trade war tension between China and the US. The Fed and ECB’s change in monetary policy was initiated after the ‘blood bath’ in markets in December 2018. This shift has redirected flows from higher yield expectations across developed markets to yield hunting in emerging markets. Stabilisation in the USD in early 2019 versus its sharp strengthening in 2018 has been a big positive driving force for emerging markets despite lots of other persistent risky issues: the China-US trade deal has not been agreed yet, keeping intrigue for emerging markets sentiment; (geo)political turbulence is still in place for Hungary, India, Kazakhstan, Poland, Russia, Turkey and Ukraine. Many economic issues should be solved locally in 2019, for instance in Brazil and China.

In line with markets, we remain confident that the China-US trade deal will be agreed later in Q2 19. Any withdrawal from the current ‘trade talks journey’ by either counterparty would weigh immediately on emerging market sentiment. After US President Donald Trump has dealt with US-China trade, we could see his attention shifting to starting a trade war with the EU. If this happens in May 2019, the biggest losers would be the Central and Eastern European economies. Market expectations are still in favour of Germany’s economic pickup in Q2 19, which is fuelling the Czech, Hungarian and Polish economies, but Trump’s auto tariff idea would spoil the sentiment overnight.

Economic growth in emerging markets is set to slow down less than expected on easing monetary conditions. Given stabilisation in currencies across many emerging markets, accelerated inflation is set to calm down in H2 19, allowing emerging markets’ central banks to follow a change of monetary stance in developed countries. We have seen the first shoots of monetary easing in China and India in Q1 19. We also see tentative signs of a bottom in China (PMI, metals), which has eased concerns about a hard landing in the country. Other Asian economies are likely to follow the pattern very soon, while Russia, South Africa, Turkey and Brazil could join the cuts later in 2019, helping economic expansion in particular looking ahead to 2020.

We now see many yellow lights in the emerging market risks heat map becoming green, while the green lights are becoming even greener. However, there is still a risk that a possible new TRY crisis will put the brakes on the appetite for emerging markets in H1 19.

 

Source: FXSTREET

Brazilian President Jair Bolsonaro and his economy minister tried to rescue their contentious pension reform bill on Wednesday, as deepening political chaos surrounding the government’s signature proposal slammed Brazilian markets.

Bolsonaro again warned that failure to overhaul the creaking social security system would bankrupt the country, while Economy Minister Paulo Guedes said he would quit if the president or Congress chose not to follow his policy recommendations.

Brazilian financial assets tumbled. The real fell to a nearly six-month low against the dollar, while the Bovespa stock market slumped 3.6 percent. Bond yields and market-based interest rates also climbed steeply.

Voters elected Bolsonaro to end years of graft and rising violence, and kick-start the economy. But as his inexperienced government has become increasingly swallowed by infighting, his poll numbers have dropped and investors are beginning to wonder whether he can deliver.

The president waded into the debate after a bruising 24 hours for his government that highlighted the uphill political battle required to pass an ambitious legislative agenda.

Guedes told a Senate committee that Bolsonaro’s government was failing to convince lawmakers of the merits of his plan to save over 1 trillion reais ($250 billion) over the next decade, squandering the political capital won in the elections.

“If the president supports the things that I believe can help Brazil, I will be here. But if neither the president nor the House nor anyone else wants that, I will go back to what I was doing,” Guedes told the Senate Economic Affairs Committee.

Guedes had skipped a congressional hearing on the pension proposals on Tuesday, while a bloc of 11 political parties demanded the removal of changes affecting rural, elderly and disabled Brazilians.

A measure on Tuesday by lawmakers to seize more control over the federal budget in coming years also received near-unanimous approval by the lower house of Congress.

Rodrigo Maia, who as speaker of the lower house is in charge of guiding the pension bill through Congress, on Wednesday denied that vote handicapped the government.

Bolsonaro said he would meet with Maia next week to discuss the growing crisis. But the president’s tweets and comments have riled the speaker.

“Let’s stop kidding around and let’s work seriously,” Maia said late Wednesday. “Brazil needs a functioning government … and the president is playing around with the presidency of Brazil.”

Bolsonaro, who nearly died from a stab wound during last year’s election campaign, said in a TV interview that his health had impaired his work leading the government.

On Wednesday, after he underwent a medical checkup, the Sao Paulo hospital that operated on him said he was in “excellent clinical condition.”

The Brazilian real on Wednesday plunged 2.3 percent to close at 3.9531 per dollar. After spot trading but while Guedes continued his contentious Senate hearing, the currency slipped in the futures market past 4.00 per dollar.

After markets closed, Brazil’s central bank stepped in to slow the slide, announcing a Thursday auction to sell $1 billion in the spot market with an agreement for future repurchase.

The benchmark Bovespa stock index nosedived 3.5 percent, and has now shed 8.5 percent in just over a week.

Interest rate futures jumped as investors bet a delay and dilution of fiscal reforms may force the central bank to raise interest rates. The April 2020 contract rose to 6.75 percent, meaning a rate hike within a year is fully discounted.

“We still think ‘sausage making’ is in full process, where any headlines will lead to volatility in the real, and setbacks like this could continue in the coming months,” said Citi strategists in a client note on Wednesday.

“We remain on the sidelines,” they said.

 

Source: Reuters

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Brazil stands to be one of the major beneficiaries of the China-proposed Belt and Road Initiative (BRI), which is in line with the government’s economic development plan, Brazilian expert Xia Huasheng has said.

The Belt and Road cooperation with China helps boost Brazil’s agricultural exports and attracts investment for infrastructure construction from Chinese multinationals, which brings resources, experience and technology, Xia, a professor of finance at the Sao Paulo School of Business Administration under the prestigious Getulio Vargas Foundation (FGV), told Xinhua in a recent interview.

“Within the framework of the Belt and Road Initiative, the majority of projects are related to infrastructure,” he said, noting strengthening infrastructure is essential to Brazil’s economic recovery.

“The new Brazilian government wants more investment in infrastructure projects,” he added.

Xia said the BRI is also in line with the pro-market policies of Brazilian President Jair Bolsonaro, who took office on Jan. 1.

“The participation of Chinese multinationals is essential” to bilateral cooperation, because they not only invest in the government’s infrastructure projects, “but they also take a series of measures to increasingly become local companies with greater interaction with Brazilian companies, and generate jobs and benefits for the country,” Xia said.

In his opinion, the Belt and Road can help open up markets and promote a greater “involvement” of the private sector in participating countries.

“Heavy investment by the government is very important to laying the foundation of this initiative, which is now more mature,” he said. “The moment has come for private companies and banks to take advantage of this opportunity to do business and generate benefits.”

He said he believes that the market forces of supply and demand within the context of globalization will prompt industrial, agribusiness, manufacturing and trade centers to be built along the Belt and Road, and gradually, greater interaction between such businesses will further expand the initiative.

Through the initiative, goods and services from different regions can be traded at lower logistical costs, he said, and more jobs are meanwhile created, technology promoted, and living standards improved, especially of the people previously marginalized by globalization.

Since its launch in 2013, the China-proposed BRI has involved more than 100 countries, making it a factor in promoting mutual benefit on a global scale and an important platform for international cooperation, said the academic.

In Brazil, researchers are closely following the developments of the BRI, he said.

China has remained Brazil’s largest trading partner since it took the place of the United States in 2009. In 2018, bilateral trade hit a record 100 billion U.S. dollars, official data showed.

 

Source: XINHUA NET

Brazilian economic growth has slowed more than anticipated this year and inflationary pressures have eased, minutes of the central bank’s recent policy meeting showed on Tuesday, suggesting policymakers were in no rush to raise interest rates.

While the Brazilian economy remained on a “gradual recovery path,” policymakers now view risks to inflation as “symmetric,” compared with “asymmetric” to the upside at their previous meeting.

Doubts about the success of a proposed pension reform and a precarious global outlook mean policymakers will be patient in assessing Brazil’s economy and in no rush to change policy, the minutes said.

Their decision to keep the benchmark Selic rate on hold at a record low 6.50 percent was unanimous.

The minutes of the March 19-20 meeting showed that the central bank’s rate-setting committee, known as Copom, believed inflation would peak around April or May this year before easing back to this year’s target of 3.9 percent.

Fresh data on Brazilian consumer prices on Tuesday showed a decent rise in inflation in the month to mid-March, reinforcing Copom’s view that inflation had yet to peak.

“The minutes have a dovish lean … but do not imply any rush to cut rates, instead advocating patience,” analysts at Citi wrote in a note. “Rates are seen below neutral unless the fiscal situation improves. This makes pension reform a more important driver for Brazilian rates than the minutes per se.”

Copom, under the stewardship of new central bank chief Roberto Campos Neto for the first time, also noted the outlook for global growth had deteriorated since the committee’s Feb. 5-6 meeting.

Brazilian financial markets have been highly volatile in recent days, tumbling amid concern that poor coordination in Congress would delay and dilute pension reform. The Bovespa stock index lost 5.5 percent last week, Brazil’s currency hit its weakest levels of the year, and bond yields soared.

 

Source: Reuters

Brazil has just overtaken China in terms of consumer sentiment, as the world’s second-largest economy slows down and spending intention on big ticket items decline, according to a Credit Suisse survey released Monday.

Speaking to CNBC at the Credit Suisse Asian Investment Conference in Hong Kong on Monday, Eugene Klerk, the bank’s managing director of global thematic research said China showed weaker readings in spending intentions compared to Brazil and India.

The Credit Suisse Emerging Consumer survey, released Monday at the conference, found that China now sits at third place in terms of overall consumer sentiment, with India and Brazil at first and second place respectively.

“If we look at the data this year, we find consumers particularly optimistic in India and we also find consumers in Brazil becoming a lot more optimistic,” Klerk said. “We see a different picture is in China.”

The survey interviewed consumers face-to-face across eight emerging economies: namely China, India, Brazil, Indonesia, Mexico, Thailand, Russiaand Turkey.

Durable goods — such as cars and luxury items — were most affected by the decline in consumer sentiment, the survey found. The bank, however, still sees “structural growth” in local goods and brands.

Klerk said he believes this decline in spending on durable goods is “cyclical” in nature.

“The theme of the emerging consumer has always been seen as a very structural one,” Klerk explained. “This year’s survey suggests that maybe the emerging consumer is slightly more cyclical than we thought he or she would be.”

The decline in spending intention across a range of luxury items, he said, suggests the narrative is “more of an economic headwinds story rather than a conscious decision to stop spending money on cars.”

China’s $13 trillion economy has been slowing, and the ongoing trade war with the U.S. has only aggravated the slowdown.

Beijing has lowered its economic growth target to between 6 percent and 6.5 percent for 2019. That’s compared to last year’s expansion of 6.6 percent, which marked the country’s slowest pace of growth since 1990.

 

Source: CNBC

Brazilian financial markets fell in highly volatile trading on Thursday as investors feared former President Michel Temer’s arrest on graft charges could slow proposed pension reform seen as critical to injecting life into a tepid economic recovery.

Temer, who left office on Jan. 1, is accused of leading a “criminal organization” that took in 1.8 billion reais ($472 million) in a bribery and kickback scheme related to the construction of a nuclear power complex.

At one point on Thursday, the Bovespa stock market lost as much as 3.7 percent for the week, which would mark its worst week since August.

Brazil’s 10-year bond yield was up more than 20 basis points at 8.93 percent and the currency, the real, down over 1 percent at one point.

But markets clawed back some of these losses as the sharp moves prompted traders to book profits, reduce positions and assess what is next for the pension reform process.

“Investors were already primed to sell Brazil and the uncertainty fueled by (Temer’s) arrest accelerated the move,” said one trader at a Sao Paulo brokerage.

“But that gradually eased and when all is said and done, will the fiscal adjustment (from reforms) be enough? I think today’s caution was exaggerated,” he added.

The Bovespa ended 1.34 percent lower at 96,729.08 points, Brazil’s 10-year bond yield closed up four basis points 8.76 percent and the currency ended little changed at 3.79 per dollar.

Temer’s shock arrest came a day after the government unveiled a drastically watered down austerity plan for military pensions and pay, and a poll showed President Jair Bolsonaro’s popularity has plummeted.

There is no direct link between Temer and the Bolsonaro government or its economic agenda. But pension reform is not going as smoothly as the government would like, and the scandal around Temer and his former aides is seen as an unwelcome distraction.

Pension reform remains investors’ biggest worry. The 10.4 billion reais in savings from changes to military pensions and pay was well short of the 93 billion reais the government had originally trumpeted.

This raises questions about how much the government will be forced to compromise with other sectors, diluting its savings target of over 1 trillion reais in a decade and slowing its passage.

Recent surveys by Bank of America Merrill Lynch and Citi show investors growing more pessimistic on the eventual scale of savings and speed of the reform bill’s passage through Congress.

 

Source: Reuters