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Brazil to maintain record low rates, debate turns to more easing

Brazil’s central bank will keep its benchmark interest rate anchored at a record low later this week, and probably keep it there for the rest of this year, according to a Reuters poll of economists.

The central bank’s policy-setting committee (Copom) has held its Selic interest rate at 6.50 percent since March last year, and is likely to remain patient for several more months while it assesses the economic and political outlook.

The focus may even be shifting, however slowly, to whether the central bank’s next move might be a rate cut rather than a hike.

Growth in Brazil remains sluggish after a deep recession, and inflation remains well-contained even though interest rates have never been lower. Brazil’s currency has also firmed slightly, keeping growth in check and capping import prices.

 All 28 economists polled by Reuters expect the central bank to keep its key rate unchanged on Wednesday for the seventh straight meeting. Of the 22 who responded to the question how rates would skew for the rest of the year, 12 said ‘no change’, eight said ‘higher’ and two said ‘lower’.

That is more dovish than a Reuters poll in December, when more than two thirds of respondents said Copom would begin raising rates in the second half of 2019. Now, just over one third say the risk for rates this year is higher.

“The skew is still tilted to the upside, but increasingly less so. Rates on hold for the full year would definitely be the baseline if social security reform is approved,” said Alberto Ramos, Managing Director and Head of Latin American Economic Research at Goldman Sachs in New York.

“Positive news will likely lead to currency appreciation, and that will turn the inflation outlook even more benign in the short term,” Ramos said.

While a dovish turn from the U.S. Federal Reserve in recent weeks has brightened the outlook for emerging economies and their financial markets, the biggest single domestic factor determining Brazil’s economic path this year is pension reform.

Economists are increasingly hopeful that President Jair Bolsonaro’s plans, which could save up to 1.3 trillion reais ($350 billion) over the next 10 years, will get through Congress soon. This will help balance Brazil’s books, inject a huge dose of investor confidence into the economy and put the national currency, the Brazilian real, on an even stronger footing.

“If a good package of social security reform measures is passed, and the external environment is favorable, there could even be a small cut in interest rates this year,” said Sergio Vale, chief economist at MB Associados.

Financial markets have already moved in that direction. On the eve of Copom’s last rate decision in December, interest rate futures were pricing in around 20 basis points of tightening by the end of 2019. Now they are pricing in around 20 basis points of easing.

Wednesday’s Copom decision will be the last presided over by central bank governor Ilan Goldfajn, who is set to be replaced next month by Roberto Campos Neto, a senior executive at Banco Santander Brasil SA.

In an interview with Reuters last month, Goldfajn echoed the Copom’s statement from December and said policy is stimulative. “Whether it is sufficiently so, we will always look at the right moment,” Goldfajn said, stressing, however, that this did not indicate any shift in stance.

 

Source: Reuters

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Why Brazil Must Build a (Fiscal) Wall

Judging by the reaction of financial markets, the Brazilian economy started the year at high speed. The real is among the world’s best-performing currencies so far in 2019 and the main stock market index Ibovespa hit a string of record highs leading into last week, when it broke the 97,000-point mark. Future interest rates have fallen sharply.

Foreign investors are buying in as well. The premium demanded as compensation for the inherent risk of buying Brazilian bonds, the Credit Default Swap rate (CDS), that in September was above 310 basis points has fallen to around 180 basis points, a range close to that of emerging countries with an investment-grade seal.

Brazil’s new economy minister, Paulo Guedes, is at the heart of markets’ optimism. Starting with his inaugural speech, Guedes’ priorities have been music to financial investors’ ears. He proposes “fiscal walls” to sustain the 20-year public spending ceiling mandated by a constitutional amendment approved by Congress in 2016. These walls would consist of a public expenditure review with substantial pension reform, extensive privatizations – both as a source of extra proceeds and to re-focus companies on their core missions – a simplified tax code and, overall, an improvement of Brazil’s business environment.

There are nevertheless two major “buts.” Current optimism with financial assets is based on confidence that the entire Bolsonaro administration and Congress will move forward along the fiscal adjustment path. Current financial assets already reflect such a belief and we may see further highs as steps are taken down the road. But if the administration or Congress fails to act, or if the measures they take are perceived as weak, confidence may dissipate and bring down asset prices.

The second “but” has to do with the real economy, where private investment, income growth and, with a time lag, job creation take place. There is a stark contrast between the top floor of asset prices and the ground floor of the real economy. Even though agriculture is poised to yield a third super-harvest in a row and mining has maintained reasonable stability since the end of the recession, manufacturing has wobbled, and construction has performed unfavorably since 2016.

Then there is the labor market. Priscilla Burity, in a BTGPactual report, shows that the underlying labor market has crossed a patch rougher than what the headline unemployment rate may suggest. In big cities, unemployment rates are higher than national ones and have not trended down. The share of discouraged workers out of the labor force is near record highs and labor underutilization has risen since the first quarter of 2017. Even assuming annual GDP growth at 2.5 percent, single-digit unemployment rates are not expected before 2021. And an improvement of labor market conditions is necessary to underpin a virtuous cycle of credit and higher private spending.

At the beginning of 2018, conditions seemed robust enough for an acceleration of economic growth. Debt levels for families and companies had come down, interest rates were low and private banks’ ability and willingness to lend money was there. But the actual GDP performance has disappointed. Business confidence was never high enough to lift investments and, in an election year marked by political polarization, the private sector adopted a wait-and-see attitude.

Now the starting point is again one of higher confidence on a fiscal adjustment, while the overall scenario is still of lower household and corporate debt levels, low interest rates, easier financial conditions and idle capacity, including in the labor market. Growth forecasts are in the range of 2.5 percent to 3.0 percent for 2019-2020 with higher expectations for some virtuous cycle between new credit, increased business expenditures and a more active consumer outweighing the fiscal retrenchment.

The bottom-line for 2019 is straightforward. Either confidence in those fiscal walls is reassured and market optimism trickles down to the real economy, or the risks of a crash mounts – particularly as the global scenario looks riskier than in previous years. Given the current landscape, Brazil better build those walls fast.

 

Source: Americas Quarterly

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Brazil reclaims status as an emerging-market darling among investors amid new leadership

Brazilian stocks have become one of Wall Street’s favorite destinations for investing this year as investors bet on big changes taking place in Latin America’s largest economy.

The Bovespa index, Brazil’s benchmark stock index, hit an all-time high on Monday and is up more than 8.5 percent thus far in 2019. The iShares MSCI Brazil ETF (EWZ), which tracks a basket of Brazilian stocks, has risen 12.2 percent this year. The EWZ is also outperforming EEM, the broader emerging-markets ETF, as well as funds tracking other emerging-market stocks.

The jump in Brazilian shares comes as investors cheer the possibility of key reforms being passed by new President Jair Bolsonaro, including pension reform. However, Bolsonaro has a limited time period to make these changes. He is also a polarizing figure given racist and homophobic statements he has made in the past.

Bolsonaro is “hitting all the right notes the market has been wanting to hear for years,” said Chen Zhao, chief global strategist at Alpine Macro. “That’s why I think the market reaction has been so positive. If he really delivers on what he promised, I think that could turn out to be a major supply-side story in the EM world.”

Brazil’s new president was elected with overwhelming support. Bolsonaro won the presidency in October with 55 percent of the vote as Brazilians grew fed up with a spike in violence and lackluster economic recovery.

The Brazilian economy contracted all throughout 2016 on the heels of a massive price drop in oil, one of Brazil’s biggest exports. U.S. crude futures briefly traded around $26 per barrel in early 2016 before rebounding; they traded above $51 on Monday. The economy turned around in 2017, but only grew by 1.1 percent. Quarterly GDP growth did not reach 1 percent in the first three quarters, FactSet data show.

Jens Nordvig, founder of Exante Data, said Brazil’s economy should be growing much faster after its collapse in 2016.

“They just had the biggest recession literally in the history of economic statistics. Coming out of a recession like that, you should have like 4, 5, 6, 7 percent growth for a number of years and they just have not had that,” Nordvig said, adding this goes back to some of Brazil’s structural issues, including an overcrowded pension system.

Brazil’s current retirement age is 60 for men and 55 for women. This has led to massive debt in Brazil. As of the end of November, Brazil’s government debt level was more than 75 percent of GDP, according to data from the Brazilian central bank.

But Bolsonaro’s election has increased bets that Brazil would be able to reform the country’s crippling pension system. More than 91 percent of investors surveyed by Bank of America Merrill Lynch believe pension reform will be done in 2019, with one third of respondents expecting it to be approved in the first half of the year.

The newly minted president has already suggested hiking the retirement age to 62 for men and 57 for women. He has also issued a decree that rolls back some benefits.

Investors are also expecting Brazilian shares to build on their hot start to 2019. Sixty-eight percent of investors polled by Santander expect Brazil to be the top-performing country for Latin American equities.

Brazilian stocks are expected to get a boost from a slowdown in rate hikes from the U.S. Federal Reserve, which is also expected to boost broader emerging markets. They are also expected to benefit from a privatization and deregulation push by the Bolsonaro administration.

“Inflation expectations have moderated and the perception of a dovish Fed strengthens the case for [the Brazilian central bank] to stand pat,” strategists at MRB Partners wrote in a note earlier this month. “The new government’s bias in favor of privatization and smaller government will support a re-rating in a number of listed state-controlled enterprises.”

Investing in Brazil does come with its fare share of risks, however.

A formal proposal has not been presented yet and time is of the essence for Bolsonaro. The Bolsonaro administration has its best shot at implementing meaningful pension reform in the next six months, according to Elizabeth Johnson of TS Lombard. After that, it becomes more of an uphill battle.

“They have a debt profile that is unsustainable. They need to address that via pension reform and tax reform. Everybody knows that. It’s just a matter of what flavor those reforms take and how quickly they get through,” said Exante Data’s Nordvig. “If those reforms don’t get done, this administration has already failed. That’s just a must-have.”

 

Source: CNBC

 

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Brazil Treasury sees federal debt up as much as 11 pct this year

Brazil’s federal debt rose to 3.88 trillion reais ($1.03 trillion) in December, up 8.9 percent from 3.56 trillion reais a year earlier, and is expected to rise further this year, the Brazilian Treasury said on Monday.

The Treasury predicts public debt this year will swell to somewhere between 4.1 trillion and 4.3 trillion reais, the upper end of which would represent an increase of almost 11 percent, it outlined in its annual financing plan.

Brazil’s net financing needs this year are also expected to increase, by almost 20 percent to 779.7 billion reais from 651.1 billion last year, according to the Treasury’s projections.

The figures are the new government’s first official forecasts for Brazil’s debt and financing needs this year. President Jair Bolsonaro and his administration have drawn up an ambitious economic reform agenda, which foreign investors have welcomed.

Yet their share of Brazil’s debt holdings fell last year, ending December at 11.22 percent, down almost a full percentage point from 2017. Treasury is confident that will rebound this year.

“Foreign investors had a series of problems with emerging markets last year. But I was in New York in December … and investors are quite optimistic: they like the economic agenda we’ve presented,” Mansueto Almeida, Secretary of the Treasury, told reporters on Monday.

Almeida said that quick approval of the government’s reforms would improve Brazil’s outlook and allow Treasury to extend the average maturity of its borrowing and issue more fixed rate paper.

“Ahead of the elections last year they decided to reduce the duration of their borrowing, and they’re basically saying now that they intend to continue this strategy, which makes sense,” said one fund manager in Sao Paulo.

Brazil’s benchmark Selic interest rate is at an all-time low of 6.50 percent, and there is a growing groundswell of opinion that it will not rise much this year, if at all.

According to Treasury forecasts, Letras Financeiras do Tesouro, short-term notes linked to the Selic rate, will account for between 38 and 42 percent of the federal debt this year, up from 35.5 percent last year.

Fixed rate bonds will account for between 29 and 33 percent of the total debt stock, compared with 33 percent last year, while inflation-indexed bonds’ share is expected to be somewhere between 24 and 28 percent versus 27 percent last year, Treasury said.

Source: Reuters

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Brazil in Spotlight as Appetite for Latin American Stocks Rises

Brazil is the country of the future, or of 2019 at least, money managers say.

Stocks in Latin America’s biggest economy will be the top performer in the region this year, according to 68 percent of respondents in a survey of investors that attended Banco Santander’s annual Latin American CEO conference. Another January survey by Bank of America Merrill Lynch showed about 90 percent of respondents expected the country’s stock gauge ending the year above current levels.

Brazil’s equity benchmark Ibovespa index is already up 8 percent this year, led by state-run companies, as investors bet the new administration will deliver on its market-friendly promises from privatizing companies to moving forward with pension reform. The index is currently trading at a record high and the median forecast of strategist estimates sees it closing 2019 at 105,950 — an 11 percent upside from current levels.

The Bank of America Merrill Lynch survey found that 91 percent of participants believe the long-awaited pension reform will be approved some time in 2019 and one-third of investors expect its approval in the first half of the year. Almost half of the respondents on Santander’s survey expect approval in the second half of the year.

Argentina, which is going through a presidential election year, was seen as the second best choice by Santander’s respondents, while those surveyed by Bank of America saw a quarter of investors planning to increase their allocations in the country and none reducing them. The benchmark S&P Merval index has gained 15 percent this year in dollar terms, the most among primary indexes, after wiping out more than 50 percent of its value in 2018.

Investors in Latin American stocks will be most focused on reforms and political developments in the region, then trade tensions between China and the U.S., global commodity prices and then the pace of Fed increases, according to the Santander survey.

Source: Bloomber

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Brazil’s economic hopes on Bolsonaro’s shoulders

Global investors seem thrilled at the prospect of Jair Bolsonaro taking over the Brazilian presidency on 1 January, says Sandra Rosa in Finanz und Wirtschaft. The benchmark Ibovespa index has gained a fifth since his election victory began to look likely in the autumn. The hope is that the new leader will continue the business-friendly structural reforms of his predecessor Michel Temer. But the optimism looks wildly overdone.

Brazil has been in “an economic funk for the better part of a decade,” says Bloomberg. The economy’s state has been a result of “heavy-handed government meddling in private industry, a sprawling pay-for-play corruption scandal, and political gridlock that allowed the budget deficit to balloon”. To get state spending and debt, now worth around 80% of GDP, under control the government would have to pass some radical reforms.

A crucial move would be to address an overgenerous and unjust public pension system that is key to the country’s debt problem. Temer failed to get enough votes to push through pension reforms. Bolsonaro would need 60% of votes in Congress to implement them. “Turkeys, however, tend not to vote for Christmas,” says Amundi’s Yerlan Syzdykov in the Financial Times. The cuts would be unpopular, so this is “a mission impossible.” Meanwhile, Bolsonaro’s cabinet has already started “backtracking” on selling off state companies.

Bolsonaro may also be tempted by a Trump-style stimulus to boost growth, but with the annual overspend already at 7% of GDP, there is no fiscal room for manoeuvre. And let’s not forget, says Rosa, that the military, which is far from business-friendly, is likely to play a large role in Bolsonaro’s government. Brazil’s stockmarket rally is on borrowed time.

Source: MoneyWeek

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Navy admiral named Brazil’s Minister of Mines and Energy

Brazil’s President-elect and former army captain, Jair Bolsonaro, has named a Navy admiral as his Mining and Energy Minister. This appointment marks the eighth member of the armed forces to  Bolsonaro’s government and the 20th Minister appointed so far.

Bento Costa Lima Leite de Albuquerque Junior (60), the current head of Brazilian Navy’s nuclear and technology development program, was born in Rio de Janeiro, and has been with the institution since 1973.

The new Minister will be tackling offshore oil licensing rounds and planned energy privatizations in his new job, according to a Twitter post from Bolsonaro’s son, Carlos Bolsonaro.

The government-led transition team is already taking part in talks to free up billions of barrels of offshore oil reserves for development by foreign oil companies.

Some oil industry executives criticized Albuquerque’s lack of experience in the sector, the current Mining and Energy Minister, Moreira Franco, welcomed the appointment and described the upcoming minister in a tweet as “very well prepared for the technical and command responsibilities of the sector.”

While Bolsonaro hasn’t yet provided specifics of his view for the mining sector, there are expectations for deregulation of the industry, but some of his past statements have activists up in arms.

He has said he may withdraw from the Paris climate accord if it means sacrificing sovereignty over the Amazon, an ecosystem with worldwide ecological significance. Asked about the indigenous reserves in the area, he has declared he won’t add even a centimetre to them.

Climate scientists say Bolsonaro’s intention to open the Amazon for greater development could make it impossible for Latin America’s largest nation to meet its reduced emissions targets in the coming years.

Other examples conservationists are worried about include Bolsonaro’s criticism of the country’s environmental agencies for blocking or taking too long to approve mining and energy projects. He has promised to reduce the wait time to license small hydroelectric plants to a maximum three months, rather than the decade it can sometimes take.

The Mines and Energy Ministry was one of the last to be defined. It is not yet known who will lead the Ministry of the Environment.

Together with being the world’s top iron ore producers, Brazil hold large reserves of bauxite, manganese and potash. It’s also Latin America’s No. 1 oil producer.

 

Source: Mining.com

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