Brazil posted a trade surplus of $3.673 billion in February, government data showed on Friday, surpassing market estimates of $3.0 billion, with imports falling more than exports due to sluggish domestic demand.

Imports totaled $12.620 billion, a 21.2 percent drop from the same month a year ago, while exports fell by 15.8 percent to $16.293 billion, the trade ministry reported.

It was the highest surplus for the month of February since the series began in 1989.

Brazil’s trade surplus last year narrowed 13 percent to $58.3 billion from $67 billion the year before. It is forecast to drop further to $51 billion this year, according to economists polled by the Central Bank.

Economic growth in Brazil almost ground to a standstill at the end of last year. Gross domestic product expanded by just 0.1 percent in the fourth quarter, while over the course of 2018 growth was unchanged form the previous year at 1.1 percent.

The GDP data suggest activity this year will be lackluster again. Economists at Barclays cut their 2019 growth forecast to 2.2 percent from 2.5 percent, and Goldman Sachs economists cut theirs to 2.0 percent from 2.2 percent.

As part of his orthodox economic reform agenda of cutting taxes, slashing public spending and overhauling the pension system, President Jair Bolsonaro has also said he wants free “bilateral trade with the entire world without an ideological bias”.


Source: Reuters

The Brazilian government posted a fiscal surplus of 46.9 billion reais ($12.5 billion) in January, the central bank said on Thursday, above forecasts but unchanged from a year earlier.

In Brazil, January is traditionally marked by higher tax revenues and lighter spending, so these figures do not change the fragile outlook for public finances, analysts said.

The primary surplus, comprising the central government, regional governments and state-owned enterprises before interest payments, exceeded the 34.3 billion reais median forecast in a Reuters poll of economists.

For the 12 months to January, the primary deficit was equal to 1.57 percent of gross domestic product (GDP), the central bank said, a figure that analysts call worryingly high.

“Overall, the fiscal picture remains very weak, despite the effort over the last two years to contain discretionary spending and the significant retrenchment of public investment,” said Alberto Ramos, head of Latin America research at Goldman Sachs.

“A deep, permanent, large structural fiscal adjustment remains front-and-center on the policy agenda to restore both domestic and external balance,” he wrote in a note to clients.

Brazil’s gross public sector debt in January was 5.3 trillion reais, or 76.7 percent of GDP, unchanged from the month before, the central bank said.

Ramos warned that public debt is on track to hit a “disquieting” 80 percent of GDP before stabilizing, leaving the economy with little wiggle room to cope with adverse shocks.

Earlier on Thursday, data showed that Brazil’s economy almost ground to a standstill at the end of last year, with economists warning that the weak momentum is likely to carry on into this year.

President Jair Bolsonaro’s cornerstone economic proposal is a pension reform bill he delivered to Congress this month, which would raise the minimum retirement age in an effort to save more than 1 trillion reais over the next decade.

Thursday’s figures showed a surplus of 35.6 billion reais from the central government, 10.8 billion reais from regional governments and 507 million reais from state-run firms.


Source: Reuters

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

Brazil’s inflation rate has dropped more than expected below the official target’s midpoint, reinforcing a view that the central bank can take its time before hiking interest rates from all-time lows.

Consumer prices tracked by the benchmark IPCA index rose 4.39 percent in the 12 months through mid-November, government statistics agency IBGE said on Friday. Economists polled by Reuters had expected a 4.44 percent increase.

The central bank targets a 4.5 percent year-end rate in 2018 and 4.25 percent in 2019, plus or minus 1.5 percentage points.

Lower fuel, power and healthcare costs accounted for the bulk of the deceleration in inflation, offsetting an increase to food prices. When stripped of volatile components, so-called core inflation remained closer to 3.5 percent.

Economists at Capital Economics said the IBGE release suggests policymakers “won’t be rushed into tightening policy”.

“Overall, there is still little sign of a significant build-up in core price pressures,” they wrote in a note to clients.

The IPCA index rose 0.19 percent from mid-October, IBGE said, below a median estimate of 0.24 percent.

An underwhelming economic recovery has kept unemployment high, curbing wage gains. Meanwhile, the victory of far-right lawmaker Jair Bolsonaro in the presidential election dispelled concerns over a potential currency selloff that could boost inflation.

Subdued price pressures have driven the central bank to keep rates at an all-time low even as inflation accelerated past this year’s target midpoint in recent months.

The central bank last month kept the benchmark Selic rate at 6.50 percent and acknowledged reduced upward risks to inflation. In the minutes of that meeting, which took place just after the election, policymakers said inflation would likely peak in the second quarter of 2019 before easing towards its targets.


Source: Reuters

Efforts to reform Brazil’s downstream fuels market illustrate the tension between trying to move away from over-arching state control, but also placate a populace angry after corruption scandals and economic austerity.

Under existing law, Petrobras plays the role of the country’s sole supplier, but this no longer reflects the on-the-ground reality. Nor is it the part the company, which is actively looking for partnerships at some of its refineries, is keen to play. The supreme federal court is, though, taking a keen interest in the legality of any potential partnership.

It’s estimated that, to meet Brazil’s fuels demand in 2030, an investment of over $10bn in downstream infrastructure would be required. Petrobras is unlikely to be willing or able to shoulder that burden alone. Effective policies that promote market freedom and open the sector to competition and new entrants are key to attracting the requisite investment capital.

But a truck drivers’ strike over rising diesel prices—which paralysed the country for nearly two weeks in May, affecting sectors transportation and food supply—highlights the tension between reform and protectionism. The strike came after Petrobras started applying an import price parity policy in its diesel sales to stop losing money on its imports.

After negotiation with unions, President Temer agreed a partial climbdown. But his decision to subsidise the diesel price at the pump to get the truckers back to work led Petrobras chief executive Pedro Parente to resign in protest. Parente had been credited with restoring foreign investors’ confidence and steadying Petrobras after its corruption scandals.

Post-Parente, Petrobras accepted the diesel price subvention programme, a temporary government fix to try to alleviate diesel price fluctuation. Any differences between prices paid and selling prices will be later reimbursed to Petrobras by ANP.

But analysts claim that this programme, which is set to finish at the end of the year, is harmful for the industry in the long term. Before the strike, there was a growing number of new players importing fuel. Most private diesel importers are now unable to compete against fuel at a regulated price, leaving Petrobras as virtually a sole supplier. According to an executive at the firm, it’s now supplying 90% of diesel market demand, compared to a 74% average in 2017. If this scenario persists, it’s likely to shut out new entrants entirely and postpone, or worse, the investment required to expand supply infrastructure to meet future demand.

The ANP published a resolution in September offering a reduction in royalties for incremental production from mature fields, as Brazil faces the challenge of what to do with ageing infrastructure.

The new resolution cuts royalties for the additional volumes from the standard 10% to 5% for fields which have been producing for more than 25 years or have produced more than 70% of original proved reserves. Operators must request the incentive from the ANP, alongside a revised development plan that outlines the schedule, costs, volumes and expected revenues of projects that will deliver incremental production, and evidence of economic benefits to federal entities from making these investments.

The prize for re-invigorating mature assets is potentially significant. According to a recent report from consultancy Wood Mackenzie, redeveloping the Campos Basin’s mature oilfields could extend the basin’s life, add more than 200,000 b/d of oil equivalent per day to its declining production by 2025, and generate additional $3bn in royalties.

But next year may also see the start of a large-scale decommissioning phase. According to the ANP, there are around 160 offshore production platforms in Brazil, of which more than 60 have been in operation for over 25 years and may be candidates for decommissioning. Petrobras is, for example, seeking contractors to scrap nine ageing platforms at the Marlim field.


Source: Petroleum Economist

Internal political uncertainty and U.S. rising interest rates have caused a two and a half year high of the dollar to real exchange rate. The dollar’s appreciation, in turn, has caused concern regarding Brazil’s economic recovery – which has been driven by its internal market – given its pressure on inflation and the possible decrease in consumption as products become more expensive.

On September 5, the dollar hit a two and a half year high against the real closing at R$4,14 – the highest level since January 2016. Throughout the past few months, the dollar continued to rise and exchange offices were selling the tourism dollar – dollars sold directly to consumers – at R$4,32. Since January 2018, the dollar has appreciated 25% against the real.

On the international front, the dollar’s appreciation was caused by higher yields on U.S. Treasury securities which rose to 2% and continuous fear of a trade war between the U.S. and its trade partners. Additionally, the Federal Reserve may continue its interest rate increase to contain inflationary pressures due to economic growth – especially in U.S. retail sales. The concern is that an increase in retail sales may increase inflation, and in order to contain this increase, the Federal Reserve would likely increase interest rates even further.

High interest rates in the U.S. – deemed the safest market in the world – have the potential to attract resources from other emerging market countries, such as Brazil.

In Brazil, the appreciation of the dollar can also be explained by the continuous volatility in the presidential polls. Last week, the Superior Electoral Court (TSE) voted to deny Lula da Silva from running under the Clean Slate Law – as of the latest August poll, Lula was polling first with 39%. After the TSE decision, a new poll was published on September 5 without Lula; Jair Bolsonaro is now first with 22%, followed by Marina Silva 12%, Ciro Gomes 12%, Alckmin 9%, and Haddad 6%. Doubt remains as to whether the next government will make the necessary economic reforms to reach fiscal balance.

Alongside the dollar pressure, the Brazilian economy continues to underperform with 1.1% growth so far in 2018. This indicator is far worse than what was expected, causing economists at financial institutions to revise the GDP growth to 1.44% for 2018 – earlier in the year the expectation was 2.70%.

So far in order to intervene, the central bank has held a number of foreign exchange swaps, equivalent to the future sale of dollars. In its latest round, on August 30, the total offer was $1.5 billion.

On August 1, the central bank’s Monetary Policy Committee (Copom) decided to keep interest rates at 6.5%, signaling caution due to the volatility of the external scenario.

The Selic rate is used to keep inflation within its target to control prices of goods and services – when inflation is low the central bank lowers the Selic rate to boost economic activity, and when inflation is high, they increase the Selic to encourage people to consume less to remove reais from the market (sometimes increasing unemployment). Financial analysts project inflation at 4.16% for 2018.

Despite this volatile scenario, Minister of Finance Eduardo Guardia and Central Bank President Ilan Goldfajn believe that Brazil will not face the same difficulties as its neighbor, Argentina, since Brazil has low levels of foreign debt, high international reserves, opportunities to sell future dollar contracts, and stable foreign investment inflows.

The dollar’s appreciation has a direct impact on the pockets of Brazilians. Uncertainty in the presidential elections polls and a need for security has caused investors and Brazilian tourists to buy more dollars, which in turn increases the price of the dollar even more.

In addition, it causes an increase in prices of goods and service and puts pressure on inflation, as many parts of the final goods are imported using U.S. currency – especially true for the electronics industry as well as food such as bread and pasta since wheat tracks the price of the dollar. In addition, the price of oil is likely to continue to increase due to tensions between Iran and the United States. If the dollar rises too much too quickly, it creates concern of boosting inflation in Brazil – something that if relatively moderate would not be considered too negative given its low 2017 and 2018 rates.

Inflation may also be passed along to products that do not use imported parts as some goods are traded in dollars for export and Brazilian exporters will have to adjust their prices in order to make a profit.

In regards to tourism, the appreciation of the dollar comes with positive and negative effects. On the negative side, vacations for Brazilians looking to go abroad became extremely expensive. On the positive side, international travelers may be attracted to come to Brazil due to its weak real which in turn can boost the tourism industry activity and improve some parts of the economy.

Source: Seeking Alpha

In the decisive week for new chapters of the crisis — likely to be aggravated by the plea bargain of Rodrigo Rocha Loures and the disclosure of new wiretaps conducted by the Federal Police at the request of the prosecutors’ office — President Michel Temer is doubling down on the economic recovery, and on the lack of a consensus name to replace him, to gain muscle and stay in office. He ordered his economic team to formulate a new “package of kind policies” he intends to announce in coming days.

The Palácio do Planalto, the presidential office, expects to gain time to adopt the measures and accelerate the economic recovery. In this line of action, the timetable outlined by the government includes the labor reform’s passage on June 1st, on the Senate’s floor, and the first vote on the pension reform on the Chamber of Deputies’ floor on June 13.

Aiming to keep the economy producing good news, Mr. Temer ordered new policies with popular appeal from the minister of Planning, Dyogo Oliveira, who worked actively with his team during the weekend. The Office of the Chief of Staff and the government leader in Congress, Senator Romero Jucá (PMDB of Roraima), are also involved in designing the plan.

On another front, Mr. Jucá will command the strategy to vote on labor reform on June 6 on the Senate floor. This plan will entail passing it in the morning in the Economic Affairs Committee and on the same day, in the afternoon, taking it to the floor. To do that, Mr. Jucá will have to get the signature of most leaders of the allied parties in an urgency requirement.

This mechanism suppresses analysis steps at the Social Affairs Committee and at the Constitution and Justice Committee. In the case of the PMDB, Mr. Jucá will face the resistance of leader Renan Calheiros (Alagoas), who advocates a broad discussion of the bill in the thematic committees. On the other hand, he will have the support of the president of the Constitution and Justice Committee, Senator Edison Lobão (PMDB of Maranhão), who has remained faithful to Mr. Temer, at the request of ex-President José Sarney.

In the Chamber of Deputies, the offensive of the governing leaders also targets the economic agenda. The government will try to pass a bill that would allow foreign stake in airlines up to 100%, a from businesses that has been supressed for several years. Another effort will be made at the resumption of talks to try and vote, on June 13, on the pension reform in a first round.

The goal is to show that Mr. Temer maintains political strength in Congress. Presidential aides reject the notion of some leaders, even of the PSDB, that the reforms would go through without Mr. Temer in the presidency. They claim Mr. Temer is the only politician amid the crisis with the necessary skill and ability of political coordination to push through controversial policies in Congress in a situation of turbulence.

One example they recall is the recent vote on the bill to validate tax incentives, which had 405 votes on the floor of the Chamber of Deputies’ last week and untied a legal knot that had persisted for decades.

In the hypothesis of his removal, however, the Planalto’s Plan B is the candidacy of Chamber Speaker Rodrigo Maia (Democrats, DEM, of Rio de Janeiro), in the Electoral College. He is an appealing name for the deputies, who have more votes in the college, because it opens the post of house speaker.

Another name that emerged over the last few days for a potential Congressional in-house election was of Senator Armando Monteiro (Brazilian Labor Party, PTB, of Pernambuco), former minister of Development in the Rousseff administration. A moderate with good positioning in the business world, Mr. Monteiro would be an option to the interim president of the PSDB, Tasso Jereissati, of Ceará.

Source: Valor Econômico