Assunto: My Mood for Today - Brazil Economic Outlook

Brazil Economic Outlook
Bolsonaro still lost in Brazil
                       

May 9, 2019

Incoming data for 2019 has been mixed thus far, following a tepid end to last year. A high unemployment rate, which crept up in the October to January period, continues to plague household spending, while consumer confidence dropped to a six-month low in March. On a brighter note, industrial production grew solidly in February, despite plunging iron ore output following the Vale dam disaster. 

On 20 March, the government presented details on changes to military pensions, a precondition for Congress to start debating the critical social security bill. 

However, the proposal underwhelmed expectations as changes to the military career path translated into a higher bill for wages, denting some savings from the reform. Meanwhile, the rocky political scene of recent weeks has spooked the Brazilian stock market. Reports of bickering between President Jair Bolsonaro and House Speaker Rodrigo Maia bode poorly for the smooth passage of legislation, while the arrest of former President Michel Temer could keep politics in the spotlight.



A family without control

"What Bolsonaro needs to do is step down from the campaign stump, he needs to show who is in charge, at home and in government," said Simone Tebet, head of the Senate’s Justice and Constitution Committee.

“We were anticipating volatility in the negotiation process,” said Shamaila Khan, director of emerging-market debt at AllianceBernstein. “The reform process will be supported by public opinion and Bolsonaro’s still high approval ratings.”

For the president’s support base, the case against him is largely a media fabrication. The press is a regular target of Bolsonaro’s ire. Is not only this. For all Bolsonaro's family "media is the enemy", they use the social media to instigate the voters to go against the media or any person who they believe is not in faor of "their style"

Since Carlos Bolsonaro and his Justice Minister Sergio Moro publicly clashed last week with Maia, administration officials have tried to calm tensions and reassure investors. Moro said the standoff had been overcome, and Vice President Hamilton Mourao has been calling for increased dialogue among cabinet members.

"The key points are clarity in our objectives, determination to achieve them and patience to have the best dialogue," the retired Army General told Bloomberg News via text message.

Yet it is not the first time the government has promised more cohesion and harmony. In fact, this Tuesday did little to convince skeptics.

Editorials in all three of the country’s leading newspapers blasted Bolsonaro for the recent political turmoil and questioned his ability to carry out his presidential duties.

"What he’s shown so far is that we’ll have 3 years and 9 months of more turbulence," said Traumann, who advised former Finance Minister Henrique Meirelles.

In Brazil, we do not know who is in command: Bolsonaro's sons or a professor based in Virginia. 


Financial Times pulls out of gala honouring Brazil's Jair Bolsonaro

The Financial Times has pulled its involvement in an event honouring Brazil’s far-right president, Jair Bolsonaro, after a campaign by LGBT rights activists against the celebration of the self-declared homophobe.

The recently elected South American leader is due to be honoured at the Brazilian-American Chamber of Commerce’s person of the year gala dinner, which is scheduled to take place in New York later this month.

The FT is one of several prominent sponsors and partners of the event, including the management consultancy Bain & Company and Delta Airlines, who have pulled their involvement after pressure from the campaigning organisation GLAAD.

A spokesperson for the the newspaper confirmed it would no longer be a media partner for the ceremony to honouring Bolsonaro, but added it intended to “maintain a partnership with the Brazilian-American Chamber of Commerce” on other events.

The growing boycott leaves the dozens of remaining British and American sponsors in a tricky position, as they have to choose between their desire to match public statements of support for LGBT rights with their desire to do business in one of the world’s most important emerging economies.




Brazil Economic Growth
The economy is expected to strengthen somewhat this year, due to improved sentiment and accommodative monetary policy; however, growth will continue to be hindered by a challenging external environment and still-high unemployment. Passage of tough reforms remains key for improving public finances, but the pension reform is likely to be watered down in Congress. Analysts downgraded Brazil’s outlook again this month following the soft end to last year and weak incoming data. FocusEconomics analysts project growth of 2.1% this year, which is down 0.2 percentage points from last month’s forecast, and 2.5% in 2020.

Elusive Economic Growth Points to Depth of Brazil’s Problems
President Jair Bolsonaro’s administration bets that overhaul of an unsustainable pension system will unlock Brazil’s economic potential, but sinking growth projections show the country has deeper-rooted problems.

The recovery is again disappointing despite a full year of record-low borrowing costs and a recent improvement in business confidence. Latin America’s largest economy grew a paltry 1.1 percent in 2017 and in 2018. On Thursday the central bank cut its 2019 growth forecast to only 2 percent, matching a dwindling consensus estimate. Economists started cutting their projections even before the most recent signs of trouble for pension reform.

Structural issues that have hobbled Latin America’s largest economy for decades are rearing their heads. The malaise is chronic, because Brazil has barely improved a business environment that’s crippled by a mind-bending tax system, regulatory uncertainty, crumbling infrastructure and widespread inefficiency. With a commodity boom that had propelled growth long gone, there’s renewed urgency to get to the root of the country’s stagnation.

“I don’t see any significant investment happening. The country’s been stagnant since 2011 and lacks energy. Where’s the source of growth?’’ Marcos Lisboa, president of business school Insper, said in an interview. “We’re wasting our opportunities. Either we start changing the country, or our generation and the next will see it stuck in mediocrity.”

Pension reform, Bolsonaro’s flagship economic proposal, can prevent public finances from careening off a cliff but is no silver bullet. Instead, many companies see the bill as a test of the administration’s ability to improve the business climate, according to Carlos Sequeira, BTG Pactual’s head of equities research for Latin America.


Crumbling Infrastructure

Brazil’s woeful ports, roads and highways rank high among grievances. Four months ago, a major Sao Paulo overpass gave way, snarling traffic of the Southern Hemisphere’s biggest metropolis that already loses some 40 billion reais ($10.6 billion) annually to congestion, according to the FGV School of Economics.

Outside cities, potholes pock rural roads -- when they’re paved. The main northbound soy highway turned to mud in 2017 rains, trapping truckers in 42 kilometers of gridlock en route to port.

Over the past two years, Brazil made progress in reducing the time it takes to open a new business -- from 80 days to 21. That still compares to eight in Mexico and six in Chile, World Bank data show. When it comes to taxes, an average medium-sized company spends 1,958 hours completing its ten annual payments, double the time spent by the second-worst placed nation, according to the bank’s Doing Business survey.

“Former President Michel Temer’s administration made some progress on the competitiveness agenda, but Brazil continues to struggle with bureaucracy, tax complexity, juridical uncertainty and low labor productivity. Minister Paulo Guedes and his team want to bring Brazil to the top 50 countries in terms of business environment by the end of this presidential mandate -- quite a feat considering the country currently ranks 109th in the World Bank’s Doing Business survey. If accomplished, this would definitely support an increase in productivity, allowing the country to enjoy stronger growth without inflation", said Adriana Dupita, Latin America economist at Bloomberg

Regulations dog small companies to powerhouses like Ford Motors, which has been in Brazil since Henry Ford built an industrial town deep in the Amazon jungle. Last month, labor leader Adauto de Oliveira met Ford’s South America president, ostensibly to discuss investments to extend a local plant’s lifespan. Instead, the executive announced he’d decided to shutter the facility, as regulatory expenses left Ford unable to make a profit in Brazil.

“It was a bucket of cold water,’’ said De Oliveira.

He barely had time to relay the news to co-workers before Ford released a statement. The company’s expected cost of closure: $460 million, mostly for severance.


Carwash Corruption

To be sure, Brazil’s problems are not as bad as in neighboring Argentina and not everyone is as pessimistic. Growth was in good measure supported by construction programs that were hurt when builders were implicated in the Carwash corruption probe, said Fabio Kanczuk, a former economic policy secretary, now a World Bank executive director. As those projects resume, he bets growth will accelerate to over 3 percent in the fourth quarter, compared to the prior year.

But Adolfo Sachsida, the government’s economic policy secretary, says that more will be needed to accelerate growth in a country beset by years of inaction.

“When people err for a long time, there’s a cost of correcting course,’’ he said. “It takes time and the confidence that the new model is here to stay.’’


COPOM keeps monetary policy unchanged at record low
At its 7–8 May meeting, the Central Bank of Brazil’s Monetary Policy Committee (COPOM) unanimously decided to keep the benchmark SELIC interest rate at its record low of 6.50%, where it has rested since the Central Bank paused its long and aggressive easing cycle in March 2018. The decision matched market analysts’ expectations.

A sluggish recovery in Brazil has warranted an accommodative monetary policy stance to stimulate growth, which largely drove the Bank’s decision to maintain rates at record lows. In addition, inflationary pressures have been largely contained, although have surprised slightly to the upside in recent months, further justifying the stance. The Bank modestly upgraded its inflation forecast at its May meeting for the end of 2019 from 3.9%, in a scenario with interest and exchange rates determined by the market, to 4.1%. Inflation is still expected to end the year below the Bank’s 4.25% target.

Looking forward, the Bank struck a largely neutral tone stating that the balance of risks is balanced and that “caution, serenity and perseverance” are critical in monetary policy decisions. However, in its accompanying statement, the Bank did acknowledge that downside risks on inflation from an idle economy have risen somewhat.

The bulk of our panel sees the Bank staying on hold in coming months and gradually raising rates towards year-end or at the start of 2020 as the economic recovery gains traction. FocusEconomics Consensus Forecast participants see the SELIC rate closing 2019 at 6.65% and 2020 at 7.52%.



Manufacturing PMI drops to six-month low in April

Conditions in Brazil’s manufacturing sector appear to have deteriorated in April. The manufacturing Purchasing Managers’ Index (PMI) fell from 52.8 in March to 51.5, the worst reading in six months. Despite the drop, the PMI is still above the crucial 50-threshold, signaling expansionary conditions.

April’s print reflected slower growth in new orders, output and employment. Orders from abroad dropped for the fifth consecutive month and jobs were added at a subdued pace. On the price front, input cost inflation jumped amid a weaker real, while selling price inflation moderated. On a brighter note, manufacturers were optimistic regarding the future economic situation, reporting the second highest confidence level recorded in the series’ history.

The analysts surveyed by FocusEconomics for the LatinFocus Consensus Forecast see industrial production growing 2.4% in 2019, which is unchanged from last month’s estimate. In 2020, industrial output is expected to grow 3.1%.


Emerson de Pieri | Managing Partner
Barings Investments | Haliwell Financial
Disclaimer: Our Mood for Today is produced for general interest only; it is not definitive. It must not be relied upon in any way. Although high standards have been used in the preparation of the information, analysis and views presented in Our Mood for Today, no responsibility or liability whatsoever can be accepted by Barings Invest for the contents. We make no express or implied guarantee of its accuracy. As far as applicable laws allow, we do not accept responsibility for errors, inaccuracies or omissions, nor for loss or damage that may result directly or indirectly from reliance on its contents. Barings Investments LLC - 2598 East Sunrise Boulevard, STE 210A - Fort Lauderdale, FL 33304, United States

SOURCES: Credits given to Bloomberg, Focus Economics, The Guardian, Financial Times
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