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Central Bank signals another rate cut in May

21.03.2018

As expected, the Central Bank’s Monetary Policy Committee (Copom) in an unanimous decision reduced base interest rate Selic by 25 basis points this Wednesday to 6.5%. In its statement following the decision, the Copom said that “the baseline scenario for inflation has evolved more benignly than expected early this year.” Monetary policy officials also pointed out that the economic recovery is consistent and that the external outlook is still favorable. And it signaled the monetary-easing cycle is not over: “At the next meeting [May 15 and 16], the Committee sees an additional moderate monetary easing as appropriate,” the statement said. For the Copom, a new cut “mitigates the risk” of inflation taking longer to converge towards the targets. As for June’s meeting, except for changes in the domestic and/or foreign markets, the Copom sees “as appropriate the interruption of the monetary-easing process” to evaluate its next steps.

Source: Valor International

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As expected, the Central Bank’s Monetary Policy Committee (Copom) in an unanimous decision reduced base interest rate Selic by 25 basis points this Wednesday to 6.5%. In its statement following the decision, the Copom said that “the baseline scenario for inflation has evolved more benignly than expected early this year.” Monetary policy officials also pointed […]

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January surplus, while expected, was surprisingly large

28.02.2018

The central government usually posts a surplus in January, but this year the result was surprisingly big – the second largest on record. Surging tax revenue was the primary factor, with a 10.7% rise in real terms from the same month of 2017, to R$156.4 billion. Nevertheless, most of the increase came from non-recurring revenues obtained with tax debts, albeit the economic recovery also contributed. Officials believe the trend will continue and allow the central government (Treasury, Social Security, and Central Bank) to meet the primary deficit target of R$159 billion this year or even obtain a lower number, as already happened in 2017. Federal expenditures rose 1.6% in January from a year ago. If the pace continues, it would mean lower growth than this year’s GDP expansion forecast of 3% and put Brazil on track to attain a core fiscal policy goal.

Source: Valor International

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The central government usually posts a surplus in January, but this year the result was surprisingly big – the second largest on record. Surging tax revenue was the primary factor, with a 10.7% rise in real terms from the same month of 2017, to R$156.4 billion. Nevertheless, most of the increase came from non-recurring revenues […]

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Brazil cuts benchmark rate to historic low of 6.75%

07.02.2018

Brazil’s central bank on Wednesday lowered the country’s benchmark Selic rate by another quarter of a percentage point to a historic low of 6.75 per cent, following 10 consecutive cuts.

The unanimous decision was widely expected, with policymakers taking heart from falling inflationary pressure to cut rates in a bid to kickstart the economy.

Consumer price inflation in Brazil eased in December with the annual rate ending the year at 2.95 per cent. The IMF is forecasting the economy to expand 1.5 per cent this year.

Economists believe Brazil needs further fiscal reforms to stimulate the economy. These include changes to Brazil’s over-generous pensions system. The government has been attempting to whip votes in Congress. But with general elections in October, legislators want to avoid such a deeply unpopular reform.

Source: Financial Times

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Brazil’s central bank on Wednesday lowered the country’s benchmark Selic rate by another quarter of a percentage point to a historic low of 6.75 per cent, following 10 consecutive cuts. The unanimous decision was widely expected, with policymakers taking heart from falling inflationary pressure to cut rates in a bid to kickstart the economy. Consumer […]

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Federal spending begins falling in relation to GDP

30.01.2018

The federal government’s total spending in 2017 grew less than inflation, falling 1% in real terms from the prior year’s. At the same time, the National Treasury’s net revenues — after transfers to states and municipalities — rose 2.5% in real terms. Higher-than-expected revenues and lower-than-expected expenditures were the reason for the primary deficit of R$124.4 billion of the central government (Treasury, Social Security and Central Bank). That was R$34.6 billion lower than the target set in law, of R$159 billion.

Yet the most important is that the government’s total spending in 2017 fell 0.4% in its comparison with the GDP. Treasury Secretary Ana Paula Vescovi said Monday that the government again expects to reduce its spending in 2018 by some 0.4 or 0.5 percentage point of GDP. “At the end of two years, the spending will fall one percentage point of GDP, something that has not happened for 25 years,” she said.

The reduction of spending as a proportion of GDP is the main goal of the fiscal policy established with the spending cap, instituted by constitutional amendment 95, of December 2016. The idea is that expenditures fall five to six percentage points of GDP until 2026, when the spending-cap system will be reviewed.

Treasury’s 2017 result, released Monday, confirms that the spending cap set for last year was extremely lax. It was set having in mind the disbursements of 2016, adjusted by 7.2% inflation. Monday, the Treasury announced that the spending submitted to the cap rose only 3.1% in relation the effective disbursements of 2016.

Spending in 2017 was R$50 billion below the cap, creating a cushion of R$89 billion for 2018. This means the government is constitutionally authorized to spend R$89 billion more this year than in 2017. It will be able to do that if it raises enough funds to ensure also the primary-deficit target of R$159 billion.

To set this year’s spending cap, the government adjusted the cap of 2017 by the inflation from July 2016 to June 2017, which stood at 3%. Under this constitutional criterion, the 2018 spending cap was set at R$1.35 trillion. That is, this year’s cap was not defined by the effective disbursements of last year. Since the 2017 spending was R$1.26 trillion, this year’s spending may rise R$89 billion (R$1.35 trillion minus R$1.26 trillion) from that effectively made last year. The conclusion is that it became much easier for the government to comply with this year’s cap, and it may even leave some room for 2019.

Last year’s spending reduction was achieved with a sharp contraction of so-called discretionary expenditures (those the government is able to cut) and especially of investments. The discretionary expenditures amounted to R$117.5 billion, less than in 2010. Investments, for their part, reached R$46.2 billion, lower in real terms than of 2006.

The bad aspect of this fiscal situation is that the cut in investments and discretionary expenditures was made to accommodate the increase in mandatory expenditures, which continue growing. The payment of social-security benefits rose 6.1% in real terms from 2016, and the payments of salaries to public servants, active and retired, increased 6.5% in real terms.

Source: Valor International

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The federal government’s total spending in 2017 grew less than inflation, falling 1% in real terms from the prior year’s. At the same time, the National Treasury’s net revenues — after transfers to states and municipalities — rose 2.5% in real terms. Higher-than-expected revenues and lower-than-expected expenditures were the reason for the primary deficit of […]

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Brazil stocks cruise to new high

16.01.2018

It’s not just Wall Street that is seeing records being shattered on Tuesday.

Brazilian equities also climbed to a new all-time high as investors ramp up bets that Latin America’s largest economy — despite its political dysfunction and endless corruption scandals — would get a lift from stronger US and global economic growth.

The country’s benchmark Bovespa stock index gained 0.6 per cent to 80,246.33, taking its gains since mid-November to over 13 per cent. The index has more than doubled since hitting a seven-year low in early 2016.

“Brazil is still a market that investors love to love,” said Geoff Dennis, head of global emerging markets equity strategy at UBS. “When markets move, they tend to buy Brazil.”

Although Brazil is still only slowly emerging from its deepest recession on record, a weaker dollar — combined with signs that the Federal Reserve will continue to take a slow and steady approach to interest rate rises and a robust outlook for the global economy — has prompted investors to return to a risk-on mode.

The rebound in oil and commodity prices have further helped anchor sentiments. Petrobras, the state-owned oil company, and mining giant Vale are among the top performers on the Bovespa over the past three months, gaining 12.6 per cent and 27.6 per cent respectively.

How long the rally can last is anyone’s guess. With the country set to go to the polls to elect a new president in October, political risks could inject fresh volatility into the markets once again.

“Presidential elections will be in the spotlight this year,” said analysts at Bank of America Merrill Lynch. “Reforms are key to correct the still concerning fiscal situation and improve the overall economic outlook, in our view. A virtuous cycle on the economic front could result in higher growth, low inflation, low interest rate and debt sustainability. Policy mismanagement after the elections could lead to the opposite so the 2018 presidential elections could have a binary outcome.”

Source: Financial Times

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It’s not just Wall Street that is seeing records being shattered on Tuesday. Brazilian equities also climbed to a new all-time high as investors ramp up bets that Latin America’s largest economy — despite its political dysfunction and endless corruption scandals — would get a lift from stronger US and global economic growth. The country’s […]

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Surging revenues ease fiscal concerns

10.01.2018

Preliminary December data on federally administered revenues left officials euphoric. “They came in 4.5% higher than even government estimates for the month,” says a high-ranking economic official. “It is already mirroring economic growth.”

The final result will be disclosed later in the month and could be even better since officials are still adding everything up, the source says. The government had hoped to collect R$72 billion in December from federal taxes (excluding Social Security revenues), net of tax breaks and other credits, according to the financial and budget planning decree.

Outperforming revenues are the primary explanation for last year’s significant drop of the primary deficit of the central government (Treasury, Central Bank, and Social Security), which fell to less than R$130 billion. Officials still don’t have the final figure. The government had targeted a deficit of R$159 billion.

Last month’s revenue results reinforce expectations among the economic team that tax receipts will enjoy significant real growth compared to 2017, helping attain the fiscal target. “We are not aiming for that, but the deficit probably will be lower than the R$159 billion forecast,” the source says.

Surging tax receipts in the second half of 2017, helped by a new debt-settlement scheme dubbed Special Program of Tax Recovery or PERT, allowed something that seemed impossible early in the year. Revenues ended the year with real growth, albeit a small one, from 2016, when a program allowing Brazilians to regularize their unreported foreign holdings netted R$46.8 billion.

The government is convinced it can reach the fiscal target easily despite failing last year to pass higher taxes on single-investor funds, which was supposed to yield R$6 billion, and a potential shortfall of R$12 billion from not privatizing Eletrobras this year. “We will not have problems on the revenue side,” the official says.

Source: Valor International

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Preliminary December data on federally administered revenues left officials euphoric. “They came in 4.5% higher than even government estimates for the month,” says a high-ranking economic official. “It is already mirroring economic growth.” The final result will be disclosed later in the month and could be even better since officials are still adding everything up, […]

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Real-estate developers see a brighter 2018

15.12.2017

Real-estate developers will end 2017 with more launches and sales than last year, but earnings of several companies are still under pressure due to weak operating performance in recent years. Considered a year of recovery for the sector, 2017 was also marked by cash generation among many companies and by creditors’ approval of judicial recovery plans of PDG Realty and Viver Incorporadora. The market expects the operating improvement to consolidate next year, but reflected only in the 2019 balance sheets.

“This year was of transition and adjustment. In 2018 there will be effective cash generation and, due to the industry’s cycle, earnings will start recovering by 2019,” says Santander’s real-estate analyst, Renan Manda.

Developers avoid setting targets for launches in 2018, but some of them such as EZTec and Tenda expect raising projected sales (VGV). Until September, the launch of publicly traded companies increased 28%, and net sales rose 25%, according to Valor data. Seasonally, the fourth quarter is the most heated for the industry.

Sales started to show improvement in the second quarter, Mr. Manda says. Most developers were able to generate cash in the third quarter as the number of deliveries fell, pushing down contract cancellations. Cash generation tends to keep growing in 2018 and help cut debts.

“Inventories have been falling every quarter. Sales are starting to pick up,” says another industry analyst, although he also warned that prices probably would stay flat next year because companies reduced launches faster than they cut inventories. Mr. Manda, with Santander, also expects prices to keep stable or follow inflation. “I don’t expect any price pressure,” he says.

Next year will present a more favorable environment for the middle-class and high-middle-class income ranges, and also for developers working with government housing program Minha Casa, Minha Vida, says Luiz Mauricio Garcia, a senior real-estate analyst with Bradesco BBI. But the segments will recover “from different levels.”

“The low-income segment has a better supply-demand balance,” says the Bradesco BBI analyst. A new expansion will only occur when employment indicators improve. “Low income concentrates nearly 80% of demand,” Mr. Garcia says.

Developers focusing on middle-class and luxury properties will benefit from macroeconomic shifts and more readily available mortgages. “Net sales increased as cancellations fell. Gross sales also tend to improve,” says the Bradesco BBI analyst, who stresses that they still are one of the most challenging markets.

Developers are already recovering in São Paulo but not in Rio de Janeiro’s market, says Brasil Brokers president Claudio Hermolin. “Launches sold faster in São Paulo this year than in 2015 and 2016, but were still slow in Rio,” he says. The executive points out São Paulo properties are still selling slower than in 2013 and 2014.

Flávio Amary, president of developer trade group Secovi-SP, expects launches and sales to rise in the city next year but declines to provide a specific forecast. “The scenario is pointing to a better market,” he says. Launches of residential properties in São Paulo could rise between 5% and 10% this year, Mr. Amary says, with sales increasing from 20% to 25%. Early this year, Secovi-SP estimated growth between 5% and 10% for both indicators in 2017.

For Rubens Menin, president of the Brazilian Association of Real Estate Developers (Abrainc), the industry’s biggest challenge now is housing credit. “We hope LIGs [covered bonds] take off in 2018. The securities were regulated in August, and the Central Bank is considering the rules,” Mr. Menin says.

Abrainc’s president believes LIGs will complement the Workers’ Severance Fund (FGTS) as funding sources for the industry. “LIGs could surpass R$200 billion in three to four years,” Mr. Menin says. LIGs are covered by both the lender who issued them and a property portfolio big enough to back the entire issue.

According to Gilberto Abreu, president of the Brazilian Association of Mortgage and Savings Entities (Abecip), mortgages financed by savings accounts will rise 15% in 2018. Abecip estimates that mortgages financed by savings funds will total R$45 billion in 2017, from R$47 billion last year. When FGTS loans are taken into account, the overall new mortgage balance this year is R$117 billion, from R$116 billion in 2016.

“Banks will grow more interested in mortgages over the upcoming months but nothing compared to the peak in 2014, says Santander’s Mr. Manda.

Ricardo Ribeiro, vice-president of Direcional Engenharia, expects state-owned lender Caixa Econômica Federal to set the tone of 2018. “If Caixa is unable to keep lending to mid-standard developers, it will get very tough,” the executive says. He is also concerned about potential lending restrictions in Minha Casa, Minha Vida to families earning more than R$4,000 a month.

Caixa is the largest mortgage lender in Brazil and needs to adjust its capital ratio to Basel III rules. The Senate passed with a few changes a bill allowing FGTS to help capitalize the bank. The proposal still needs to pass the Chamber of Deputies again and would let Caixa swap about R$10 billion in 15-year bonds issued to FGTS with perpetual notes. Mr. Ribeiro says the mid-income sector faces good prospects if the issue is solved and savings accounts start getting net inflows again.

Source: Valor International

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Real-estate developers will end 2017 with more launches and sales than last year, but earnings of several companies are still under pressure due to weak operating performance in recent years. Considered a year of recovery for the sector, 2017 was also marked by cash generation among many companies and by creditors’ approval of judicial recovery […]

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MRV will invest R$50bn in 10 years to become world’s number 2

13.12.2017

MRV Engenharia announced a R$50 billion investment in ten years, during which it estimates to build 500,000 units. If the target is materialized in the next decade, MRV will become the world’s second largest real estate company. Currently, the Minas Gerais-based developer is in third place behind China Vanke and US group D. Horton. MRV projects that in ten years it will create 94,600 jobs in the period. For 2018, the company estimates launches and gross sales of 50,000 units. Considering the price of R$150,000 per unit, projected and actual sales will total R$7.5 billion next year, although the figure is not a target, the company says.

Source: Valor International

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MRV Engenharia announced a R$50 billion investment in ten years, during which it estimates to build 500,000 units. If the target is materialized in the next decade, MRV will become the world’s second largest real estate company. Currently, the Minas Gerais-based developer is in third place behind China Vanke and US group D. Horton. MRV […]

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Brazil Is Turning Its Fiascoes Into a Much-Needed Win

12.12.2017

Latin America’s largest economy was used to corruption and inflation. How will it handle good news?

Well, here are some things you don’t see every day. A few headlines in Brazil are aligning to show Latin America’s largest economy a path back toward confidence — and, just possibly, to restore some of the world’s confidence in democracy.

The first unusual circumstance is that Brazil’s central bank governor will almost certainly have to write a letter to the finance ministry explaining why inflation is ending the year below the 3 percent floor of the target range. Too-high price increases have traditionally been Latin America’s foil. That’s always a “dog bites man” story, hardly worth mentioning. What’s happening now is news, akin to “man bites dog.”

The second circumstance is that in cutting the benchmark interest rate to 7 percent last week, the central bank brought its rate in line with that of the national development bank BNDES. The latter has been used by corporations to borrow at below-market rates, often cosseting firms that are tight with the government. It’s led to big distortions and poor investment decisions. BNDES is like Godzilla trampling over the corporate decision-making terrain.

The third is how microscopic approval ratings are encouraging President Michel Temer’s administration and Brazil’s congress to cooperate to pass constitutional amendments designed to limit spending and overhaul the state pension system. Ordinarily, an approval rating in the low single digits would have politicians running away from reform. But so great is public disgust at graft specifically and the political class generally that Brasilia’s burghers are desperately trying to ward off pitchforks — and that means doing something. In this, they are aided by Temer’s decision not to run in next year’s elections.

Happily, the rare coalescence of these individually significant events is making a difference to Brazil’s economy, which had been contending with its worst recession ever and a crippling lack of confidence in policy making. Temer, who almost had to resign himself, is only president because Dilma Rousseff was impeached last year.

As my colleague David Biller has chronicled, things are now starting to look up: Consumption grew last quarter and investment rebounded. While gross domestic product increased 0.1 percent from the second quarter, what’s striking is the mix. The 1.6 percent gain in investment was the first positive reading in four years. Private-sector economists are marking up their forecasts, with the median estimate for GDP next year now raised to 2.6 percent, according to a weekly survey by the central bank published Monday.

It might be tempting to attribute at least some of this relative upswing to the broadening global bounce. After all, the country is a major commodity exporter. Tempting, but wide of the mark. Brazil is relatively insulated from global winds. For example, GDP fell just 0.1 percent in 2009 while many economies were almost in free fall. Similarly, until very recently the post-financial-crisis global expansion just seemed to pass it by.

Now the cliched green shoots seem to be shooting in Brazil — precisely because things got so bad. Whatever the reason, we should all applaud the progress, especially in a part of the world where militaries ruled so recently. It’s important these days for democracies to show they can function and get things done.

By Daniel Moss

Source: Bloomberg

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Latin America’s largest economy was used to corruption and inflation. How will it handle good news? Well, here are some things you don’t see every day. A few headlines in Brazil are aligning to show Latin America’s largest economy a path back toward confidence — and, just possibly, to restore some of the world’s confidence […]

Read more

Meet the Optimists Forecasting Brazil Will Bounce Back, And Fast

22.11.2017

No one’s popping the champagne just yet to toast the end of Brazil’s worst-ever recession, but some seasoned forecasters see cause for optimism in 2018, predicting the fastest expansion in seven years.

Three senior economists — a top Brazil forecaster in 2016, a University of Chicago-trained Ph.D, and an academic and IMF consultant — expect Brazil to grow on average 3.9 percent in 2018, a level not seen since 2011.

Marcelle Chauvet sits on a committee that tracks Brazil’s economic cycles at the Getulio Vargas Foundation, a prominent business school and think tank. She predicts 3.5 percent growth in 2018, a full percentage point above the consensus estimate from economists the central bank surveys. Traditional models tend to be overly optimistic heading into recession and overly pessimistic when emerging because they rely excessively on short-term cyclical data rather than longer term trends, she said.

“Most people are wrong when forecasting growth right at the end of the recession,” said Chauvet, a University of California economics professor, who has advised the International Monetary Fund and the Brazilian central bank.

With some 13 million unemployed after the worst downturn on record in 2015 and 2016, the strength of the recovery will play a major role in the 2018 presidential election. Years of recession and corruption scandal have fueled disillusionment with traditional politicians. And now, extremist candidates on the left and right will potentially vie with more market-friendly centrists for the country’s top job.

According to official data, growth resumed in the first three months of 2017 after eight quarters of contraction. For next year the median forecast from 100 economists surveyed by the central bank is 2.5 percent. The government’s outlook is even lower, at 2 percent.

By far the highest growth projected among the 34 economists surveyed by Bloomberg comes from Helcio Takeda, partner and director of economic research at Pezco Economics. He forecasts 3.8 percent growth in 2018 and expects the government’s economic agenda to advance, including approval of some type of pension reform.

Among central bank surveys in 2016 Takeda ranked first in accuracy for his long-term forecasts of the exchange rate and benchmark interest rate. The bank does not rank economists’ GDP predictions. Paradoxically corruption scandals and political noise this year have led him to reinforce his bets for 2018.

“We saw the political impact wasn’t so strong and started having the view that it isn’t just the president who’s the guarantor of the economic agenda,’’ Takeda said by phone. “Consider also that the base of comparison, 2017, will still be rather weak.’’

The most optimistic on Brazil’s growth next year is Paulo Rabello de Castro, president of BNDES state development bank, who has a doctorate in economics from the University of Chicago. His argument is that increased public lending will help fuel demand and investments. The bank plans to increase financing by 27 percent next year to nearly 100 billion reais ($30bn), he said.

“I think it will be possible to reach some 4 percent, or 4.5 percent, because statistically we’re coming from the bottom of the barrel,’’ Rabello told reporters in Rio de Janeiro. “We have a certain obligation to try, and we’re going to try.”

In the three years subsequent to the 1981-1983 downturn, Brazil averaged 6.9 percent growth, according to the government’s economic research institute.

“If you look at past data, recovery tends to be much higher than potential growth. Not immediately, but a couple quarters later, almost trying to catch up for whatever happened during the recession,” Chauvet said. “It’s kind of overdue.”

Source: Bloomberg

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No one’s popping the champagne just yet to toast the end of Brazil’s worst-ever recession, but some seasoned forecasters see cause for optimism in 2018, predicting the fastest expansion in seven years. Three senior economists — a top Brazil forecaster in 2016, a University of Chicago-trained Ph.D, and an academic and IMF consultant — expect […]

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