If you think Brazil’s first quarter was bad, wait for the second

David Biller – Bloomberg Business, 05/27/2015

Brazil’s economy probably shrank in the first three months of 2015, and the second quarter may be worse as the nation enters its first recession in six years.

Gross domestic product contracted 0.6 percent in the first quarter, according to the median estimate of 36 economists surveyed by Bloomberg. When surveyed last month, analysts forecast that would be the year’s weakest quarter. Now they foresee the second quarter being even worse, according to a May 22-27 survey.

As steward of Brazil’s economic policy, Finance Minister Joaquim Levy has cut spending while raising taxes and the prices of regulated items to avert a sovereign downgrade. At the same time, the central bank is boosting borrowing costs to slow inflation. This two-pronged tightening has already taken a toll on industry and investment, and the slump will spill over into consumption and services in the second quarter, according to Roberto Padovani, chief economist at Banco Votorantim.

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If you think Brazil’s first quarter was bad, wait for the second

Brazil’s senate clears second austerity bill

Paulo Trevisani, Djania Savoldi – The Wall Street Journal, 05/27/2015

The Brazilian Senate on Wednesday approved a controversial bill meant to save taxpayer money by reducing pension payments to widows.

The measure is part of a broader effort to reduce the government’s high debt levels, which are threatening the country’s investment-grade rating.

The vote is a victory for President Dilma Rousseff and comes less than a day after Congress cleared another bill that reduces unemployment benefits. Together, the bills will save some 15 billion Brazilian reais ($4.8 billion) in taxpayer money, government officials say.

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Brazil’s senate clears second austerity bill

Potential ‘fallen angels’ show impact of Brazil slowdown

Jonathan Wheatley – Financail Times, 5/6/2015

A darkening gloom hangs over Brazil’s economy. Analysts are steadily downgrading their growth projections for the economy this year, while inflation expectations creep ever upwards.

As evidence that the strain is being felt by businesses, a report from Moody’s Investors Service shows Brazil overtaking Russia as home to the emerging world’s largest number of potential “fallen angels” — companies at risk of losing their investment grade credit rating and falling into speculative grade, or junk.

The central bank’s latest weekly survey of market economists shows Brazil’s gross domestic product shrinking 1.18 per cent this year and consumer prices rising 8.26 per cent.

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Potential ‘fallen angels’ show impact of Brazil slowdown

Brazil is suffering from recession and scandal

Financial Times, 5/4/2015

In a world of near-zero interest rates, how about this? Last week, Brazil’s central bank increased its main interest rate to 13.25 per cent. The 50 basis-point rise is part of Brazil’s efforts to put its house in order. The economy is expected to shrink by 1 per cent this year, the deepest recession in 25 years; unemployment is rising; while inflation is running at over 8 per cent — almost twice the official target, hence the rate rise. After years of fast growth and easy credit, Brazil is on its back.

Latin America’s biggest economy is also reeling from a corruption scandal at Petrobras, believed to be the largest in national history. Release of the state-controlled energy company’s long-delayed results last month estimated losses, due to corruption, of more than $2bn — much of them due to political kickbacks. Combined with the recession, this has savaged President Dilma Rousseff’s standing. Even in a region of weak leaders, her dismal approval rating stands out. At 13 per cent, it is lower even than that of Nicolás Maduro, the president of Venezuela.

There are three main reasons for Brazil’s gloom. China’s slowing economy has punctured the commodity price boom forcing Brazil, and other commodity countries in the region, to tighten their belts. The prospect of higher US interest rates threatens to suck international liquidity out of the country. Most of all, it is paying the cost of Ms Rousseff’s mistaken faith during her first term in so-called “developmentalism”.

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Brazil is suffering from recession and scandal

Brazil’s economy: A tight squeeze

The Economist, 4/30/2015

DO NOT envy Brazil’s monetary policymakers. The economy is faltering. With business confidence plumbing record depths, unemployment up and real wages down—by 3% year-on-year in March, the most in more than a decade—demand remains fragile. Supermarket sales fell by 2.6% last month, compared with the previous one. Output will probably contract by at least 1% this year. Yet with prices rising at the fastest rate since 2003, the central bank’s rate-setters had little choice when they met on April 29th but to raise interest rates by another half a percentage point, to 13.25%.

If Brazil is fortunate, the painful rate hike could leave policy-makers with a bit more room to manoeuvre when they next convene in June. One source of inflationary pressure is easing: the real has rebounded by more than 10% against the dollar since its 12-year trough six weeks ago. This, notes Alberto Ramos of Goldman Sachs, an investment bank, mainly reflects the prospect that the Federal Reserve will keep its own rates rock-bottom for a while longer, given the recent underwhelming performance of the American economy. But it also illustrates the markets’ belief that the wily finance minister, Joaquim Levy, will manage to keep his pledge and turn a primary budget deficit (excluding interest payments)‎ of 0.6% in 2014 into a surplus of 1.2% this year.

This faith was shaken on April 30th, when official figures showed that in March the government managed to set aside a piffling 239m reais ($79m) to pay creditors; analysts had been expecting something closer to 5 billion reais. Meanwhile, the total public-sector deficit ballooned to 7.8% of GDP, inflated by a 34.5 billion reais monthly loss stemming from the central bank’s currency-swap programme. The economic slowdown also appears to be hurting the government’s tax take.

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Brazil’s economy: A tight squeeze

Brazil Rate Hikes Actually A Good Thing

Kenneth Rapoza – Forbes, 4/29/2015

Brazil’s central bank hiked interest rates by 50 basis points on Wednesday as expected. One would think that making credit more costly when the economy is in the gutter is anti-growth. It is. But not in Brazil. That is because inflation of 8.2% is hurting growth just as much, if not more, as high rates. High rates Brazil can live with. Unpredictable inflation? No thank you. So when Brazil’s central bank raised interest rates to 13.25% after market hours today, Brazil investors understand that as bank governor Alexandre Tombini doing what needs to be done: attacking nasty and unrelenting inflation.

Nomura Securities said after the news that the Central Bank of Brazil will likely raise rates by an additional 25 basis points in June. The risk is tilted toward more hiking, too, regardless of a strengthening real and a weaker labor market.

In fact, an additional 50 bips hike is not out of the question, says Nomura’s João Pedro Ribeiro.

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Brazil Rate Hikes Actually A Good Thing

Brazil’s Real Climbs as Higher Rates Seen Attracting Investors

Filipe Pacheco and Paula Sambo – Bloomberg Business, 4/27/2015

Brazil’s real rose for a fifth straight day amid speculation the central bank will raise borrowing costs by another half-percentage point this week, making local assets more attractive to international investors.

The real gained 1.2 percent to 2.9170 per dollar at the end of trade in Sao Paulo, an eight-week high. The rally that began April 20 is the longest since June 2014.

Buying the real with borrowed dollars has returned 11 percent this month, the most among the 31 major currencies tracked by Bloomberg after the ruble. The real climbed Monday as analysts forecast that Brazil will lift the target lending rate on April 29 by 50 basis points for a fourth straight meeting to curb above-target inflation. The Federal Reserve, meanwhile, is expected to hold borrowing costs steady that day as U.S. economic growth shows signs of slowing.

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Brazil’s Real Climbs as Higher Rates Seen Attracting Investors