Brazil’s real: how low can it go?

Joe Leahy, John Paul Rathbone – Financial Times, 02/08/2016

When Dilma Rousseff attended the 2016 opening session of Brazil’s congress this week, she appealed to lawmakers to approve tax increases to tackle a widening gap in the country’s public finances.

Most critically, the president called for the reintroduction of a tax on financial transactions, known as the CPMF, that was abandoned in 2007 after objections from business. Opposition congressmen booed her.

But with Brazil reporting a budget deficit last year that was the biggest among emerging economies except for Saudi Arabia at over 10 per cent, unpopular measures are needed to save the country from a deepening fiscal hole, analysts say

Partying on a precipice

The Economist, 01/30/2016

JANUARY is a languid month in Brazil. Beyond the hullabaloo at samba schools—practising for their bawdy annual face-off during Carnival, which starts on February 5th—business pauses while Brazilians go on holiday in the scorching southern summer. Fewer cars clog streets; more bodies throng the beaches.

Politicians customarily switch off along with everyone else. Congressmen return from their Christmas break on February 2nd, but will probably do little until after Mardi Gras a week later. Neither they nor the president, Dilma Rousseff, will be able to relax, though. A frightening mosquito-borne disease has put the health authorities on high alert (see page 42). Meanwhile, Brazil’s political and economic crises are deepening. When politicians return to work they may regret the time they took off from attempting to solve them.

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 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 Interest Rates Going Higher This Week

Kenneth Rapoza – Forbes, 4/27/2015

Brazil’s central bank will most likely hike interest rates by 50 basis points this week. Despite a lackluster economy, runaway inflation is key to the bank’s decision. Current year over year inflation in Brazil is 8.13%. The bank’s target is more like 5.5%. Enough is enough.

There are four main variables influencing the monetary policy committee’s decision this week, notes João Pedro Ribeiro, a fixed income analyst with Nomura Securities in New York. Ribeiro lists recent currency strength as one factor that could sway committee members to be a bit less hawkish. The real is now breaking through the 3 range and trading at R$2.90. Not too long ago, Nomura polled clients who all said the real was closer to R$4 than to R$3. Another factor to look out for is the ongoing changes to the government’s fiscal deficits.

But out of all of these variables, nothing is more hawkish than inflation.

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Brazil’s March Unemployment Rate Climbs in Blow to Rousseff

David Biller and Mario Sergio Lima – Bloomberg Business, 4/28/2015

Brazil’s March unemployment rate climbed to the highest level in three years as Latin America’s largest economy slips closer to recession amid rising interest rates and fiscal tightening.

The jobless rate rose to 6.2 percent from 5.9 percent a month earlier, according to data released by Brazil’s national statistics agency (IBGE). That was higher than the 6.1 percent median estimate from 32 economists surveyed by Bloomberg.

Market reaction to the report was mixed. Swap rates fell, while the currency rose and stock futures pointed to a higher opening in Sao Paulo.

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Brazil’s Annual Inflation Hits Highest Level In Nearly 10 Years

Rogerio Jelmayer – The Wall Street Journal, 5/6/2015

Consumer prices in Brazil rose more than expected in February, putting the 12-month rate at the highest level in nearly 10 years and underlining one of the main challenges facing Latin America’s largest economy in the year ahead.

Brazil’s consumer-price index, the IPCA, was up 1.22%, compared with a rise of 1.24% in January, the Brazilian Institute of Geography and Statistics, or IBGE, said Friday.

The rolling 12-month IPCA increased 7.70% through February, up from 7.14% in January, remaining well above the 6.5% ceiling of the central bank’s target range. The 12-month figure marked the highest level since May 2005, when it reached 8.05%.

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The noise from Brazil? An economy on the brink

Alberto Nardelli – The Guardian, 3/6/2015

The more you look at Brazil’s fundamentals, the more shaky the country looks. And we are not talking about the defensive prowess of David Luiz here. It is the country’s economic backline that risks tumbling down like a set of dominoes.

When a Latin American economy is in trouble a good place to start is its inflation rate. Brazil’s is today running at 7.5%. While this is nowhere near the 2,000-3,000% of the early 1990s, when the price of everything went up several times a week, it is far higher than the central bank’s mid-point target of 4.5%.

On Wednesday, in an effort to bring inflation down, Brazil’s central bank raised interest rates to 12.75%, a six-year high.

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Brazil’s scandalous boom to bust story

Patrick Gillespie – CNN Money, 2/19/2015

Five years ago its economy grew three times faster than the United States. In 2011 its economic size surpassed Great Britain’s. Millions of Brazilians moved from poverty to the middle class, and the president at the time, Luiz Inácio Lula da Silva, had an 83% approval rating.

Eike Batista, once Brazil’s richest person, told “60 Minutes” that his nation was realizing its potential.

“Brazil has put its act together,” Batista told 60 minutes in 2010. “We’re walking into a phase of almost full employment…It’s unbelievable.” It certainly was unbelievable.

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Brazil’s Industrial Output Posts Steepest Drop Since 2009

Paul Kiernan – The Wall Street Journal, 2/3/2015

Brazil’s industrial production contracted sharply in December and finished last year with its steepest decline since 2009, as rising interest rates, weak demand and waning confidence from consumers and businesses weighed on output.

Production declined 2.8% in December from November in seasonally adjusted terms, the Brazilian Institute of Geography and Statistics, or IBGE, said Tuesday.

Economists had expected a smaller drop of 2.4%, according to the median estimate in a survey by the local Agencia Estado newswire.

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