Ever trying to put a positive spin on things, Brazil’s finance minister Guido Mantega sought to put the disappointing Q3 GDP figures news in context. “Among the Brics we were the country that grew the most in the second quarter. In the third quarter we had the lowest growth,” he said, blaming the external sector for the volatility. He has also been rebuffing concerns about Brazil’s fiscal position, also on the slide. Problematically, Mantega has long since lost credibility with the markets, and even though foreign investors are still pouring billions into the populous domestic consumer market, the country’s macroeconomic policy credibility is under intense scrutiny, with Brazil bears talking up the possibility of it losing its investment grade rating in 2014, a general election year.
The economy posted a quarter-on-quarter contraction of 0.5% in the July-September period, according to the national statistics institute (Ibge), down from 1.8% in the second quarter and the worst quarterly result since the start of 2009. The year-on-year result was positive at 2.2%, but that was below expectations. In the first nine months overall, growth was 2.4% year-on-year; and it was 2.3% year-on-year over the rolling four quarters.
The quarter-on-quarter result was dragged down by weak investment (-2.2%) and exports (-1.4%), which was not sufficiently offset by only marginal growth in household and government consumption (1.0% and 1.2% respectively). The year-on-year results looked better, with investment up 7.3% (led by capital goods), and household and government consumption each up 2.3%. Net exports were a big drag, however (-10.6%).
Mantega insisted upon the release of the results on 3 December that the economy has touched bottom and is already in recovery mode. However, the Ibge reported the very next day (4 December) that its index of industrial production was up just 0.6% month-on-month and 0.9% year-on-year in October, hardly anything to write home about. Industrial output has been volatile all year and the latest figures underline that it is still struggling to recover. On the upside, the growth in October was more broadly based (across 21 of the 27 industrial sectors on a month-on-month basis, and 17 of the 27 on a year-on-year basis), and was also strongly linked to capital goods, suggesting that manufacturers are re-stocking at the very least. However, there was also a strong base effect in the October annualised figures (+18.8%), as capital goods output had contracted 5.1% in October 2012.
Though Mantega blamed the still weak external scenario for Brazil’s woes, critics also point the finger at the lack of domestic macroeconomic policy stability and transparency, saying that the government’s meddling, however well-meaning, has completely muddled the investment environment for the local private sector. The subsequent (6 December) local consensus forecast of local private economists compiled by the central bank and published in its weekly Focus report was for real GDP growth of 2.35% in 2013, down from 2.5% the prior week; while the 2014 forecast was unchanged at 2.1%. There is some concern about a further GDP contraction in the fourth quarter, which would tip Brazil into a technical recession.
Weak growth will complicate Copom’s life
On 27 November the central bank’s monetary council (Copom) unanimously voted to lift the benchmark Selic interest rate 50 basis points to 10% (without bias), returning it to its highest level since March 2012.
The Copom has now lifted the Selic by 275 basis points since April in an effort to temper inflation, which though trending down (it was 5.77% year-on-year in November, from 5.84% in October), is still stuck at the higher end of the official target range of 4.5% +/- 2.0%.
The Copom faces a difficult scenario moving into 2014. Brazil is stuck in low gear, but with fairly persistent inflation. The inflation outlook is complicated by a new rise in domestic fuel prices (see below) and the inevitable prospect of the tapering of the US Federal Reserve’s US$85bn monetary stimulus programme. That will hit the Real, already one of the worst performing currencies against the US dollar this year, and thereby threaten additional imported inflation. As we went to press on 11 December the Real was trading at R$2.31/US$, having declined by about 12% this year.
The latest (6 December) consensus forecast in the central bank’s Focus report was for faster inflation in 2014 of 5.92%, up from 5.7% this year.
The country’s fiscal (and current account) position is also deteriorating and although the government led by President Dilma Rousseff is paying lip service to fiscal consolidation there is no real sign of this happening on the ground.
Mantega repeated that the government would eliminate some subsidies and tax exemptions to meet its year-end primary fiscal surplus target and noted that the national development bank (Bndes) would also rein in financing for regional governments. Yet as we point out in the latest (November 2013) edition of our sister publication, Latin American Economy and Business, “much of the news flow in recent weeks suggests that the government is taking steps so that the state lenders, Banco do Brasil (BB) and Caixa Econômica Federal (CEF), can reinforce their balance sheets so as to allow both institutions to be better placed to increase lending from mid-2014 should the economy slow once more. In essence, the 'credit cannon' is being reloaded.
Mantega also stated that there would no ‘creative accounting’ to meet the primary surplus target of about 2.3% of GDP (R$110.9bn). Yet congress recently approved two separate pieces of legislation effectively loosening up the fiscal rules for states and municipalities, prompting critics to complain that the government had shifted from ‘creative accounting’ to ‘creative legislation’ to manoeuvre around the primary fiscal surplus target.
R$40bn to meet year-end target
Brazil posted a primary surplus of R$5.4bn (US$2.3bn) in October, the weakest for the month since October 2004, on the latest treasury figures. The accumulated year to date (ytd) surplus is now R$33.4bn, down 48.2% (or R$31.1bn) on the same period of 2012. Nonetheless treasury secretary, Arno Augustin, said that he was confident that the government would meet its full year R$110.9bn target. Augustin projected “double digit” surpluses in November and December, boosted by a cash windfall from recent auctions for the country’s major Libra offshore oilfield and as well as tax settlements by some of the country’s big corporates including the mining giant Vale. Augustin noted that combined these extras would bring in R$38.4bn alone.
The treasury can also use an accounting measure to discount from the final primary surplus calculations investment made under the growth acceleration program (PAC). Critics say the government is scrambling around to meet its targets for a second year in a row, with the credibility of its fiscal policy management being seriously eroded. With the government unwilling or unable to rein in fiscal policy, the heavy lifting against inflation is being left to the central bank. However a higher Selic will also increase debt costs for the government, adding to its fiscal woes.
Consumers hit with new fuel price increases
The state oil company Petrobras lifted wholesale diesel and gasoline prices by 8% and 4% respectively on 1 December in order to “make prices in Brazil converge with the international benchmarks, within a compatible period, [and] assure that debt and leverage rates return within 24 months to the limits established by the 2013-2017 Business Plan”, the company’s Chief Financial Officer Almir Barbassa said.
Since June 2012 Petrobras has increased gasoline prices by 15% and diesel prices by 22% to reduce the discount with international prices. For Brazilian consumers, the latest increases, the first since March last, will amount to a 2.5%-3.0% increase at the pump, according to estimates by local analysts. On 25 October Petrobras had put a new automatic price adjustment formula to the board. However the board asked for a revised formula. The new formula has not been divulged but sector analysts saw in the latest increase the staying hand of Finance Minister Mantega, who is the company’s chairman. The Brazilian government, which controls Petrobras through a majority of voting shares, has been reluctant to sanction additional price rises ahead of an election year, at a time when consumers are already feeling the inflationary pinch.
Mercosur talks
Some of the trade disputes between Argentina and Brazil are on their way to solution, and the two countries, along with Paraguay and Uruguay, should be able to present a joint Southern Common Market (Mercosur) position to the European Union (EU) on an inter-bloc association agreement (FTA) before the end of this month, Brazil’s trade minister Fernando Pimentel said on 5 December in Buenos Aires.
Pimentel’s statement is a sign that the reshuffled Argentine ministerial team under Cabinet Chief Jorge Capitanich and Economy Minister Axel Kicillof is ready to rebuild bridges with its main trading partner. Bilateral Argentina-Brazil trade is worth US$30bn a year, but has been troubled by a barrage of Argentine protectionist measures, which have also irritated Paraguay and Uruguay, the smaller Mercosur members. Pimentel is optimistic that the four countries (with Venezuela, the recently added Mercosur member taking a back seat) can now get serious about inking a trade deal with the EU (pending since 1999). While there has clearly been an advance, forging a common position in the EU negotiations will remain a challenge.
According to Pimentel, Capitanich and Kicillof have promised that Brazilian car and footwear exports to Argentina, stuck on the border for months because of complex Argentine import regulations, will start moving next week. “This issue that has been upsetting our exporters has been resolved”,” Pimentel stated. “There’s been a change of team and we think that is positive”. There were even suggestions that the thaw might extend to other products, including pharmaceuticals. Analysts believe the breakthrough has been made possible by the departure of Argentina’s controversial former domestic trade secretary Guillermo Moreno, and are talking of a desmorenización of trade policy. Pimentel diplomatically avoided answering a direct question on the subject, but smiled broadly.
The change raises hopes for a Mercosur–EU association agreement. The free trade deal has been in on-and-off discussions for more than a decade. Talks collapsed in 2004 and were revived in Madrid in May 2010. In January this year, both sides agreed to exchange initial offers before the end of 2013, so there is now a tight window in which to do so, ahead of 15 December deadline for submission of the Mercosur offer to Brussels. The Mercosur countries must agree a common list of products that will be tariff-free. EU officials want the list to cover 90% of existing trade. Pimentel says Brazil will be close to that level, while Capitanich says Argentina can cover 70% “for sure”. What remains to be seen is whether Argentina can really liberalise its trade policies at a time when its heterodox economic policy still relies on exchange rate and other interventionist measures to conserve limited foreign currency reserves. It is a problem the new economic team has yet to resolve. There has been talk of a differentiated agreement, allowing Argentina to go in a slower speed.
- Investment laggard
Brazil wants to increase its ratio of investment to GDP from its current 19% to well over 20%. Blamed the global financial crisis, Finance Minister Mantega said it will now take Brazil a few years to get to 24%. China’s ratio currently stands at 46%; India’s at 36%. Critics say domestic tax and labour reform, along with a downsizing of the bloated public sector, are key to boosting the investment rate.
- Trade deficit to November
Brazil posted a trade surplus of US$1.74bn in November, above expectations. The accumulated trade deficit in the first 10 months of 2013 was US$89m, compared to a US$17.2bn surplus in the same period of 2012. Exports totalled US$221.3bn (down 1.1% year-on-year) and imports US$221.4bn (up 7.2%), driven up by higher fuel purchases among others.
- Paraguay gives the nod to Venezuela
Paraguay’s senate approved Venezuela’s full adhesion to Mercosur on 10 December. The adhesion protocol, sent down by President Horacio Cartes, will now go to the congress, where it is also expected to pass.
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