Brazil & Southern Cone - April 2006 (ISSN 1741-4431)

The new finance minister, Guido Mantega, argued on 20 April that disappointing tax receipts for March and even more disappointing retail sales figures for February, should not raise doubts about the state of the economy. The tax and retail sales figures were published on the same day as the central bank's monetary policy committee, Copom, announced its decision to cut rates by 0.75 of a percentage point. The publication of the Copom minutes on 27 April, was another dose of bad news. The minutes indicated that future interest rate cuts were likely to be smaller than the 0.75 point cuts of the last three Copom meetings. 

The March tax figure was flattered by one-offs such as the clearing of arrears by companies and an increase in capital gains taxes. Without these, the March fall in tax revenues would have been even more pronounced than the 0.9% fall in real terms, year-on-year. What concerns local analysts is that receipts are falling just as the government starts to spend. Whether the government likes it or not its spending will jump in May when the new minimum wage starts to be paid. 

Retail sales in February fell by 4.13% compared with January. For the first two months of the year retail sales were down by 1.95% on the same period of 2005. To be fair, retail sales are volatile. In January, they were up by 4% on December 2005. Year-on year, retail sales in February looked better, up 5.4% in volume and almost 8% in value. For the first two months, volumes were 6% up on the same period of 2005 and the value of sales was almost 9% higher. On the other hand, capital investment is weak. The number of agricultural machines sold in Brazil in the first quarter of 2006 fell 40% compared with the same period last year and was 80% down on the first quarter of 2004.

The IMF has also shown some doubts over the government's pledge to maintain fiscal austerity, and warned President Lula da Silva not to be tempted to ramp up public spending ahead the October general election. The weaker the economy looks, the greater the temptation for the government to try to generate a feelgood factor. It should be emphasised, however, that so far the government is still on track to meet its 2006 fiscal target of 4.25% of GDP. In the 12 months to February, Brazil posted an operating budget surplus of 4.38% of GDP. This is down from a surplus of 5.2% of GDP as recently as September 2005. 

Mantega rebuffed the doubts expressed by Fitch and the IMF. Mantega's arguments, however, seemed to confuse stocks and flows. He claimed that the latest data would show that Brazil has already achieved 40% of the budget surplus target for 2006. The analysts' worry is that increased spending and dwindling inflows will threaten the annual target. The determining factor in deciding whether the government will hit its 4.25% of GDP target is likely to be the performance of state-owned companies. Companies such as Petrobras and Banco do Brasil could have banner years (and should do if interest rates fall) which will help the government hit its target.

Copom: The Copom cut rates on 19 April to 15.75% annually, the lowest level in five years. This was the seventh consecutive cut and was agreed unanimously by the committee's members. Most analysts believe that the central bank will meet its 4.5% inflation target for the year.

Unemployment: In March unemployment reached 10.4% of the urban workforce, up from 10.1% in February and 9.2% in January. Still the average rate for the first three months of the year (9.9%) is better than the 10.5% registered in the first quarter of 2005.