Brazil’s current account remained relatively stable in 2012, with a deficit of around 2.4% of GDP, slightly higher than the 2011 deficit of 2.1% of GDP. The CAD was fully funded by FDI, which summed US$68 billion (3% of GDP), while portfolio flows remained anemic at 0.4% of GDP. These dynamics prevailed throughout 2012, so […]
The end of Q4 brought forward interesting dynamics in the LatAm region: Namely, a sharp deceleration in inflation in every inflation-targeting economy, with the exception of Brazil (although we expected inflation to soothe by year-end in Mexico, Chile and Peru, the deceleration was much stronger than anticipated, and downward revisions to our inflation forecasts could […]
The Fed’s QE3 will have varying effects by country in LatAm; however, there are a few broad strokes that color the region. QE3 comes at a moment when growth is weak across the board and policy action is widely needed. What QE3 signifies for LatAm, in this context, is not only related to the added […]
On March 29, the government announced a new decree in the Official Gazette, increasing the financial-operation tax (IOF) on overseas loans—corporate loans and debt sold abroad by banks and companies. The tax was raised to 6% from 5.38% on international bond sales and extended to transactions with a maturity of up to 360 days from the previous 90-day limit. Brazil’s central bank said the increase was aimed at curbing foreign currency loans with a maturity longer than three months; which have grown around 39% since the end of 2008. In addition, the local newspaper Folha de S.Paulo, asserted that since January 2011, the inflows of U.S. dollars into the country had reached almost US$35 billion, reflecting an increase of 42% with respect to 2010’s total inflows.
The current account deficit likely narrowed to US$3.9 billion in February, from a deficit of US$5.4 billion in January, but widened compared to a deficit of US$3.3 billion in February 2010. A widening of the merchandize trade surplus to US$1.2 billion—driven by higher commodity prices—despite an expected narrowing in the net services deficit to US$5.3 billion, should explain the deterioration from January. This would mean that, on 12-months rolling basis, the current account shortfall shrank to US$49.3 billion in February from US$48.6 billion in the previous month. We highlight that FDI and portfolio inflows have been more than enough to cover the gap; however, the quality of the funding has deteriorated as portfolio, rather than FDI, becomes more prominent. We expect the current account to continue to deteriorate in 2011 to US$70 billion, or 3% of GDP, as domestic demand should continue to grow at a faster pace than external demand as the currency remains overvalued—though elevated commodity prices should help in avoiding a sharper deterioration.
The PMI stayed above 50 in February, advancing 2.9% m/m seasonally adjusted (SA) to 54.6, after growing 1.3% m/m SA in January and 5% m/m SA in December. The index is 43% above the low of 38.1 reached in January 2009, but 5.5% below the high of 57.8 in January 2010. Solid domestic demand rather than external demand generated strong growth in new orders, pushing companies to increase output and hire workers. Inventories decreased rapidly, while average input costs increased at a marked pace.
Expectations for Brazil’s benchmark SELIC monetary policy rate for year-end 2011 remain at 12.5%, implying 125 bps of tightening for the rest of 2011. For 2012, analysts kept their forecast at 11.25%, suggesting 125 bps of cuts. Meanwhile, as of February 22, the markets’ DI futures curve moved back up to a total of 175 bps of hikes to 12.9% for the rest of 2011 from 150 bps a few days ago. The markets expect the COPOM to raise rates by 50 bps in March, continue with another 75 bps increase in Q2 (78.4 bps) and end the year with a 50 bps hike in H2 (41.4 bps). Markets anticipate the SELIC rate staying unchanged in 2012.
Brazil’s mid-January IPCA headline inflation came in above expectations (consensus, 0.69% m/m; RGE, 0.7% m/m) at 0.76% m/m (0.63% m/m in December), pushing yearly inflation up to 6.05% from 5.9% by the end of 2010 and away from the central bank target of 4.5% (+/- 2%). Food prices dropped to 1.2% m/m from 1.32% m/m in December and the last year’s peak of 2.22% in November; however, higher transportation prices—particularly bus tariffs (1.77% m/m) and ethanol prices (4.31% m/m)—together with stronger prints in housing, personal expenses and education, kept inflation elevated. Food inflation was responsible for 37% of the increase.
Dilma Rousseff was elected as the first female president in Latin America’s largest economy by winning the run-off presidential race on October 31 with 56.1% of the vote, compared with 43.9% for her opponent, Jose Serra. The result was expected given recent poll results. The new president will take office on January 1, 2011.