Perspectives

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19  
EcoPerspectives // 1 quarter 2019  
economic-research.bnpparibas.com  
Brazil  
A new era  
The election of Jair Bolsonaro at the presidency of Brazil has marked a swing to the right, the weakening of traditional political parties  
and a return of the military to national politics. The new administration faces the challenges of rapidly engaging its fiscal reform,  
gaining the trust of foreign investors while reconciling ideological differences across its ranks. How society will adjust to a new era of  
liberal economic policy remains the greatest unknown. Meanwhile, the economy is still recovering at a slow pace. Supply-side  
indicators continue to show evidence of idle capacity while labour market conditions have yet to markedly improve. Sentiment  
indicators have shown large upswings in recent months which should help build some momentum in economic activity over Q1 2019.  
Tricephalic leadership?  
1
- Growth and inflation  
GDP Growth (%)  
Since the nomination of Jair Bolsonaro as Brazil’s new president,  
the composition of the cabinet has seen the emergence of three  
distinctive groups within the administration: the economic  
technocrats, the military and the anti-globalist nationalists primarily  
embodied by the minister of Foreign Affairs, Ernesto Araujo, a  
stanch admirer of President Donald Trump’s nationalistic rhetoric.  
Inflation (%)  
Forecast  
8.7  
Forecast  
3
.7  
3.8  
3.6  
3
.4  
3.0  
2
.5  
1.3  
1
.0  
Leading the economic technocrats’ contingent is Paulo Guedes who  
was confirmed at the head of a super ministry made up of the  
ministry of the Economy, the Ministry of Planning and the Ministry of  
Industry and Trade. Roberto Campos Neto, a previous executive at  
Banco Santander will be the next Central Bank governor while  
Joaquim Levy, another graduate from the University of Chicago -  
along with Guedes - and former Finance Minister under the 2nd  
Rousseff administration will head the third largest national  
development bank in the world, BNDES. Roberto Castello Branco,  
an economist by training and third “Chicago Boy” has been  
appointed as the new CEO of oil giant Petrobras following previous  
stints at mining company Vale and at the Central Bank. The leading  
agro-business lobbyist at the Chamber of Deputies, Tereza Cristina  
and one of only two women in cabinet will be heading the Minister of  
Agriculture while Ricardo Salles a lawyer and strong supporter of  
economic liberalism as well as a fervent critic of Presidents Lula and  
Rousseff was appointed Minister of the Environment. Moving to  
deliver on his law and order platform President Bolsonaro appointed  
former anti-corruption judge Sergio Moro as Minister of Justice and  
saluted the nomination of Mauricio Valeixo as Brazil’s Head of  
Federal Police. Both men were prominent figures in the Car Wash”  
investigation and instigated the police operation that led to the  
detention of former President Lula in April 2018.  
-3.5  
16  
17  
18  
19  
20  
16  
17  
18  
19  
20  
Source: National accounts, BNP Paribas  
2
- Percentage point contribution of components to GDP (y/y)  
3
Q1-18  
Q2-18  
Q3-18  
2
1
0
-1  
-2  
Source: IBGE, BNP Paribas  
2
and its implication for a Mercosur-EU trade deal. Many of these  
tensions are likely to be further exacerbated when the new  
Congress reconvenes in February. President Bolsonaro’s  
unwillingness to build a stable coalition in exchange for political  
appointments may render policy-making more challenging down the  
line.  
Military figures are also largely represented in the new  
administration making up more than one third of the new cabinet, a  
1
record for Brazil since its transition to a democratic regime. Issues  
likely to steer up tensions between the three groups include:  
relations with China, the extent of privatizations and the rules for  
foreign investment, pulling out of the Paris climate change accords  
Rebounding confidence  
1
Notable positions occupied by individuals with a military background include the  
The economy is still recovering at a slow pace. In Q3, the economy  
expanded by 0.8% q/q and 1.3% y/y in seasonal adjusted terms  
Presidency (Captain), Vice Presidency (General) Ministry of Defense (General),  
Intelligence Office (General), Ministry in charge of political relations with Congress  
(
s.a). Quarterly data benefitted from a low base effect following a  
(General), Ministry of Science and Technology (Air Force senior officer), Ministry of  
Mining and Energy (Admiral), Ministry of Infrastructure (Military engineer), Ministry of  
Transparency, Supervision and Control (Captain), Secretary of Communication  
2
Under a new policy, the European Union will refuse to sign trade agreements with  
(General).  
countries that do not ratify the Paris climate change agreement.  
st  
20  
EcoPerspectives // 1 quarter 2019  
economic-research.bnpparibas.com  
subdued Q2 owing to the truckers’ strike. On the demand side, the  
increase was largely driven by investment and private consumption  
contributing respectively 1.3 pp and 0.9 pp to the y/y growth rate  
which was dragged down due to a larger negative contribution of net  
exports (-1.5 pp) (chart 2). Also as supply continued to outpace  
demand, the contribution of inventories to y/y GDP variation was  
again positive (+0.5 pp) for the second consecutive quarter.  
Revisions to GDP figures were made leading to GDP growing by  
3
- Inflation remains below target  
Inflation IPCA ▪▪▪ Core inflation IPCA  
11  
1
Y/Y % change  
0
9
8
7
6
5
4
3
2
1
0
Upper  
bound  
1.1% in 2017 vs 1% previously, bringing the statistical carry-over  
through Q3 2018 to 1.1%.  
Inflationtarget  
Lower bound  
A number of tailwinds are currently supporting the economy  
suggesting that a risk of a business cycle reversal is limited.  
Households are generally better positioned to maintain  
consumption: real earnings have continuously risen on a y/y basis -  
albeit at a slow rate - after experiencing negative growth through  
much of 2016 and household debt relative to disposable income has  
fallen. Meanwhile, monetary policy is expected to remain  
accommodative as inflation risk remains subdued (chart 3). Credit to  
household, which has steadily expanded growing at an average  
monthly rate of 6.5% y/y through November, will continue to support  
private consumption while recent regulatory changes in the  
mortgage market should help boost residential investment.  
2010 2011 2012 2013 2014 2015 2016 2017 2018  
Source: IBGE, BNP Paribas  
4
- Post-election rebound in confidence indicators  
Construction  Consumption  Manufacturing ▪▪▪ Services  
120  
Operation  
Rousseff  
Impeachment  
(Dec. 2015)  
Bolsonaro  
President  
(Oct. 2018)  
Lava Jato  
March 2014)  
1
10  
00  
(
The post-election phase has also witnessed a bounce back in  
sentiment indicators. The Consumer Confidence Index (CCI)  
advanced vigorously through Q4 reaching its highest levels in  
December since April 2014. Business sentiment also rebounded  
strongly reflecting the new administration’s inclination to implement  
business friendly policies. The IBRE/FGV Business Confidence  
Index (BCI) increased by 1 point in December to 95.9 points its  
strongest rebound since March 2014. The increase was largely  
driven by optimism in the services, trade and construction sectors  
as confidence in industry remains subdued for the moment (chart 4).  
Markit’s composite PMI was also back in expansion zone in October  
1
90  
80  
70  
60  
2
010 2011 2012 2013 2014 2015 2016 2017 2018  
Source: IBRE/FGV, BNP Paribas  
(
50.5) for the first time since May, ultimately reaching 52.4 in  
December. Bolsonaro’s victory has also triggered a series of initial  
public offerings (IPO) after months of paralysis. The stock market  
reached historic highs gaining 12% since the second round of the  
election and is on course to break the 100.000 point mark.  
Meanwhile the USDBRL has had somewhat of a roller-coaster ride,  
strengthening ahead and during the elections, to then see much of  
its gains erased in the last two months of the year. While the  
currency has recovered somewhat since Bolsonaro’s inauguration  
Corporate credit has also yet to recover, exhibiting a negative real  
growth rate since December 2014.  
More fundamentally, reduced scope for fiscal policy flexibility limit  
the ability of the government to jump start the economy. In the  
medium term, structural impediments - namely low productivity,  
trade openness and investment combined with high levels of job  
informality, inequality and corruption  will continue to weight on the  
economy’s medium term growth prospects.  
(
+4%), the currency has yet to bounce back from hitting historical  
lows in 2018 that saw the BRL depreciate by 15% against the USD.  
In the shorter term, a new trucker strike represents the greatest  
downside risk to the growth outlook. Moreover, with capacity  
utilization in manufacturing remaining far below pre-recession levels,  
industry still exhibits considerable slack. In line with auto output -  
which experienced a drop of 14% through H2-2018 - industrial  
production continues to be weak, essentially stagnating since July.  
Idle capacity is also evident in the labour market: unemployment  
remains high at 11.6 % decreasing only very slowly while  
underemployment has increased.  
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