Inflation Is Under Control, but at a Price
Inflation is one of the “good news” stories of the Brazilian economy. The year 2018 ended with inflation of 3.75%, up from 2.95% the previous year, but still well below the government’s target for the year of 4.5%. But the battle to keep inflation within targets comes at a price. Inflation has been comparatively low in recent years because of a mostly recessionary economy in which weak consumer demand, blunted by unemployment and debt, held down prices of services and manufactured goods. Meanwhile, although low by historical standards, Brazilian interest rates are still high when compared to other countries, with the base rate standing at 6.5%. The battle will be joined again in 2019, but this time in an economy marked by rising employment and consumer demand. “We’re going to see increased inflationary pressure in 2019,” said Zeina Latif, Chief Economist at the XP investment fund, at a recent seminar. Factors contributing to inflation, in addition to consumer demand, include a stronger U.S. dollar, volatile international oil prices and pressure to raise government-administered utilities rates in the face of heavy debts among providers. Meanwhile, under Brazil’s inflation-targeting program, the government is committed to ever more stringent targets. After holding to a target of 4.5% for 14 straight years, the government has set new, more ambitious, goals for 2019, 2020 and 2021, at, respectively, 4.25%, 4.0% and 3.75%. Meeting those goals puts the onus on the government, especially the Central Bank. Said Getúlio Vargas Foundation economist Armando Castelar, at the same seminar: “We expect inflation of 4.5% going into 2019. To get it down to 4.25% will most likely require interest rate hikes.” The market seems to agree. The latest Central Bank survey of expert opinion found economists and market analysts predicting a rise in the base rate to 7.0% by the end of this year and to 8.0% by the end of 2020. Such rates could crimp economic activity. Brazilians will continue to enjoy comparatively low rates of inflation, but at a price.
State of the Economy
Industrial production turns in disappointing 2018 performance.
The Brazilian Census Bureau (IBGE) last week released 2018 industrial production data, showing a weak 1.1% rise over 2017. It was the second positive year in a row but still well below the 2.5% gain in 2017 against 2016. Problems last year included a truck strike in May, low investment levels ahead of October elections and depressed consumer confidence. However, there were some promising sparks. Capital goods output rose 7.4% year-on-year, showing that manufacturers have an appetite for growth in 2019. Meanwhile, unemployment continues to decline. Tame inflation and historically low interest rates should also help spur industrial output in 2019. (see more)
Central Bank holds base rate steady amid worries about global growth.
The Brazilian Central Bank’s monetary committee this week voted unanimously to hold the nation’s base interest rate steady at 6.5%. It was the seventh straight “hold” order by the bank, which cited tame inflation and slow growth for its decision. It was also the last rate decision under the command of Central Bank President Ilan Goldfajn, who is due to be replaced by banker Roberto Campos Neto in the coming weeks. Economists called the bank’s accompanying statement “dovish,” indicating likelihood of stable rates for at least several months going forward. However, a nascent economic recovery could bring demand pressure later in the year, followed by modest Central Bank rate hikes. (see more)
Total lending rises 5.5% in 2018 after two years of retraction.
Total lending by the Brazilian financial system rose 5.5% in 2018, against the previous year, to R$3.26 trillion, the Central Bank said last week. It was the first expansion after two years of decline. Growth was led by consumers, who took out 8.6% more in loansthan in 2017. Businesses increased their borrowing by 1.9%. The expansion was a consequence of Brazil’s modest economic recovery combined with a decline in arrears and broadly stable interest rates. Arrears on business loans declined from 6.3% at the end of 2017 to 3.8% at the end of 2018. Consumer arrears fell from 4.5% to 2.7%. (see more)
State of Business
- Bradesco, Brazil’s second biggest private bank, reported 2018 earnings this week, showing a rise of 13% over the previous year to R$21.5 billion. Profits were lifted by a sharp reduction in arrears and, therefore, provisioning against non-performing loans. Provisioning dropped 30% in 2018 to R$14.5 billion. Overall lending rose 8% to a total of R$532 billion. Bank profits are expected to rise again in 2019 as Brazil’s economic recovery gains momentum.
- Brazil has gone down a couple of notches when it comes to the Corruption Perception Index, released annually by Transparency International. The index is a measure of how business professionals and consumers perceive corruption within their societies. In the latest ranking, Brazil managed only 35 points on a scale of 1 to 100 to rank 105th out of 180 countries. In the previous year’s ranking, Brazil was 96th with 37 points. A series of spectacular investigations has highlighted corruption in Brazil in recent years.
- Brazilian urban transportation start-up Yellow and Mexican counterpart Grin announced their merger last week. The companies supply bicycles and scooters for rent in 15 Latin American cities. The combined company will be called Grow. The partners raised an additional $150 million in seed money from international investment funds.
- The Brazilian unit of General Motors this week issued a statement pledging investments of R$10 billion for the period 2020 through 2024. However, the company said the investment plan was dependent on concessions from the government on taxes and labor unions on wages and benefits. Investments during the 2014 through 2019 are projected at R$13 billion. GM is the Brazilian market leader. Negotiations with the government and unions are ongoing.
- Itau, Brazil’s largest private bank, had a good year in 2018. Balance sheets released this week showed the bank with net profits of R$25.7 billion, up 3.4% from the previous year. Provisioning against bad loans was down 8% at R$34 billion while total lending advanced 6% to a whopping R$640 billion. The bank attributed its gains to an improving economic climate, higher income from fees and cost cutting.
- The Brazilian unit of Carrefour, the French-owned supermarket giant, last week announced creation of a new spin-off. The subsidiary will be called Carrefour eBusiness Brasil and will bring together all of the company’s current e-commerce divisions. While e-commerce has been growing in Brazil, supermarkets have lagged. Currently, only about 1% of food purchases are made online.
- Brazilian auto production fell 10% in January against the same month a year earlier as exports plummeted, the National Motor Vehicle Manufacturers Association (Anfavea) said this week. Production was 196,800 vehicles. Exports were down 46% at just 25,000, a reflection of the Argentine economic crisis. Argentina is traditionally the biggest buyer of Brazilian motor vehicles. Brazilian domestic consumption, on the other hand, continued robust at 199,800, up 10.2% against January of 2018.
U.S. Dollar: The Brazilian Real closed at R$3.72 to the dollar, down 1.6% on the week and 14% on the year. The Real fell on worries about global economic growth (see more)
Stocks: The Ibovespa index closed at 95,590 points, down 2.5% on the week but up 18% on the year. Stocks fell in the short term on profit-taking following sharp gains in January. (see more)
Interest Rates: The benchmark January 2021 contract closed at 7.16%, up from 7.01% the previous week, on expectations of inflationary pressures next year. (see more)
- Friday, February 8, Brazilian Census Bureau (IBGE) release of monthly IPCA inflation data, Rio de Janeiro
- Wednesday, February 13, Brazilian Census Bureau (IBGE) release of monthly retail sales data, Rio de Janeiro