On July 26, 2017, the Monetary Policy Committee of the Brazilian Banco Central (COPOM) again declined by one percentage point the discount rate (SELIC) to 9.25%.

This is the seventh consecutive decrease, made possible by the new drop in inflation, estimated at 2,78% in July (IPCA index accumulated 12 months), below the minimum threshold (3%) defined as the target by Banco Central.

But this scenario, almost unthinkable up to a year ago (in July 2016, inflation was 8.93%), could be short-lived because of the government’s decision to increase fuel taxes on July 21. The price of fuel at the point of sale could increase by about R$ 40/50 per liter, causing a ripple effect and increase transport costs and hence the prices of many products.

The decision of the Temer government, very controversial and which has lowered its popularity to levels worst than those of Dilma, was triggered by the need to make ends meet. The persistence of the economic crisis has reduced the tax revenue and, in order to secure the achievement of the annual deficit target of R$ 139 billion, the government has had to impose this “sacrifice” on population.

In the struggle to contain the budget deficit, it is not helping the political situation: Temer is literally buying – through the adoption of targeted amendments – the support of parliamentarians in the vote that would free him from prosecutors General Janot’s allegations.

It seems that Parliament will vote for dismissing the complaint against President Temer. It remains to be seen for what margin of vote: the wider the victory of the government, the greater the chances of being able to approve, before the 2018 elections, pension reform and perhaps political reform.

Let’s see some updated data:

GDP (Value added at market prices)

 

2012 2013 2014 2015 2016 2017 2018
GDP – real growth (%) 1,8% 2,7% 0,1% -3,9% -3,6% 0,34% 2,00%

 

Still few signs of recovery of economic activity, especially for the industrial sector and services. The positive performance is still ensured by the excellent performance of the agricultural sector, which, in addition to supporting GDP, has kept the trade balance positive (positive balance expected in 2017: US $ 60 billion).

As of this month, I enter the growth forecast of 2018 GDP, now estimated at + 2%.

 

Inflation and real/dollar exchange 

 

2012 2013 2014 2015 2016 2017 2018
IPCA (IBGE – %) 5,80% 5,90% 6,40% 10,67% 6,29% 3,40% 4,20%

 

Inflation 2017 is estimated at 3.40, despite the figure for the last 12 months (August 2016 / July 2017) fell below 3%.

The rise in the price of fuels in the second half of 2017 and a stronger economic recovery should create some tension on the inflationary front.

  2012 2013 2014 2015 2016 2017 2018
Exchange rate R$/US$ (end of the period) 2,04 2,34 2,66 3,9 3,25 3,3 3,43

 

Over the past few weeks, real has ridden the world’s dollar devaluation trend and is today (1/8/2017) quoted at 3.12 (it was about 3.32 a month ago).

The market continues to estimate that the quotation will close 2017 at 3.30.

Slight devaluation of the euro against real, which today (1/8/2017) is worth 3.69 reais (it was 3.77 a month ago).

 

Interest rate

2012 2013 2014 2015 2016 2017 2018
Nominal Interest rate (end of the períod) 7,30% 10,00% 11,80% 14,87% 13,75% 8,00% 7,75%
Real interest (deflactor: IPCA) 2,50% 2,10% 4,20% 2,60% 6,91% 4,60% 3,55%

 

 

Again down the forecast of the discount rate (SELIC) by the end of 2017, now stand at 8.00%.

 

The Brazilian stock market (Bovespa)

Very positive July for the Brazilian stock exchange, reported at 66,000 points (it was below the 62,000 points a month ago). The probable dismissing of complaints against Temer and the 9 and a half years sentence to Lula (with the momentary impossibility of applying for the 2018 presidential election) have created a scenario of relative optimism on the markets.

As I wrote in the previous post, for those who have liquidity and are cold blooded, a “window” has opened in order to invest and earn in Brazil. But watch out for change: if the devaluation of the dollar ends, how much you earn on the local market could go to smoke once brought back to USA.

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