The last few weeks have been marked by the strong shake caused by Joesley Batista, owner of JBS, one of the largest industrial groups in Brazil, released on 17/5/2017. The revelations involved President Michel Temer and caused panic in the markets.

On 18/5/2017, the Brazilian stock market (Bovespa) fell close to 10% and the dollar reached a peak of R$ 3.40 on the real.

The current scenario, almost three weeks from the fact, is extremely cautious. Though extremely weakened, Temer has been able to maintain the support of the main governing allies, chiefly of the PSDB (its president, Aecio Neves, is involved in the scandal).

In the coming weeks the Tribunal Superior Eletoral (TSE) may decide to annul the 2014 elections for illegal acts committed during the election campaign by the winner Dilma-Temer.

Any condemnation would lead to the immediate removal of Temer, which would cause new strong oscillations in the market.

The relative calm in these days is due to the fact that the political system is signaling that a possible fall of Temer would not cause discontinuity in the team that is now driving the economy. That is, the market has already “priced” in part for the possible collapse of the government, knowing that a “Plan B” is already being set up within the principles of the Constitution.

Bearing witness to the will to maintain the positive expectations of recent months and to “bust” the economy, there are two important signs:

– at the meeting ending June 1, 2017, Brazilian Banco Central’s Copom (Monetary Policy Committee) has further reduced the discount rate, which is then down from 11.25% to 10.25% per annum

– the latest Focus research, carried out by Banco Central with about 100 economists from Brazil’s main financial institutions, does not show a deterioration in the medium-term forecast of key economic indicators

 

Let’s see some updated data:

GDP (Value added at market prices)

2011 2012 2013 2014 2015 2016 2017
GDP – real growth (%) 3,9% 1,8% 2,7% 0,1% -3,9% -3,6% 0,50%

GDP growth forecast returned – despite the repercussions of the JBS-Temer scandal – to two months ago, around +0.50%. Signs of a slight recovery in industrial production, particularly in the automotive sector, continue.

 

Inflation and real/dollar exchange 

2011 2012 2013 2014 2015 2016 2017
IPCA (IBGE – %) 6,50% 5,80% 5,90% 6,40% 10,67% 6,29% 3,90%

 

Inflation forecasts for 2017 are still falling, down from 4.04% a month ago to 3.90%. Inflation under control is still the government’s main “trump”, which is reducing interest rates without causing inflationary pressures. The low utilization rate of installed capacity and the high level of unemployment are favoring a low inflation.

 

2011 2012 2013 2014 2015 2016 2017
Exchange rate R$/US$ (end of the period) 1,88 2,04 2,34 2,66 3,9 3,25 3,30

Instead, R $ / US $ exchange rate forecasts for the end of 2017, is estimated at 3.30 (it was 3.25 a month ago). Today, 5/6/2017, the change is at 3.27.

A new strong appreciation of the euro, also due to the devaluation of the dollar / euro exchange rate: today a euro is around 3.67 reais.

 

Interest rate

2011 2012 2013 2014 2015 2016 2017
Nominal Interest rate (end of the períod) 11,00% 7,30% 10,00% 11,80% 14,87% 13,75% 8,50%
Real interest (deflator: IPCA) 4,80% 2,50% 2,10% 4,20% 2,60% 6,90% 4,60%

The forecast of the discount rate (SELIC) at the end of 2017 is stable, always at 8.50%.

Banco Central is keeping the reins of monetary policy tightly, orienting in a safe and reliable way – for the moment – market expectations.

 

The Brazilian stock market (Bovespa)

After the black day of 18/5, the Ibovespa stays around 62 / 63,000 points.

Thanks to foreign investors, whose investment flow in May was however positive (+ 650 million USD).

In the moments of crisis, the best opportunities are created: underrated and really weak stocks can grant great gains (but also big losses if the crisis is to be deepened).