June was a month characterized by strong turbulence in the Brazilian currency and equity markets. Investors seem to be betting on a progressive deterioration of macroeconomic indicators, also caused by the uncertainty of the campaign for the October 2018 presidential elections.

The latest Datafolha research, carried out between 21 and 24 June 2018 without Lula among the possible candidates, sees the following scores: Bolsonaro 17%, Marina Silva 13%, Ciro Gomes 8%, Alckmin 6%, Alvaro Dias 3%, Fernando Collor 2%, Haddad 2% and gradually others with less than 2%.

The candidates “supported” by the financial world for their defense of a policy of reforms and fiscal equilibrium (Alckmin and Meirelles, mainly) are still in the rear of the presidential race and this is a big concern to the operators. Some parties have not yet chosen whether to present their own candidates, others are undecided about the candidate to support, fearful of betting on the “wrong horse” (in Brazil, frequently, programmatic issues pass on the second or third floor, unfortunately).

As a positive news of the month, the success of the auction for electricity transmission concessions. Of the 20 lots put up for auction (for a total of 2600 km), 6 were won by the indian Sterlite Power. In total, an investment of about 6 billion reais is expected (around 1.4 billion euros).

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% -3,5% 1,01% 1,55%

Another strong reduction for the 2018 GDP growth forecast, which went from +2.18% to +1.55%. Therefore, a year of low growth is expected, a consequence of various concomitant factors: lack of reforms, growth of public debt, reduction of investments (including those from abroad) and electoral uncertainty.

 

Inflation and real/dollar exchange 

2012 2013 2014 2015 2016 2017 2018
IPCA (IBGE – %) 5,80% 5,90% 6,40% 10,67% 6,29% 2,95% 4,03%

The forecast for inflation in 2018 also rose, exceeding 4.03%. The effects of the truckers’ strike are prolonging, and freight costs have to settle on structurally superior levels to those pre-strike. The devaluation of the real is also causing a significant increase in the prices of imported products, not just consumer goods but also raw materials and semi-finished products.

  2012 2013 2014 2015 2016 2017 2018
Exchange rate R$/US$ (end of the period) 2,04 2,34 2,66 3,90 3,25 3,25 3,70

The tension on the real / dollar exchange rate continues, as result of the revaluation of the American currency worldwide but also of the negative moment of the Brazilian economy. Today the dollar is quoted at 3.90 reais, compared to 3.73 of about a month ago. The economists consulted in Banco Central’s Focus research predict that they close the year listed at 3.70 reais. Banco Central has intervened on the market by offering swap contracts for several billion dollars, but without managing to contain quotations, stressed by the growing demand for dollars.

The euro has also been valued in recent weeks, and is now quoted at around 4.54 reais.

 

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% 7,00% 6,50%
Real interest (deflactor: IPCA) 2,50% 2,10% 4,20% 2,60% 6,91% 4,05% 2,47%

The discount rate (SELIC) at the end of 2018 was stable at 6.50%. As inflation is rising but still within the planned fluctuation limits, Banco Central prefers to keep SELIC at record lows so as not to further depress the 2018 GDP growth.

With this, real interest rates are reaching pre-crisis levels, and therefore increasingly less attractive to large institutional investors.

 

The Brazilian stock market (Bovespa)

The Bovespa also fell sharply, rising from 85 thousand points at the beginning of May to 78 thousand at the beginning of June and at 73.5 thousand points today. In the last three months, bank stocks have suffered:

Bradesco:           -30%

Banco do Brasil: -29%

Itau Unibanco: – 21%

Petrobras is also bad (- 15%), while Vale (net exporter) has increased by 15% thanks above all to the devaluation of the real.

The prospects of the Brazilian stock exchange will be the subject of a next post.