The end of June was marked by the announcement of the EU-Mercosul agreement, after a 20-year negotiation. This is the largest trade agreement both for the European Union and for the countries that make up Mercosul (Brazil, Argentina, Uruguay and Paraguay) and it is estimated that in fifteen years it could generate an increase of about 87.5 million dollars in the Brazilian GDP. This is a very important step in the direction of lower commercial isolation of Brazil (considered one of the most “closed” economies in the world) and which will oblige the country, when ratified by the Parliament of all the countries involved, to comply with environmental , labor and human rights laws in force in EU countries.
Another positive sign comes from the almost certain approval of the pension reform, which will be discussed and voted on in July. However, the fate of some of the most controversial parts of the reform still remains uncertain (capitalization, inclusion of the pensions of state and municipal officials, special regimes for military and law enforcement), which can significantly change its economic impact.
The third positive sign concerns the position of Banco Central (BC), which is making the willingness to resume the discount rate reduction process (SELIC), which has stopped at 6.5% since August 2018. According to the BC, the possible cutting of SELIC will take place only after the approval of the pension reform. Expectations regarding inflation are very good and a significant decrease in rates can be an important stimulus for the growth of the economy.
Let’s see the update of some economic indicators.
GDP (Value added at market prices)
|GDP – real growth (%)||3,0%||0,5%||-3,5%||-3,3%||1,0%||1,1%||0,87%|
Despite the positive signals described above, the 2019 GDP growth forecast continues to fall: from + 2.5% at the beginning of the year we have gone to the current + 0.87%. After a negative first quarter, the second quarter result will also be very modest. Half of the year went under the sign of stagnation, only one semester remains to reach a performance that is at least reasonable (close to + 1%). Another lost year, the Government must act with a vigorous economic policy.
Inflation and real/dollar exchange
|IPCA (IBGE – %)||5,90%||6,40%||10,7%||6,29%||2,95%||3,69%||3,80%|
The 2019 inflation forecast is down, the only positive effect of the stagnation of the economy in the first half. Without inflationary stress, the Central Bank can act more freely towards a more expansionary monetary policy.
|Exchange rate R$/US$ (end of the period)||2,34||2,66||3,90||3,25||3,25||3,75||3,80|
The dollar is quoted today at R $ 3.83, stable compared to the prices of a month ago. The market expects a price of R $ 3.80 for the end of 2019, but if the economy were to enter, as hoped, into a virtuous circle, there is room for further enhancement of the real (on R $ 3.60 / 3.70 per dollar at the end of 2019).
The euro is now listed as R $ 4.33, which is also stable.
|Nominal Interest rate (end of the períod)||10,00%||11,80%||14,87%||13,75%||7,00%||6,50%||5,50%|
|Real interest (deflactor: IPCA)||2,10%||4,20%||2,60%||6,91%||4,05%||2,81%||1,70%|
The market really seems to believe in the possible reduction of the discount rate (SELIC). Compared to a month ago, the forecast has risen from 6.5% to 5.5%, an enormity if we think that for almost a year there have been no changes regarding SELIC’s end-of-2019 target.
A decrease in SELIC does not mean a significant improvement in the cost of credit to businesses or consumers, but it is nevertheless an important signal and an incentive to transfer investments towards financial applications of greater risk.
The Brazilian stock market (Bovespa)
On June 23, the Ibovespa closed for the first time over a hundred thousand points and in the following week it managed to sustain this important psychological threshold.
According to XP Investimentos, the Brazilian stock exchange could have a significant appreciation after the approval of the pension reform (still not fully priced) and reach 140 thousand points by the end of 2020.