At the Copom meeting on 31 July 2019, the Banco Central decided a reduction of 0.50% of the discount rate (SELIC), which then fell to 6.00% per annum. This is the first reduction achieved in the last 16 months. The decision to decrease SELIC was expected by operators and could be the beginning of a cycle of reductions that should bring the discount rate to around 5.5% by the end of 2019.
Various factors contributed to this decision: inflation under control, approval of the pension reform in the Chamber of Deputies, a “benign” world scenario and stagnation of the economy. Starting a rate reduction cycle, the Central Bank intends to boost economic growth far below the expectations of the beginning of the year.
The simultaneous reduction of 0.25% of the US discount rate decided by the FED should contribute to an improvement in the performance of the Brazilian stock exchange, now more attractive for both domestic and international investors.
In a scenario of almost zero growth, the good news comes – as always in recent years – from the agricultural sector. The IBGE (Brazilian ISTAT) forecasts for 2019 a harvest of 234.7 million tons of cereals, legumes and oily products, + 3.6% compared to 2018 and + 1.4% compared to what was expected at the beginning of the year. This is the second largest harvest in Brazilian history (the record is for 2017). Of the total production, 92.4% is represented by rice, soy and corn.
On July 23, the IMF disclosed an update of the “World Economic Outlook” report, in which it drastically reduced the Brazilian GDP growth forecast, aligning itself with the market and Brazilian government forecasts. The new forecast is for a growth of 0.8% in 2019, far from + 2.5% at the beginning of the year.
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%||0,82%|
Still a slight drop in the 2019 GDP growth forecast, now at +0.82% (at the beginning of the year it was +2.5%). Even if the government has almost overcome the obstacle of pension reform and the tax reform is in the pipeline, there is no time for a substantial recovery of investments and therefore of the economy. Also public investments (indeed, above all those) are still in a phase of contraction, with the government appearing more worried about rebalancing public accounts than encouraging economic growth.
Inflation and real/dollar exchange
|IPCA (IBGE – %)||5,90%||6,40%||10,7%||6,29%||2,95%||3,69%||3,80%|
For several months now, stable inflation has been the “anchor” which has allowed Banco Central to begin a new cycle of reduction in the discount rate. Inflation under control and balance of public accounts are the cornerstones for a substantial growth of the economy.
|Exchange rate R$/US$ (end of the period)||2,34||2,66||3,90||3,25||3,25||3,75||3,75|
The dollar is quoted today at R $ 3.95, up on the real against a month ago (it was 3.83). The cut in the discount rate favors a weakening of the Brazilian currency, but the market is optimistic and expects a quotation of R $ 3.75 for the end of 2019, foreseeing that the economy enters a virtuous circle.
The euro is now listed as R $ 4.43, also being revalued compared to a month ago.
|Nominal Interest rate (end of the períod)||10,00%||11,80%||14,87%||13,75%||7,00%||6,50%||5,25%|
|Real interest (deflactor: IPCA)||2,10%||4,20%||2,60%||6,91%||4,05%||2,81%||1,45%|
As written in the introduction, the big news in July was the reduction of the discount rate (SELIC). The end-of-year forecast has gone from 5.5% to 5.25%, which would be a new historical low for SELIC. With stable inflation, the real interest rate would be reduced to 1.45%, a value that is also unpublished for the Brazilian parameters.
For the government it would be a huge relief for the cost of public debt, an important step towards a greater fiscal balance.
The Brazilian stock market (Bovespa)
After the first approval of the pension reform in the Chamber of Deputies, the Ibovespa has reached 106 thousand points, and it is still managing to support the 100 thousand points support.
The SELIC cut was supposed to support the Brazilian stock market’s growth trajectory, but the international turbulence (first and foremost that following the announcement of new duties imposed by the US on Chinese product imports) is interfering with stock performance.