A series of good news in the economic area characterized the end of October.

The Banco Central decided, at the meeting that closed on October 30, a new cut of 0.5% of the discount rate (SELIC), which now stands at 5% per annum. In the next meeting of COPOM (Banco Central’s Monetary Policy Committee), which will be at the beginning of December, there could be a further decline that would bring SELIC to 4.5%.

On October 23, the long-awaited pension reform was definitively approved by the Senate. After the last alterations, the expected economy in 10 years has decreased by 1/3, going from R $ 1200 to 800 billion reais. However, this is a reform that will have a great impact on Brazilian public accounts and that was necessary due to the demographic changes of recent years. Although his approval was now a foregone conclusion, the market reacted very positively, with an appreciation of the stock market and the real.

On 6 November 2019 the mega-auction for the exploration of pre-Sal basins will be carried out, which will involve four areas of the Santos basin and will see the participation of 14 companies from 11 different countries, all already pre-approved by the ANP (National Oil Agency):

The estimated production of the four fields is 1.2 million barrels per day, according to the ANP. The government plans to raise about 106.5 billion dollars through the offers. The production potential of the areas will also be able to generate revenues from the Brazilian public coffers for 52.5 billion dollars a year starting from 2024, through royalties on production. Petrobras, one of the 14 participating companies, is in the front row and should win a significant share of the production.

Once the pension reform has been approved, the government must present a sort of administrative reform, with the aim of modifying and making the management of public accounts more efficient. The reform is structured in five directions and can generate a potential economy of 27 billion reais per year. Being an intervention that involves the revision of the privileges of public officials, it will be a new test of the political articulation capacity (and strength) of the government.

Starting from this month, forecasts for 2020 are also included. We remind you that the indicators are an elaboration of the Focus research, conducted weekly by Banco Central (https://www.bcb.gov.br/publicacoes/focus).

GDP (Value added at market prices)

2014 2015 2016 2017 2018 2019 2020
GDP – real growth (%) 0,5% -3,5% -3,3% 1,0% 1,1% 0,92% 2,0%

The 2019 GDP growth forecast is slightly increasing, returning to approach 1%. There are two months to the end of the year, miracles cannot be done, it is now a matter of preparing the way for a positive result in 2020. The government is focusing mainly on containing public spending, but once the deficit will shift, the shot must be on the stimulus of consumption and investments, without which it is not possible to return to substantial economic growth.

Inflation and real/dollar exchange 

2014 2015 2016 2017 2018 2019 2020  
IPCA (IBGE – %) 6,40% 10,7% 6,29% 2,95% 3,69% 3,29% 3,60%

Inflation estimates are also in decline and is expected to be under control in 2020 too. Brazil has a stock of unused production capacity that can allow it to grow without generating excessive inflationary tensions (although it is necessary to invest heavily in the modernization of plants and infrastructures, in many cases not competitive). Low inflation is the government’s great ally, since the time of the Temer government.

 

 

 2014 2015 2016 2017 2018 2019 2020  
Exchange rate R$/US$ (end of the period) 2,66 3,90 3,25 3,25 3,75 4,00 4,00

The year-end forecast for dollar prices is stable, estimated at R$ 4.00. Today the dollar is quoted at R$ 4.01 (a month ago it was at 4.10). After the approval of the pension reform, the real has undergone a slight revaluation: as I wrote in the previous post, if a virtuous circle were to be triggered for the Brazilian economy, the dollar could also recover around R$ 3.80.

The euro is now listed as R$ 4.47 (a month ago it was at R$ 4.51).

 Interest rate

2014 2015 2016 2017 2018 2019 2020  
Nominal Interest rate (end of the períod) 11,80% 14,87% 13,75% 7,00% 6,50% 4,50% 4,50%
Real interest (deflactor: IPCA) 4,20% 2,60% 6,91% 4,05% 2,81% 1,21%  

0,90%

The year-end forecast for the discount rate (SELIC) is still down, going from 4.75% to 4.50%, which would be a further historical low. With declining inflation, the real interest rate would be reduced to 1.21%, a value that is also unusual for the Brazilian parameters.

A great relief for the Brazilian Treasury, which would see the value of the interest payable on the public debt drop significantly.

The Brazilian stock market (Bovespa)

Excellent stock market performance in October, with the Bovespa index reaching 109 thousand points, a (nominal) historical record. The positive signs of the economy were immediately incorporated by the economic operators, and – if there will be no major disturbances, above all political – it is likely that we will witness a pre-Christmas “rally” that could bring the Ibovespa close to the 120 thousand quota points, as provided by different investment funds.