Conclusion: Signs of inflationary pressures continue to mount as the Bovespa Index has broken its former TRADE line of support (now resistance).
Below we’ve compiled some recent nuggets from our resident Brazilian insider, Moshe Silver:
Inflation Rises in November
Fundacao Getulio Vargas reports the general price index measure of inflation rose 1.16% in November, on top of a 1.15% rise in October, bringing the year to date increase to 9.77% (trailing 12 months cumulative increase is 9.69%).
The three components of the general price index tracked as follows: the broad producer price index rose 1.51% in October and 1.49% in November; industrial products rose 0.21% in October and 0.46% in November; and agricultural products rose 5.54% in October and 4.52% in November.
Congress to Debate Increase in Minimum Salary
Yesterday Congress opened the discussion on an increase in the “minimum salary” from a current R$ 540 to R$ 550. Opposition politicians and labor unionists are pressing for an increase to R$ 600, a number the planning minister characterized as “foolishness,” saying the government does not yet have numbers for recalibrating its social programs.
Any increase would be submitted by Congress and would only take effect upon being approved by the executive branch. A senior budget official confirmed that an increase to R$ 550 would likely receive presidential approval. This morning, labor representatives met with planning ministry officials seeking support for an upward revision to the R$ 560-580 range.
One of the key factors behind our bullish outlook for Brazilian interest rates is the potential inability of the next regime to contain government spending and the inflationary pressures that accompany it. As recently as 11/3, President-elect Dilma Rousseff said she is seriously considering raising the monthly minimum wage to more than 700 reais ($412) by 2014 for a CAGR of 8.2%, which is greater than the 5.5% increase in 2011 under current President Lula’s budget. Further potential strains to the government’s budget include her commitment to reducing payroll taxes, levies on investment and taxes on prescription drugs, sanitation and electricity.
Market Sees Inflation, Rates Higher in 2011
According to this week’s central bank Focus report, the market expects increases in inflation and in the level of interest rates for 2011. Inflation, as measured by the broad-based consumer price index, is expected to rise 5.48% in 2011, versus a prior forecast of 5.31%. This is the ninth consecutive week of increasing estimates and takes the level of inflation forecast for next year from 4.99% to 5.05%.
The SELIC interest rate, which at 10.75% is already among the highest rates in the world in what is deemed a relatively stable economy, is now projected to rise to 12% in 2011. For the last eight weeks, the projection had held steady at 11.75% for 2011.
The exchange rate is expected to hold at R$ 1.70 to the dollar for 2010 and to be R$ 1.75 next year, slightly changed from last week’s projection of R$ 1.77 to the dollar.
GDP expansion remains forecast at 7.6% for this year, and GDP growth is projected to be 4.5% in 2011, a projection that remains unchanged for the last 49 weeks.
Mercosur Signs Accord to Cut Tariffs
Brazil closes its stint in the rotating Mercosur presidency by obtaining a preferential tariff agreement with seven developing nations: India, Indonesia, South Korea, Egypt, Morocco, and Cuba. Algeria and Iran also participated in the talks and may yet ratify the treaty as well. The negotiations were completed last Thursday at the WTO offices in Geneva and the document is to be signed next month at the Mercosur summit to be held at the Iguazu Falls on the Brazil / Argentina border. The treaty provides for a 20% reduction in tariffs on 70% of trade items between Mercosur and the other signatories. The Mercosur trade bloc comprises Brazil, Argentina, Uruguay and Paraguay.
India imported US$ 2.775 billion of merchandise from Brazil in the first 9 months of this year. Exports to South Korea will reach US$ 3 billion this year and are set to increase, and Korean trade continues to climb as the nation sells automobiles in the Brazilian market.
The accord is seen as having wider implications because countries such as Inda and Egypt also have important alliances with other nations in their regions, opening the possibility of downstream expansion of trade relations. We note that Brazil has pushed back hard against trade policy of their erstwhile BFF, China, accusing the Chinese of unfair trade practices. This may be part of a broader move to protect Brazilian export growth by diversifying their overseas target markets away from the “one-stop-selling” model.
Managing Director/Chief Compliance Officer