Brazil’s Economy Ministry has just released a report on which warns that the economy will slip into recession next year and official interest rates could more than double unless Congress approves measures to reduce the deficit in the country’s pension system.

The warning comes days after President Jair Bolsonaro presented his ambitious social security reform plan to Congress, which aims to save over 1 trillion reais ($295 billion) in the next decade.

Overhauling the creaking social security system is seen as critical to shoring Brazil’s public finances, boosting investor confidence, fostering growth and keeping interest rates and inflation under control, most economists say.

In its first official forecast on the potential impact on the economy over the next five years of reform or no reform, the Economy Ministry laid out starkly contrasting scenarios.

«In the event of no pension reform, GDP growth in 2019 will be 1% lower and Brazil will enter recession in the second half of 2020, approaching the level of losses seen in the 2014-2016 period», the ministry’s economic policy division warned in the report.

It said growth this year would slump to 0.8% from 1.3% last year — far weaker than the market consensus of around 2.5% and much worse than the 2.9% «best case» scenario of reform being passed.

Recessionary forces would also deepen over coming years if the pension system stays unchanged, the ministry said. The economy would shrink by 0.5% in 2020, by 1.1% in 2022 and as much as 1.8% in 2023.

The document also adds that benchmark interest rates will soar past 11% by year end from the current record low of 6.50% , and as high as 18.5% by 2023. Most economists expect rates to be on hold for the rest of this year.

But if reform is passed, growth will accelerate, job creation will surge and interest rates will fall, the Economy Ministry predicted.

The benchmark Selic rate could be reduced to a new low of 6.0 % later this year while the economy could create as many as 8 million new jobs by 2023, it said.

Economists have already factored in pension reform into their forecasts and say the outlook is not that strong even if something is approved this year, most likely a diluted version of Bolsonaro’s bill.

Corporate and household balance sheets have not been fully repaired since the 2014-16 recession, the international picture is cloudy, and not everyone is convinced the new administration will deliver on its pledges.

Original Story:Reuters |Jamie McGeever
Photo: FreeImages.com/Bruno Leiva
Edition:Prime Yield

Brazil’s central bank held interest rates at a record low on last February 6^thas expected, signalling it is in no rush to change them even though inflationary pressures have cooled, notices Reuters.

The bank’s monetary policy committee, known as Copom, voted unanimously to keep the benchmark Selic rate at 6.50% for the seventh straight meeting. According to Reuters, economists and investors are beginning to consider the possibility that rates could even be cut later this year. Although inflation risks have eased since its December meeting, Copom gave no indication it is moving in that direction too.

«The Committee judges that, since its previous meeting, notably related to the global outlook, inflationary risks have moderated,» Copom said in a statement accompanying the decision.

The central bank said the shifting global risks included greater odds of a global slowdown and easing short-term risks associated with normalizing interest rates in advanced economies.

Much will depend on how the economy performs in the coming months and the fate of the government’s economic reform agenda, which some see stimulating growth in the second half of 2019.

Based on market exchange rate and interest rate projections, Copom forecast inflation of 3.9% this year, unchanged from December but still below its 4.25% annual target.

The Brazilian real has strengthened around 5% since December’s policy meeting, largely on growing optimism that new right-wing President Jair Bolsonaro will deliver on his promise of ambitious economic reforms.

The central plank of that reform agenda is overhauling Brazil’s pension system, which could save the state up to 1.3 trillion reais ($350 billion) over the next decade and help the central bank to keep rates low — or even cut them further.

A stronger Brazilian currency will also help to cool price pressures. Interest rates futures markets are already pricing in around 20 basis points of easing by the end of the year.

Original story:Reuters |Jamie McGeever
Photo: FreeImage.com/ Svilen Milev
Edition: Prime Yield

Brazil’s current account deficit doubled in 2018 as economic growth fuelled demand for foreign goods and services, while foreign investment reached its highest share of GDP since 2001, reveals the country’s central bank.

The deficit remains narrow enough not to dim the generally positive outlook for Brazil that is taking shape among international investors for the year ahead.

Brazil’s current account deficit last year rose to $14.51 billion, or 0.77% of gross domestic product (GDP), almost exactly double the $7.235 billion shortfall registered the year before, equivalent to 0.35% of GDP.

Imports rose 21% on the year while exports rose 10%, which narrowed the trade surplus to $53.59 billion from $64 billion the year before.

But economists at Citi said the current account deficit, a broader measure of trade and capital flows, remains «comfortable» at less than 1% of GDP.

Investors are paying close attention to plans of the government to increase Brazil’s economic competitiveness via a mix of tax cuts, privatization and, most importantly, pension reform. The latter could save up to 1.3 trillion reais over the next decade, according to Economy Minister Paulo Guedes.

Some $88.3 billion of foreign direct investment (FDI) poured into Brazil last year, the central bank said, exceeding its earlier projections of $83 billion. Net FDI flows over the 12 months to December totaled 4.7% of GDP, the highest since June 2001, the central bank said.

Investors pulled funds out of Brazilian financial markets last year, however. Central bank figures showed that foreign investors withdrew $4.265 billion from Brazilian stocks in 2018, the most in a decade.

The pace of foreign inflows into Brazilian financial assets is expected to pick up this year, however, with investors attracted by Bolsonaro’s market-friendly policies and by relatively high interest rates.

Amundi, Europe’s largest fund manager with 1.45 trillion euros of assets under management, already said that Brazil is emerging as one of the most attractive destinations for long-term investment in local currency debt instruments.

Brazil’s benchmark Selic interest rate stands at 6.50%. That may not rise much if at all this year, thanks to the uncertain global economic outlook, but a growing consensus among international investors is that is an investment risk worth taking.

Original story:Reuters |Jamie McGeever and Marcela Ayres
Photo: FreeImages.com/Bruno Neves
Edition: Prime Yield