Macro Forum: The Street View


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GDP grew 0.8% in Q3 2018, the strongest quarter-on-quarter growth since the first Q1 2017. Year-on-year, the economy expanded by 1.3%, on the back of the recovery from the de-stabilizing effects of the truckers strike in late May which was responsible for muted second quarter performance.

The services sector, benefiting from the opening up again of transport networks and access to supplies contributed most to economic growth and agribusiness also expanded for a third successive month. Investments increased by 6.6% from the previous quarter, the largest increase in nine years. The labor market added 755,537 jobs between January and November resulting in the unemployment rate falling to 11.6% from 12.1% in May, the lowest rate since July 2016.

Annual inflation has increased, rising by 3.75% over the whole of 2018, higher than the 2.95% recorded in 2017 but comfortably within the inflation target of Brazil’s monetary authority of 4.5% plus or minus 1.5% points. As expected, in its December meeting the central bank kept the benchmark Selic rate at 6.5%.

Investor enthusiasm about the planned reforms of President Bolsonaro, including popular measures such as cost cutting and privatizations lifted the Bovespa index. Since reaching its lowest point in June 2018, the index jumped by 25.8% in local currency terms to close at year end at 87887.26. The Brazilian sovereign bond has also presented a robust performance presenting a yield compression of 100bps in BRL from September to December 2018. Reflecting such favorable market sentiment, the Real appreciated from its weakest point in mid-September to close at the end of 2018 7.9% stronger 3.87.

Few details have been announced on economic policy over and above what was promised on the campaign trail.Key changes committed to were the privatization and deregulation of state owned companies and the overhaul of the costly pension system in order that Brazil’s huge budget deficit of $35bn or 7% of GDP in 2018 can be reduced. Discussions on this topic tend to gain momentum in February as the Congress resumes activities followed by the election of speakers at both Lower House and Senate.

Brazil’s economic fortunes will,notwithstanding possible reforms continue to be led by domestic consumption. Real wage growth is likely to be constrained by still high unemployment. Whilst there is some catch up likely from constraints imposed by domestic politics and the economjc crisis in Argentina any break out in growth must therefore stem form fundamental reforms which improve productivity and deepen investment. This will take time.










Real GDP growth

Source: International Monetary Fund

Brazil FX vs FV

Source: Bloomberg Spot Price and Actis methodology for Fundamental Value


Source: International Monetary Fund