Brazil Economic Weekly

Transcription

1 Macroeconomic Research Department Macroeconomic Research Department Brazil Economic Weekly April 30 th, 2014 Impact of lower tax revenues on the consolidated primary result should be partly offset by the stronger primary surplus of the regional governments Leandro de Oliveira Almeida The weak federal tax revenues registered at the beginning of this year reinforce our expectation that the government will be unable to entirely meet its primary surplus target of R$ 99.0 billion for public sector in 2014, equivalent to 1.9% of GDP. The likeliest outcome is that primary surplus will be closer to 1.5% of GDP. Although the latest performance by the tax revenues is not directly related to the development of economic activity but to a program allowing large companies to pay outstanding taxes in installments, the fall in GDP growth this year will dampen any rapid recovery of federal tax revenues in the coming months. We foresee Brazil's GDP expanding by 2.1% in 2014 compared with the increase of 2.3% registered in On the other hand, the better outlook for the primary surplus at state and municipal government levels should be a contributory factor to the consolidated public sector target. This is because the debt of these local governments has increased at a lower rate this year and the size of the state tax revenues and federal transfers has come as a positive surprise to us. Domestic fundamentals of emerging countries explain the different approaches of central banks Thomas Henrique Schreurs Pires BRAZIL ECONOMIC WEEKLY The brighter outlook for the global economic growth, stemming from the ongoing recovery in the United States, the modest expansion of the Euro Area and the lower risk of any sudden slowdown in China's growth points to a situation in which there will be a reduced flow of capital to the emerging countries from here on. Against this backdrop, the process of getting interest rates back to normal levels in these countries carries great importance in handling the capital flows. This process has not been occurring in a similar way among countries in recent months, as monetary policy has been reflecting the domestic conditions brought about by local activity, the development of inflation and the individual performance of the external accounts of each country that differ among themselves. Despite the prospect of lower international liquidity affecting all the emerging countries, the intensity of the impact on each one will depend on their domestic conditions and the way they tackle existing imbalances. The level of weakness of each economy will require different responses from the monetary policy. One way of measuring the progress of each economy in the process of restoring interest rates to more normal levels is to compare real interest rates ex-ante in May 2013 with the current rate. India and South Africa stand out among the countries that need higher adjustments to the real interest rates while Brazil, Turkey and Indonesia have already carried out a big part of the adjustment to restore more orthodox monetary policy conditions. 1

2 Impact of lower tax revenues on the consolidated primary result should be partly offset by the stronger primary surplus of the regional governments Leandro de Oliveira Almeida The weak federal tax revenues registered at the beginning of this year reinforce our expectation that the government will be unable to entirely meet its primary surplus target of R$ 99.0 billion for the public sector in 2014, equivalent to 1.9% of GDP. The likeliest outcome is that primary surplus will be closer to 1.5% of GDP. Although the latest performance by the tax revenues is not directly related to the development of economic activity but to a program allowing large companies to pay outstanding taxes in installments, the fall in GDP growth this year will dampen any rapid recovery of federal tax revenues in the coming months. We foresee Brazil s GDP expanding by 2.1% in 2014 compared with the increase of 2.3% registered in Federal tax revenues and social security contributions expanded by 8.0% in the first quarter of this year over the same period in This was a moderate performance compared with the average quarterly growth of 11.9% seen since It is worth noting that that this increase in federal revenues is not necessarily linked to the performance of economic activity in the period, but mainly to a tax payment program for a group of 15 to 20 large companies 1. On the other hand, the rebuilding of industrial inventories in the first quarter, the hike in the IPI tax on cars and higher revenues from the IPI tax on tobacco boosted the growth of this particular levy at the beginning of this year. Social security contributions continued to increase sharply but there was some cooling in relation to the average of recent years due to the payroll exemptions in a number of business sectors. There was a strong growth in income tax and the Cofins social security tax as a result of the Fiscal Recovery Program (local acronym REFIS) in the fourth quarter of However, these taxes shrank when this program came to an end. Revenues from the IOF tax on financial transactions slowed due to the exemption on currency operations with the entry of money to the country. The remaining revenues expanded sharply over the last two quarters due to the collection of tax debts paid in installments and higher oil royalties (with the resumption of production). Domestic Outlook Nominal interannual variation Quarterly average since Q014/4Q13 014/13 Share of Total Revenues in 2013 Import Taxes 20.6% 20.4% 16.8% 3.3% IPI Total 7.0% 11.4% 12.5% 4.1% IPI Tobacco 13.9% 22.8% 27.0% 0.4% IPI Autos -1.3% -4.4% 27.9% 0.3% IR TOTAL 11.8% 21.6% 6.0% 25.7% IOF 4.1% 1.6% -2.3% 2.6% COFINS 12.6% 30.3% 7.3% 17.7% PIS/PASEP 9.8% 21.0% 7.8% 4.6% CSSL 13.3% 34.6% 0.6% 5.8% Other Revenues 6.5% 26.5% 16.6% 7.1% Social Security Revenues 12.3% 10.8% 9.6% 29.2% General Total Raised 11.2% 19.6% 8.0% 100.0% 1 According to the coordinator of the Federal Revenue Analysis Forecast, Raimundo Elói de Carvalho, in an interview given on the release of the Federal Revenue result for March

3 A look at the total revenues in real terms shows a break in the correlation between economic activity and revenues from 2012, brought about by the various exemptions introduced by the federal government during the period. Therefore, even with moderate activity there will be some upturn in revenues in the absence of any new exemptions in the coming months. This should lead revenues to increase by 2.5% by the end of Considering that, the federal government reported a primary surplus of R$ 13 billion in the first quarter of this year (helped by the receipt of R$ 5.89 billion in dividends) which is equivalent to16.1% of the federal government s target for the year, we estimate that the central government primary surplus will approach 1.0% of GDP. On the other hand, the primary surplus of the regional governments, including the states and municipalities, should at least remain at the current level of 0.4% of GDP or be even slightly higher. This occurrence would not only be due to the large income tax revenues from the REFIS program transferred by the federal government, but also the recovery of the ICMS value added tax which has risen above 4.0% in real terms a year over the last two months. Furthermore, the local governments will be granted fewer authorizations to expand their debts this year. The Senate has approved an increase of R$ 7.6 billion to April. Should this rate be upheld to the end of the year, the state and municipal governments debt would rise by R$ 30 billion (R$ 25 billion lower than the average of R$ 55 billion registered in the last two years). In conclusion, a qualification should be made in terms of our projections related to the involuntary exposure of the energy distributors even after today s energy auction in which 62% of the energy which had been uncontracted by the distributors was contracted. If the National Treasury has to inject further resources this year to cover the cost of this exposure, we believe the government will have to make some adjustment, either by obtaining new revenues or by cutting costs to comply with the primary surplus in our scenario. We foresee this cost amounting to around R$ 5 billion, depending on the hydrological outlook during the year. 20,0% 1 10,0% Federal Tax Revenues IBC-Br 15,8% 6,4% 9,6% 5,2% 8,3% 14,8% 11,5% 12,4% 8,1% 2,4% 0,6% 2,5% 10,0% 7,5% 2,5% 1,9% 0,0% Total real federal tax revenues (accumulated variation over 12 months) excluding Refis program and IBC-Br 2,1% 0,0% - Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09-2,6% -4,2% Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 0,3% Sep-12 Dec-12-1,4% Mar-13 Jun-13 Sep-13 Dec-13 Mar-14-2,5% - Source: RFB Primary surplus of the regional governments in the first quarter of each year (RS$ billion) ,4 9,6 10,0 7,8 9,2 13,6 13,2 10,6 13,2 Domestic Outlook Source: Bacen , , ,9 4, ,

4 ,4 52,4 State government borrowing operations authorized by the Senate and recognized by the Treasury (R$ billion) 26 19,8 21, ,6 11,5 7,6 4,5 1, Fonte: Tesouro Elaboração: BRADESCO In short, we expect the government s tax revenues to continue its growth at a moderate rate in the coming months. This will compromise the fulfillment of the R$ 80,8 billion federal government primary surplus target in However, the target set for the state and municipal governments of 0.5% of GDP should be achieved. Therefore, we foresee the consolidated public sector primary surplus amounting to 1.5% of GDP this year. Domestic Outlook 4

5 Domestic fundamentals of emerging countries explain the different approaches of central banks Thomas Henrique Schreurs Pires The brighter outlook for the global economic growth, stemming from the ongoing recovery in the United States, the modest expansion of the Euro Area and the lower risk of any sudden slowdown in China s growth points to a situation in which there will be a reduced flow of capital to the emerging countries from here on. Against this backdrop, the process of getting interest rates back to normal levels in these countries is assuming great importance in handling the capital flows. This process has not been occurring in a similar way among countries in recent months, as monetary policy has been reflecting the domestic conditions brought about by local activity, the development of inflation and the individual performance of the external accounts of each country that differ among themselves. To give a better illustration of this fact, we are grouping the emerging countries into three blocs: (i) Latin America; (ii) Eastern Europe, the Middle East and Africa; and (iii) Emerging Asia (excluding China). In the first group, consisted of Brazil, Colombia, Chile, Peru and Mexico, it can be seen that while Brazil and Colombia have raised their base interest rates, Peru and Mexico have left theirs on hold. Chile has trimmed its base rate by 50 basis points since the beginning of the year. One important reason for this difference is that inflation is performing differently in each country, as shown in the graph below. The pressure on domestic prices explains the stance adopted by the Brazilian Central Bank that has been hiking its base rate since April 2013, despite the moderate economic growth. The Colombian Central Bank decided to raise its base rate as a preventive measure to avoid having to make higher adjustments in the future, even though current inflation and expectations are still below the center of the target. 13,00% 11,00% 11,3% 12,5% 10,5% Brazil Chile Colombia Mexico Peru 10,8% 11,0% Interest rates in Latin American countries 9,00% 8,5% 9,0% 7,00% 7,5% 5,00% 3,00% 4,5% 5,3% 5,3% 4,3% 3,3% 4,5% 4,0% 3,5% 1,00% Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 7,0% Global Outlook Interannual inflation in Latin American countries (latest figures available) 6,0% 4,0% 3,0% 2,0% 1,0% 0,0% 6,2% Bands: higher or lower Center of target 3,9% 3,8% 3,4% 2,5% Brazil Chile Mexico Peru Colombia 5

6 Although economic activity in Peru is cooling, the rising inflation brought about by higher food prices has led current inflation to break through the target ceiling. However, the Peruvian Central Bank has been stressing that expectations remain within the limits of the target (2.80% for the end of 2014 and 2.50% by the end of 2015) and using this as a reason to keep interest rates on hold. Like Peru, the recent rise in Mexican inflation has resulted mainly from higher food prices and shows signs of easing. Moreover, the disappointing activity figures have turned expectations for inflation in 2014 and 2015 closer to the center of the target. Meanwhile, the prospect of a slowdown in domestic activity in Chile as a result of the fall in international demand for copper, combined with inflation being close to the target, gave the Central Bank the room to cut the base rate at its latest meetings. The group of countries from Eastern Europe, the Middle East and Africa (Turkey, Poland, Hungary, Romania, Russia and South Africa) have also shown different features. Whereas Turkey, South Africa and Russia are raising base interest rates, Israel, Poland, Hungary and Romania are lowering them. Inflation is a common factor that is driving the approaches of central banks in Latin America as well as the Eastern European countries, the Middle East and Africa. However, it is worth noting that Turkey, South Africa and Russia are facing greater challenges than just having inflation above the target. Turkey and South Africa are being hit by high current account deficits (7.6% and 6.4% of GDP, respectively) which requires higher interest rates to finance them, given the decline in global liquidity. 11,00% 10,00% 9,00% 8,00% 7,00% 6,00% 5,00% 4,00% 3,00% 2,00% 3,75% Hungary Romania South Africa 4,50% Poland Russia Turkey 7,00% 4,50% 5,75% 6,50% 3,25% 5,50% 10,00% 3,20% 4,00% Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 10,00% 7,50% 5,50% 3,50% 2,50% Interest rates in Eastern Europe, the Middle East and Africa Interannual inflation of countries in Eastern Europe, the Middle East and Africa 9,0% 8,0% 7,0% 6,0% 8,4% 6,9% 6,0% Bands: higher or lower Center of target 4,0% 3,0% 2,0% 1,0% 0,0% 1,1% 0,8% 0,1% Turkey Russia South Africa Romania Poland Hungary Global Outlook Russia has had to raise its base rate to prevent any further depreciation of its currency as a result of capital flight arising from the worsening of the geopolitical tension with Ukraine. The Russian Central Bank surprised the market at its latest meeting by hiking interest rates by 50 basis points in all rates as it foresaw inflation exceeding the ceiling of the target of 6.0% for the end of the year. On the other hand, Poland, Hungary, Romania and Israel chose to cut their interest rates recently, taking advantage of the prospect that inflation would be below the center of the target. In conclusion, countries in Emerging Asia (India, Indonesia, Malaysia and Thailand) also show no uniformity when it comes to the approach of their central banks. India and Indonesia have raised their 6

7 base rate while Malaysia has kept its on hold since the beginning of At the same time, Thailand has been cutting its rate since the end of Once again, the difference between the performance of inflation in these countries helps explain the approach taken by the monetary authorities. Nevertheless, it is worth stressing that both India and Indonesia are not only being hit by rising current inflation but face problems with their balance of payments which requires base interest rates to be adjusted higher to prevent capital flight and the subsequent depreciation of their currencies. The prospect of political instability in Thailand has affected the country s economic growth, particularly the negative impact it has had on business confidence (depressing investments) and tourism (an important source of income for the economy). Furthermore, the outlook for inflation remains positive, with current inflation and expectations for the year end within the range of the Central Bank s target (2.1% and 2.4%, respectively). 9,00% 8,00% 7,00% 6,00% 6,00% 8,50% 6,56% 8,00% 5,75% 7,25% 8,00% 7,50% 6,00% Interest rates in Emerging Asia countries 5,00% 4,00% 3,00% 2,00% 1,00% 3,00% 3,50% Thailand Malaysia India Indonesia China 2,50% 2,25% Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 3,00% 2,00% Interannual inflation in Emerging Asia excluding China 9,0% 8,0% 7,0% 8,3% 7,3% Bands: higher or lower Center of target 6,0% 4,0% 3,5% 3,0% 2,0% 2,1% 1,0% 0,0% India Indonesia Malaysia Thailand Global Outlook Despite the prospect of the lower international liquidity affecting all the emerging countries, the intensity of the impact on each one will depend on their domestic conditions and the way they tackle existing imbalances. The level of weakness of each economy will require different responses from the monetary policy. One way of measuring the progress of each economy in the process of restoring interest rates to more normal levels is to compare real interest rates ex-ante in May 2013¹ with the current rate. India and South Africa stand out among the countries that need higher adjustments to the real interest rates while Brazil, Turkey and Indonesia have already carried out a big part of the adjustment to restore more orthodox monetary policy conditions. 1 When the Fed announced the tapering. 7

8 5,0 4,0 3,0 4,55 April 2014 April 2013 Real interest rates ex-ante of emerging countries 2,0 1,0 0,0-1,0 1,82 1,80-1,18 1,44 1,52 1,55 1,27 1,25 1,22 1,19 0,96 1,08 0,84 0,81 0,79 0,65 0,25-0,14 2,00 0,38 0,21-0,12-0,37-0,31-0,60-0,51-0,57-0,50-0,82-0,82-1,12-2,0 Brazil Turkey Hungary Indonesia Russia Poland Peru Romania Global Outlook Colombia Chile Malaysia Thailand Mexico South Africa Israel India 8

9 Bradesco Macroeconomic Forecast Bradesco Macroeconomic Forescast As of April 30 th (*) Forecast. na = not available. Source: Official figures Production and forecasts(*): BRADESCO * 2014* DOMESTIC ACTIVITY, INFLATION AND INTEREST RATES GDP (%) Agriculture (%) Industry (%) Services (%) Private consumption (%) Government consumption (%) Investment (%) Exports of goods and services (%) Imports of goods and services (%) GDP (R$ billion - current prices) 1,941 2,116 2,269 2,515 2,801 2,912 3,317 3,629 3,879 4,203 4,561 GDP (US$ billion) ,088 1,366 1,652 1,621 2,141 2,473 2,247 2,242 2,221 Population (million) Per Capita GDP (US$ - current prices) 3,664 4,810 5,865 7,281 8,716 8,469 11,083 12,531 11,278 11,152 10,953 Industrial Production - IBGE (%) Unemployment Rate - IBGE (%) Retail Sales - (%) CPI - IPCA - IBGE (%) CPI - FIPE (%) WPI - IGP-M - FGV (%) Nominal Interest Rates - Selic target (end of period - %) Nominal Interest Rates - Selic target (12-month - %) Real Interest Rates - Selic (12-month - %) EXTERNAL ACCOUNTS AND FX Trade Balance (US$ billion) Exports (US$ billion) Imports (US$ billion) Trade flow (exports + imports) (% of GDP) Deficit of Services and Income (US$ billion) Current Account Deficit (US$ billions) Current Account Deficit (% of GDP) Foreign Direct Investment (US$ billions) FX - end of period (R$ / US$) FX - yearly average (R$ / US$) Nominal FX devaluation (YoY - %) Nominal FX devaluation (average - %) International Reserves (US$ billion) Total Medium and Long term External Debt (US$ billion) FISCAL ACCOUNTS Primary Surplus (R$ billions) Primary Surplus (% of GDP) Public Sector Nominal Balance (% of GDP) Net Public Debt (domestic and external) (R$ billion) ,040 1,120 1,211 1,168 1,362 1,475 1,508 1,542 1,608 1,825 Net Public Debt (domestic and external) (% of GDP)

10 Team Octavio de Barros - Macroeconomic Research Director Marcelo Cirne de Toledo Global economics: Brazil: Brazilian sectors: Fabiana D Atri / Felipe Wajskop França / Thomas Henrique Schreurs Pires Robson Rodrigues Pereira / Andréa Bastos Damico / Igor Velecico / Ellen Regina Steter / Priscila Pereira Deliberalli / Andréa Marcos Angelo / Leandro de Oliveira Almeida Regina Helena Couto Silva / Priscila Pacheco Trigo Proprietary survey: Fernando Freitas / Ana Maria Bonomi Barufi / Leandro Câmara Negrão Internships: Ariana Stephanie Zerbinatti / Guilherme Marinho Lima / Vitor Inocêncio / Mariana Carvalhaes / Gabriela Helena Demarchi / Vanderley Rodrigues Gonçalves Junior / Otavio de Almeida Janny Teixeira Team - BRADESCO does not accept responsibility for any actions/decisions that may be taken based on the information provided in its publications and projections. All the data and opinions contained in these information bulletins is carefully checked and drawn up by fully qualified professionals, but it should not be used, under any hypothesis, as the basis, support, guidance or norm for any document, valuations, judgments or decision taking, whether of a formal or informal nature. Therefore, we emphasize that all the consequences and responsibility for using any data or analysis contained in this publication is assumed exclusively by the user, exempting BRADESCO from all responsibility for any actions resulting from the usage of this material. We all point out that access to this information implies acceptance in full of this term of responsibility and usage. The reproduction of the content in this report (partially or in full) is strictly forbidden except if authorized by BRADESCO or if the sources (the name of the authors, publication and BRADESCO) are strictly mentioned. 10