US + Brazil Financial News (7/17)

BRAZIL

Another week, and the drama continues. Temer survived the Lower House’s Judiciary Committee, but had to stomach a deeply negative recommendation from the rapporteur, from his own party. He managed the vote, using his legendary skill in manipulating regulatory rules. Temer and his allies replaced 20 members of the Committee, literally, in the last hours before the vote. He failed, however, in the intent to proceed quickly to a full House vote. Instead Temer will have to wait until August, when the House returns from its midyear recess. Moreover, he now knows that a vote to charge him to stand trial will require “minimum quorum,” i.e. at least 2/3 of the members (342 out of 513) present at the start of the session. In other words, to block the charge, he will need 1/3 of all eligible votes, and not only 1/3 of those present at the voting session. Likely by August he will face other accusations. And, likely, by then, instead of asking at least 172 of his backers to vote against the charge to have him stand trial, he will ask them simply to stay away from the floor, and deny quorum for the vote. This way, the House will never vote on the proposal and none of his supporters will suffer the ignominy, when standing for reelection, of having to admit that that they voted to keep an accused, and corrupt, President in office. Another negative for the immediate future.

Meanwhile, last week, the Lava-Jato court condemned Lula to nearly 10yrs in prison. He will appeal but, possibly, the Appeals Court decision will be out before mid-August 2018, and against him. This “2nd round decision” would make him ineligible for public office—and the market welcomed the eventuality. Curiously, last week also, the Senate approved the Labor Reform Law—a seminal accomplishment. The reality is that, especially in the Senate, Temer’s reform program has widespread support, even if support for Temer himself is waning. Therefore, the support for his eventual ouster and substitution by someone—Rodrigo Maia, the Head of the Lower House—who would keep the policy team and carry on with the reforms. And, because it had to, before going on recess, the Lower House approved the “Preliminary Proposed Budget” (PLDO) for 2018. Since there is a new law limiting the growth of expenditures to last year’s inflation, under the 2018 PLDO, expenditures would increase by 3%, or R$39bn. The problem is that, with the increase granted to the civil-service this year, R$22bn would be taken-up by the new wage bill—and the expected increase in Social Security is upwards of R$60bn. So, something will have to give—and for the first time since 1988, it will include the so-called “obligatory expenditures.” That is, unless the government decides to change the primary deficit target… What is clear is that the fiscal specter will hover over 2018, with a vengeance.

• Friday, July 21: Balance of payments – June. Expect another positive outcome: A surplus of more than $1bn to measure against the $2.5bn deficit in the same month, last year. If it happens, the current account will be positive in the first half of the year, something that has not happened since 2007. Over 12mo, the current account will continue in deficit, but of less than 1% of GDP, a far cry from the 4-5% deficits a few years ago. In the event, the CAD is more than amply financed by FDI inflows: Forecasts for June point to about $2bn, summing to $79bn over 12mo.

• Sometime during the week:
  • CAGED formal job creation – June. Likely there will be another net loss of jobs, about 30k, seasonally adjusted.
  • Tax collection – June. Should be a good month, reversing recent losses and showing, for change, some real gain on yoy basis. The implementation of the current budget is in deep trouble and the MoF may soon announce new taxes. This will become clear after it releases, also this week, the bimonthly budget report: an update on forecasts for the 2017 primary outcome.