Brazil: Politics on focus amid second-tier macro releases – Rabobank

Analysts at Rabobank suggest that on the Brazilian political front, the focus this week will lie on the Lower House’s debates on the PGR charge against Mr. Temer and the final Congressional votings related to the political reform.

Key Quotes

“Last week was a mixed one for Brazilian assets. On one hand, the markets saw a continuation of the yield curve rally (particularly on the belly), led by expectations of further rate cuts by the BCB. Those expectations have been bolstered a bit further by the BCB’s inflation report, which pointed to an expected inflation convergence to (a falling) mid-target with nominal interest rate around 7-8% (below/around historical lows).”

“On other hand, the political scene is gradually getting some market attention, with Brazilian CDS making a move back up to the realm of 200bps. Last week, new polls highlighted risks for the execution of fiscal reforms, given the uncertain political picture for the 2018 presidential election. Moreover, the Supreme Court sent to the Lower House the second PGR’s charge against President Temer, with debate starting this week. While governability risks are limited (if any at all), and the timing of processing will be key for the chances of passing constitutional changes in the pension system before next year’s election.”

“The agenda of the week includes the current account balance (Tue), the BCB’s Bank Lending Survey (Wed), Central Government Primary Balance (Thu) and Public Sector Primary Balance (Fri). For the balance of payments, the numbers will continue to show a favourable external position of the Brazilian economy, amid low current account deficit, high foreign investment and hefty FX reserves. However, the fiscal results will show the opposite picture on the front of government finances, evidencing cyclical and structural difficulties to implement a (primary surplus) budget, with a fast-rising government debt trend. Numbers on bank lending, job market and industrial activity are also on schedule.”