An economic outlook for Brazil and Argentina
Brazil Historically, few Brazilian economists paid attention to the labour market as a means to assess how close the economy was to full capacity. The reasons lie in the fact that labour has been seen as an abundant factor for decades. Recent...
Brazil
Historically, few Brazilian economists paid attention to the labour market as a means to assess how close the economy was to full capacity. The reasons lie in the fact that labour has been seen as an abundant factor for decades. Recent employment data indicates this has changed. The main reason, it is believed, is the higher degree of formalisation of labour relations recently achieved in Brazil. The current period of stability and higher growth stimulates businesses to hire and try to retain the scarce pool of trained workers in the country. Formalisation has also been reinforced - across the board and in labour relations - by the solid growth of the supply of credit.
To be eligible for access to credit, smaller and traditionally less formalised companies had to increase their degree of formalisation. Accordingly, the monthly employment reports show very positive trends for the more aggregated data like the unemployment rate and real payroll, but also for more micro data, like formalised workers as a percentage of total workers, labour participation rates, etc. Momentum is present, and monitoring the wage negotiations starting in September will be key to evaluating the magnitude of the additional support that demand will have from the increase in real wages.
Data regarding economic activity also shows strong momentum. Retail sales have been showing variations higher than 10 per cent on average since the beginning of the year. Industrial production has followed suit, although at a slower pace. The gradual deepening of the current account deficit completes the picture of internal absorption growing at a fast pace. The reasons behind the strong demand are, first and foremost, the labour market conditions just described. We would also add credit expansion, as non-earmarked credit keeps expanding at rates of around 35 per cent. Confidence polls also remain at high levels.
Looking forward, credit is probably the pillar of demand that will soon start to slow down. The combination of non-performing loans starting to rise and higher funding costs for the banks are already affecting new concessions of credit. However, slower credit growth may help control inflation.
The 12-month data for the current account of the balance of payments has been showing sharp deterioration. The $13.9 billion current account surplus registered in May last year turned into a $18.1 billion deficit in July this year. This should not come as a surprise, as the current account responds to an appreciating currency in an economy that is systematically growing more quickly than what is indicated by its installed capacity and its aggregate investment.
The results of the fiscal accounts so far suggest that Brazil will meet the target of a 4.3 per cent primary fiscal surplus and a reduced, for the sixth year in a row, net debt/GDP ratio. Tax collection will continue to expand as the economy grows and formalisation deepens, and restrained spending by the central government in the first half of this year, should more than compensate for the deterioration at the state and municipal levels.
Argentina
Despite the fact that Argentina's fiscal surplus remains robust, the outlook does not seem as bright after taking a closer look at the figures. True, between January and July, the primary surplus stood at ARS24.3 billion, thus rising an impressive 43.6 per cent year-on-year in nominal terms. Nevertheless, the underlying trend of fiscal accounts has started to arouse concerns given Argentina's heavy reliance on windfall revenues to finance spending. Unlike neighbouring Chile, there are no explicit rules that limit the discretionary allocation of excess income stemming from buoyant commodity prices. Therefore, if confronted with a commodity price slump, the government would have to apply a more stringent fiscal policy, instead of using this tool to stimulate aggregate demand when truly needed. As in the 1990s, Argentina's fiscal stance can be deemed as highly pro cyclical.
Credit rationing is the main reason why the government would find it harder to run a smaller surplus (or even a deficit) at times of slackening activity. However, this is not surprising if we take into account that ever since the new government took office, bondholders have been expecting a sign hinting to some restraint in the growth pace of public expenditures.
During June and July, outlays have grown at a much lower rate (30.8 per cent and 27.1 per cent year-on-year, respectively). Nevertheless, the latter cannot be deemed as a genuine expenditure slowdown. This is mainly due to the fact that on an accrued basis, outlays are still rising at unsustainable rates of almost 40 per cent (the previous increases refer to cash expenditures).
Unexpectedly, the president announced that Argentina would pay out completely (and from central bank reserves) the outstanding bilateral debts contracted with Paris Club country members.
According to latest available data, of a total debt of $6.7 billion, arrears amount to $5.1 billion, which would therefore be the minimum amount to repay. Were the whole debt to be cancelled, this would imply committing around 14 per cent of gross reserves. Despite the fact that the markets had been for some time eager to hear news of this sort, the cash payment should be regarded as a second best solution.
Analysts believe that, reaching a first best would have included some kind of arrangement with the IMF and the hold-outs, so as to save reserves and obtain cheap financing. However, rhetoric and ideology prevented this alternative from taking place.
Moreover, despite the relief in monetary conditions, banks have tightened their lending standards, which have translated into the build-up of liquidity. Unsurprisingly then, credit to the private sector has slowed down consistently.
For next year, it is expected that the cash excess supply of dollars (around $6 billion) is to be matched by private sector external asset accumulation. Ultimately, this hoarding behaviour will impact the availability of credit to the private sector. Even if the market is not looking to a credit crunch, it is nevertheless expecting a sharp reduction in the growth rate of loans.
• This report was compiled by the marketing department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.
Historically, few Brazilian economists paid attention to the labour market as a means to assess how close the economy was to full capacity. The reasons lie in the fact that labour has been seen as an abundant factor for decades. Recent employment data indicates this has changed. The main reason, it is believed, is the higher degree of formalisation of labour relations recently achieved in Brazil. The current period of stability and higher growth stimulates businesses to hire and try to retain the scarce pool of trained workers in the country. Formalisation has also been reinforced - across the board and in labour relations - by the solid growth of the supply of credit.
To be eligible for access to credit, smaller and traditionally less formalised companies had to increase their degree of formalisation. Accordingly, the monthly employment reports show very positive trends for the more aggregated data like the unemployment rate and real payroll, but also for more micro data, like formalised workers as a percentage of total workers, labour participation rates, etc. Momentum is present, and monitoring the wage negotiations starting in September will be key to evaluating the magnitude of the additional support that demand will have from the increase in real wages.
Data regarding economic activity also shows strong momentum. Retail sales have been showing variations higher than 10 per cent on average since the beginning of the year. Industrial production has followed suit, although at a slower pace. The gradual deepening of the current account deficit completes the picture of internal absorption growing at a fast pace. The reasons behind the strong demand are, first and foremost, the labour market conditions just described. We would also add credit expansion, as non-earmarked credit keeps expanding at rates of around 35 per cent. Confidence polls also remain at high levels.
Looking forward, credit is probably the pillar of demand that will soon start to slow down. The combination of non-performing loans starting to rise and higher funding costs for the banks are already affecting new concessions of credit. However, slower credit growth may help control inflation.
The 12-month data for the current account of the balance of payments has been showing sharp deterioration. The $13.9 billion current account surplus registered in May last year turned into a $18.1 billion deficit in July this year. This should not come as a surprise, as the current account responds to an appreciating currency in an economy that is systematically growing more quickly than what is indicated by its installed capacity and its aggregate investment.
The results of the fiscal accounts so far suggest that Brazil will meet the target of a 4.3 per cent primary fiscal surplus and a reduced, for the sixth year in a row, net debt/GDP ratio. Tax collection will continue to expand as the economy grows and formalisation deepens, and restrained spending by the central government in the first half of this year, should more than compensate for the deterioration at the state and municipal levels.
Argentina
Despite the fact that Argentina's fiscal surplus remains robust, the outlook does not seem as bright after taking a closer look at the figures. True, between January and July, the primary surplus stood at ARS24.3 billion, thus rising an impressive 43.6 per cent year-on-year in nominal terms. Nevertheless, the underlying trend of fiscal accounts has started to arouse concerns given Argentina's heavy reliance on windfall revenues to finance spending. Unlike neighbouring Chile, there are no explicit rules that limit the discretionary allocation of excess income stemming from buoyant commodity prices. Therefore, if confronted with a commodity price slump, the government would have to apply a more stringent fiscal policy, instead of using this tool to stimulate aggregate demand when truly needed. As in the 1990s, Argentina's fiscal stance can be deemed as highly pro cyclical.
Credit rationing is the main reason why the government would find it harder to run a smaller surplus (or even a deficit) at times of slackening activity. However, this is not surprising if we take into account that ever since the new government took office, bondholders have been expecting a sign hinting to some restraint in the growth pace of public expenditures.
During June and July, outlays have grown at a much lower rate (30.8 per cent and 27.1 per cent year-on-year, respectively). Nevertheless, the latter cannot be deemed as a genuine expenditure slowdown. This is mainly due to the fact that on an accrued basis, outlays are still rising at unsustainable rates of almost 40 per cent (the previous increases refer to cash expenditures).
Unexpectedly, the president announced that Argentina would pay out completely (and from central bank reserves) the outstanding bilateral debts contracted with Paris Club country members.
According to latest available data, of a total debt of $6.7 billion, arrears amount to $5.1 billion, which would therefore be the minimum amount to repay. Were the whole debt to be cancelled, this would imply committing around 14 per cent of gross reserves. Despite the fact that the markets had been for some time eager to hear news of this sort, the cash payment should be regarded as a second best solution.
Analysts believe that, reaching a first best would have included some kind of arrangement with the IMF and the hold-outs, so as to save reserves and obtain cheap financing. However, rhetoric and ideology prevented this alternative from taking place.
Moreover, despite the relief in monetary conditions, banks have tightened their lending standards, which have translated into the build-up of liquidity. Unsurprisingly then, credit to the private sector has slowed down consistently.
For next year, it is expected that the cash excess supply of dollars (around $6 billion) is to be matched by private sector external asset accumulation. Ultimately, this hoarding behaviour will impact the availability of credit to the private sector. Even if the market is not looking to a credit crunch, it is nevertheless expecting a sharp reduction in the growth rate of loans.
• This report was compiled by the marketing department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.