Brazil: Fuel Taxes Re-introduced; Unemployment Rate Falls

Fuel Taxes Re-introduced

Finance Minister Fernando Haddad has announced that federal taxes are set to be re-introduced on fuel prices, but at a different rate for each product. On gasoline a 9.2% quota will be applied, for ethanol the quota will be set at 2%, Diesel will be free of federal tax until the end of the year. The government believe that with the measure it will be able to collect up to 0.5% of the GDP on taxes, helping to reduce the fiscal deficit. Additionally, the minister stated that a tax on oil exports are set to be introduced in order to incentive oil refinery inside Brazil. No change on Petrobras oil prices was announced yet but a small decrease on distribution prices was applied on Monday to reflect the lower  international oil prices. We believe the measure will add 1% on inflation this year, thus we are reviewing our y/y inflation forecast from 4.9% to 5.9%.

Unemployment Rate Falls

Figure 1: Unemployment Rate (%)

Source: IBGE

Elsewhere, the unemployment rate kept falling during December reaching 7.8%, the lowest rate since 2015. We believe most of the 2022 drop in the  unemployment rate has due to  the reopening of the economy and the second round effects of the fiscal package approved last year right before the elections. We see this trend of sharp falling unemployment rate to be interrupted during the first half  as the impact of the fiscal package and the re-opening of the economy fade and lagged monetary tightening bites. However, we see it very likely that the Brazilian economy is running with little idleness, as a 8% unemployment rate is an unusually low number for Brazil.

Implications for the Central Bank

The re-introduction of federal taxes on fuel prices has two implications. In the short term, it will generate inflationary pressures on prices, meaning the disinflation process will take longer than previously thought. However, in the long term, it shows the government is concerned with the fiscal situation and beyond President Lula da Silva rhetoric, the government will take efforts to reduce the deficit, which helps to ease inflationary pressures through the expectation channel. The low level of idleness in the Brazilian economy creates inflationary pressures on the Brazilian economy, which makes it difficult for the Brazilian Central Bank (BCB)  to ensure inflation convergence. We believe now that rather than start to cutting rates in August, the BCB will start to cut interest rates only in October, to compensate the higher than previously thought inflationary pressures. Therefore, we are reviewing our end-of-the-year interest rate to 12.25% from 11%.