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Analysis-Brazil’s spending cap brings fiscal surplus – and candidates’ ire

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© Reuters. FILE PHOTO: A general view of the skyline of Sao Paulo April 2, 2015. REUTERS/Paulo Whitaker

By Marcela Ayres and Bernardo Caram

BRASILIA (Reuters) – Strong commodity prices and a recovering job market have helped a sharp improvement in Brazil’s public finances, analysts say, allaying concerns about the country’s short-term fiscal health and helping to lure an influx of foreign investment.

But the impressive public-sector surplus is also providing fodder for presidential candidates on the left and right who want to overhaul fiscal rules after this October’s election.

Right-wing President Jair Bolsonaro and his main challenger, leftist former President Luiz Inacio Lula da Silva, have both blasted a constitutional spending cap that has been key to shoring up public finances since a deep 2015-2016 recession.

Without that spending ceiling, which limits the growth of federal expenditures to keep pace with inflation, Brazil could soon start a new chapter in its economic telenovela.

“With the spending cap, it’s easy to predict how public debt will behave,” said Luciano Sobral, chief economist at Neo Investimentos. “But no one thinks it will survive next year with either Lula or Bolsonaro. We don’t know what will take its place.”

Federal government revenue soared 26% in the first quarter – nearly 15% above inflation – which helped to lift the public sector’s primary surplus to 1.4% of GDP in the 12 months through February, according to central bank data last week.

Rather than celebrating the strong finances, Bolsonaro lashed out at rules keeping “excess revenue” beyond his reach.

“You can’t spend a penny of that on infrastructure because of the spending cap,” Bolsonaro said in a radio interview https://www.reuters.com/article/uk-brazil-economy-bolsonaro-idUKKCN2ML1XR last month. “A lot of people say this is something that needs to be changed … We will discuss this issue after the election.”

His rival Lula, who is leading in the polls, has also made no secret of his plan to scrap the spending cap https://www.reuters.com/world/americas/lula-says-reducing-poverty-is-brazils-priority-not-fiscal-containment-2022-01-19, saying his priority is poverty reduction rather than fiscal targets.

Investors have been sanguine so far about the shifting policy winds, flocking to Latin America’s largest economy as a relatively safe bet amid the war in Ukraine and fresh wave of COVID-19 rattling China.

Net portfolio inflows to Brazil totaled $5 billion in the first three months of this year, helping to strengthen Brazil’s currency almost 10% against the U.S. dollar in the year to date, even after a recent selloff.

Brazil’s five-year experiment with a spending ceiling shows it has been key to an improving its fiscal position, said Rafaela Vitória, chief economist at Banco Inter.

She noted the country’s last bout of double-digit inflation, in late 2015, also pushed up government revenue – but spiraling expenditures erased those gains.

Government officials say Brazil has also done its homework with a labor reform and new rules for infrastructure investment boosting economic growth and helping to beat negative fiscal forecasts.

Adolfo Sachsida, a special adviser to the economy minister, said private economists had underestimated government revenue for the past 20 months in a row by his count.

“The market is underestimating the strength of the microeconomic reforms that we have made,” he said. “Of course, we also have concerns, but I invite everyone to look at the numbers. The data are clear. Our fiscal improvement is not a matter of opinion,” he added.

But the data has done little to change the mind of Bolsonaro or Lula when it comes to Brazil’s fiscal framework next year.

Economy

Best Buy sees lower TV, computer sales as inflation hits shoppers’ wallets

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© Reuters. FILE PHOTO: A person enters a Best Buy store in Manhattan, New York City, U.S., November 22, 2021. REUTERS/Andrew Kelly

By Uday Sampath Kumar

(Reuters) -Best Buy Co Inc cut its annual profit forecast on Tuesday due to lower demand for TVs and computers, making it the latest major retailer to underline the impact of 40-year high inflation on shoppers’ spending power.

The company’s shares, which fell more than 16% last week in a broader retail selloff, were up about 2%, as the electronics seller reported first-quarter sales that were not as bad as feared.

“We believe investors had anticipated the earnings miss and guidance reduction to a large degree following reports of similar struggles at other retailers,” said Jason Benowitz, senior portfolio manager at Roosevelt Investment Group.

A spike in prices for everything from toothpaste to gas is taking a toll on consumer spending, while driving companies such as Best Buy, Walmart (NYSE:WMT) Inc and Target Corp (NYSE:TGT) to report their worst earnings miss in at least five years.

“Electronics are highly discretionary, big-ticket items. This puts them directly in the firing line of households looking to trim expenditure,” said Neil Saunders, managing director of GlobalData.

Best Buy reported earnings of $1.57 per share, missing estimates of $1.61, according to Refinitiv IBES data, with the company saying it was forced to discount more than expected in some product categories to clear inventory.

Adjusted earnings forecast for 2023 was cut to a range of $8.40 to $9 per share from a range of $8.85 to $9.15.

Still, even with higher gas and food prices, rising interest rates, and the war in Ukraine all affecting consumer behavior, Best Buy is not currently planning for a full recession, Chief Executive Officer Corie Barry said on an analyst call.

Quarterly comparable sales fell 8%, but beat tempered expectations of a 9.1% drop. It forecast full-year comparable sales to fall 3% to 6% versus its previous outlook of a 1% to 4% drop.

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Economy

EU proposes to make seizing assets easier, including of sanctioned oligarchs -document

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© Reuters. FILE PHOTO: Russian oligarch Roman Abramovich’s super yacht Solaris is seen at Barcelona Port in Barcelona, Spain, March 3, 2022. REUTERS/ Albert Gea

2/2

By Francesco Guarascio and Jan Strupczewski

BRUSSELS (Reuters) – The European Commission wants to make it easier to confiscate assets linked to serious illegal activities and suspected criminals, including those evading European Union sanctions against the Kremlin, according to a draft document seen by Reuters.

The legislative proposal, due to be published on Wednesday and still subject to changes, is aimed at addressing a longstanding weakness in the EU where many states lack sufficiently robust legal frameworks to seize criminal assets, making it easier for criminals to hide their resources and benefit from illegal activities.

The war in Ukraine further exposed this weakness, as many states are struggling to freeze assets of people sanctioned by the EU for their ties to the Kremlin – and many more lack legal powers to confiscate frozen assets.

The legislative proposal would address these weaknesses by creating a common legal framework.

Crimes for which the new rules would apply are terrorism, participation in a criminal organisation, human trafficking, money laundering, and also the violation of EU sanctions, which under a separate proposal, also to be published on Wednesday, would become a crime across the EU.

Asset seizures would generally require a conviction, but under the draft law, they could be allowed pending trial in some cases for suspected criminals, and also when they are “transferred by a suspected or accused person to third parties,” including family members.

Authorities in EU states have said one of the main obstacles they faced in enforcing the sanctions against Moscow was that affected people had their assets registered under somebody else’s name, or transferred them before sanctions were implemented.

“We are working on a European tool to make confiscations possible everywhere in all EU states”, the EU justice commissioner Didier Reynders said while pre-announcing the incoming measures earlier in May. He said one of the ultimate aims was to redistribute proceeds from these confiscations to Ukraine.

To become law, the proposal needs the backing of EU governments, which have traditionally been cautious about reforms that require changes to their criminal laws.

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Economy

Oh Snap! Social media firms sink after bleak warning from Snapchat parent

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© Reuters. FILE PHOTO: A woman stands in front of the logo of Snap Inc on the floor of the New York Stock Exchange (NYSE) in New York City, NY, U.S. March 2, 2017. REUTERS/Lucas Jackson

By Nivedita Balu and Medha Singh

(Reuters) – Snap Inc (NYSE:SNAP)’s shares plunged nearly 40% on Tuesday after a profit warning from the Snapchat parent signaled tough times ahead for the once-booming digital ad industry, sparking a sector-wide selloff.

The company was on course to erase more than $14 billion in market value, while Meta Platforms, Pinterest (NYSE:PINS), Twitter (NYSE:TWTR) and Google-parent Alphabet (NASDAQ:GOOGL) were altogether set to lose nearly $140 billion if losses hold.

Snap said on Monday it expected to miss quarterly revenue and profits targets that it set just a month earlier and would have to slow hiring and lower spending.

The bleak view from one of the sector’s most known players underlines how the Russia-Ukraine war, surging inflation and rising interest rates are hobbling social media companies at a time when they had just started recovering the impact of changes to Apple (NASDAQ:AAPL)’s iOS operating system.

“Snap is a proxy for online advertising and when you see weakness there then you automatically think Facebook (NASDAQ:FB), Pinterest and Google,” said Dennis Dick, a trader at Bright Trading LLC in Las Vegas.

“Once you start thinking about Google, that’s when the markets starts to sell off.”

Tuesday’s selloff comes days after a Bank of America (NYSE:BAC) fund managers survey indicated investors are becoming increasingly bearish on tech stocks, a stark reversal to a bullish trend in the past 14 years.

Analysts also said Snap’s outlook for core profit suggested expenses will outpace its revenue growth, given headcount was up 52% in the prior quarter. The company also faces pressure from TikTok and a shift in ad budgets to Google and Facebook, they added.

“There’s a lot to deal with in the macro environment today,” Chief Executive Officer Evan Spiegel said at a tech conference on Monday.

Graphic: Digital advertising stocks this year – https://graphics.reuters.com/DIGITAL%20ADVERTISING-STOCKS/dwpkrnzogvm/Digital%20advertising%20stocks%20this%20year.png cb55bba9-860d-4771-9546-5eaef7b68cf01

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