CARLOS GERALDO LANGONI

EXTERNAL PRESSURE

The crisis between the United States and Iran has increased the level of uncertainty in the world economy. In contrast, domestic confidence indices have improved.

Volatility:

Oil prices have suffered the biggest impact. After hovering around $ 70 a barrel, prices are now showing a falling bias. It is too early to know the new short-term equilibrium level. Iran's supply had already been excluded from the main markets due to US sanctions.

In recent years, production has increased in non-OPEC countries, such as Brazil.

In any case, it is always important to remember that Saudi Arabia - the central bank of oil - is an ally of the United States and, if necessary, could act to minimize price overshooting trends.

Exchange:

For all these reasons, Petrobras' strategy appears to be correct - without giving up its realistic pricing policy - to wait and see which direction the unfolding crisis seems to be heading.

Contributing to this pause is the relative stability of the exchange rate, which has fluctuated around the 4 Reais range, despite the global wave of risk aversion.

This is a reflection of the improvement in macroeconomic fundamentals, reflected in the high levels of business, service and trade confidence indices in December.

The external accounts remain sound, despite the sharp drop in the trade balance (around 20%) following the slowdown in global trade.

Exports retreated in all categories, contaminated by China's slower economic pace and the Argentinian recession.

Despite this adjustment, the current account deficit continues to be comfortably financed by long-term capital: foreign direct investment is expected to reach $ 80 billion this year.

Industry / Inflation:

This positive trend is not expected to change despite the fall in industrial production in November.

The main categories, including durable goods and capital goods, contracted. Still, the market is betting on strong expansion (2.19%) this year.

On the other hand, the sharp acceleration of the consumer price index (IPCA, the acronym in Portuguese) in December, explained by the rise in food prices, left annual inflation (4.31%) slightly above the official target.

It did not, however, contaminate expectations. Market projections point to a consumer price index in the range of 3.6%, below the new target center (4%).

In short, external pressure has been an important stress test for the Brazilian economy.

Judging from the behavior of the exchange rate, the result has been positive: the reform agenda is already contributing to the dampening of shocks from the world economy.

Brazil will advance in the ranking of the world's leading oil exporters in the coming years: it is essential to maintain the policy of parity between domestic and international prices.

In this sense, the replacement of diesel with LNG is a more economically and environmentally efficient solution than any artificial mechanism to mitigate the volatility of international prices.