"Actually, Brazil is not perceived as a market problem for the investors, but as a place of opportunities" (Paulo Leme, Chairman Goldman Sachs, Aug. 2015)

 

Fundamentals improve, but fiscal progress is still lacking (jul. 2016) 

A stronger and sustainable economic recovery depends on the approval of fiscal reforms, especially on the expenditure side.

  • We have revised our exchange-rate forecast to 3.25 BRL per dollar at the end of 2016 (previously 3.65) and 3.50 BRL per dollar at the end of 2017 (previously 3.85). The likely postponement of a U.S. rate hike, greater consensus on fiscal reform and the central bank’s conservative approach should help the Brazilian real appreciate this year. 

  • We have maintained our IPCA inflation projection for this year at 7.2%. Recent pressure from food prices is likely to be offset by the effects of currency appreciation and the larger drop in electricity bills. We have lowered our 2017 forecast from 5.0% to 4.8% due to the stronger real.

  • Leading activity indicators have improved in recent months, but holding interest rates higher for longer (see below) may to affect demand in the short term. We are therefore maintaining our forecast of a 3.5% drop in 2016 GDP and a moderate 1.0% increase in 2017. 

  • The government has announced a target of -2.2% GDP for the consolidated primary sector result in 2017. We have reduced our primary result forecast to -2.2% from -1.5% of GDP in 2017, in line with the announced primary target. 

  • The central bank has reiterated its goal of achieving the center of the target in 2017, which may require tighter monetary policy over a longer horizon. We are now forecasting that the cycle of interest-rate cuts will begin in October (previously August), with an initial 0.25 pp cut. We expect the Selic to end 2017 at 10.00%.

Reforms start to take shape, but uncertainties remain (jun. 2016)

The recession continues, but recent data continues to improve. We now expect a smaller GDP contraction in 2016.

 

  • The government has proposed a ceiling for public spending growth and has started discussions on social security reform. However, it is still unclear whether the new government can reach the political consensus needed to approve the fiscal measures. 

  • The 2016 target for the consolidated primary result has been revised downward, to -2.6% from -1.5% of GDP. We have reduced our primary result forecast to -2.4% from -1.7% of GDP in 2016 and to -1.5% from -1.0% of GDP in 2017. 

  • The most recent data on economic activity was surprisingly positive. We have revised our 2016 GDP forecast to -3.5% (previously -4.0%). For 2017, we have maintained expectations for moderate growth, at 1.0%. Industry may recover in the second half of the year, but the labor market is likely to remain weak given its lagged reaction to economic activity. We expect unemployment to end the year at 12.5% and to end 2017 at 13.0%.

  • We have revised our exchange-rate forecast to 3.65 reais per dollar for the end of 2016 (from 3.75) and to 3.85 reais per dollar for the end of 2017 (from 3.95). This level reflects the more benign external scenario driven by the likely delay in interest rate hike by the Federal Reserve. 

  • We have increased our forecast for consumer inflation, measured by the IPCA, this year to 7.2% from 6.9%, in light of greater pressure from food prices. The projected increase for market prices has risen to 7.5% from 7.1%, while we maintained the forecast for regulated price inflation at 6.5%. Our inflation forecast for 2017 remains at 5.0%. 

  • The recession makes room for interest rate cuts ahead. Higher current inflation and fiscal uncertainties, however, suggest caution. We deferred our expected timing for the first rate cut to August. We now forecast the Selic rate at 12.75% by the end of 2016 (12.25% previously).​

 

(Credits: Itaú BBA)

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