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Brazil Business Forecast Report Q2 2010

Published by: Business Monitor International

Published: Feb. 5, 2010 - 70 Pages


Table of Contents


Executive Summary
Fiscal Uncertainty Continues To Rise
Chapter 1: Political Outlook
Domestic Politics
Significant Policy Challenges Ahead
As Brazil enters the 2010s and a new president is set to take office in 2011, the new administration will face a
myriad of policy challenges over the coming decade.
Table: Political Overview
Chapter 2: Economic Outlook
Economic Activity
Households To Lead 5.0% Growth In 2010
Robust private consumption levels in Q309 point to a strong recovery for the Brazilian economy in 2010.
TABLE: ECONOMIC ACTIVITY
Fiscal Policy
Fiscal Slippage Is Main Economic Risk
Our long-held concern about a deteriorating fiscal position in Brazil seems to be playing out, with September
witnessing the government post one of its worst performances on record.
TABLE: FISCAL POLICY
Monetary Policy
Inflationary Pressures To Remain Muted
With wholesale prices remaining firmly in deflationary territory, December saw Brazil’s broadest measure of
inflation, the IGP-M index, record the steepest year-on-year fall in prices since the series began in 1989.
TABLE: MONETARY POLICY
Currency Forecast
BRL: Limited Room For Significant Appreciation
After testing the crucial BRL1.7000/US$ technical level in November, the Brazilian real has struggled to remain
on its impressive appreciatory course, which saw the unit rally some 33% against the dollar in 2009.
Balance Of Payments
Freer Trade Will Have To Wait
The last Mercosur presidential summit has failed to make significant progress towards reducing the barriers to
free trade with the South American bloc, which continue to hamper the region’s external sector.
TABLE: EXCHANGE RATE
TABLE: CURRENT ACCOUNT
Chapter 3: 10-Year Forecast
The Brazilian Economy To 2019
Outperforming The Previous Decade
Vast natural resources, the emergence of an enormous consumer segment and a prudent policy mix will keep
investor interest rooted in Brazil over the coming decade.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Special Report
Political Risk In The Next Decade
What To Expect In 2010-2019
Table : Countries Facing Major Leadership Succession In 2010-2019
Table : Countries At Ris k Of Major Political Uphea val
Table : Countries At Ris k Of Interstate Conflict Or Heightened Bilateral Tension
Table: Countries Facing Secessionist Or Autonom y Movements , Ins urgencies , Or Civil Wars
Table: Pivot al States
Chapter 5: Business Environment
Business Environment Outlook
TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS
Institutions
TABLE: BMI LEGAL FRAMEWORK RATINGS
Infrastructure
TABLE: LATIN AMERICA, ANNUAL FDI INFLOWS
Market Orientation
TABLE: BMI TRADE RATINGS
TABLE: TOP EXPORT DESTINATIONS
Operational Risk
Chapter 6: Key Sectors
Consumer Electronics
Table: Consumer Electronics Overview
Defence
Table : Government Defence Expendit ure , 2006-2014
Chapter 7: BMI Global Assumptions
Global Outlook
2010 Looking Rosier
TABLE: GLOBAL AND REGIONAL REAL GDP GROWTH
TABLE: de veloped mar ket exchange rates
Table : Emerging Mar ket Exchange Rates
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES
TABLE: EMERGING MARKETS

Abstract

The outlook for the Brazilian economy over our forecast horizon will in no small part be affectedby the presidential election race and its ultimate outcome. As the economy gears up for a robustrecovery in 2010, we believe that the economic policy mix will become increasingly politicallycharged, with loose fiscal policy likely to remain in place for longer than the economic situation mayrequire. Our concern, therefore, remains fiscal slippage in Brazil, and the risk that global investorsmay begin to feel uncomfortable with a less credible macroeconomic policy. Although the fiscal gapis still far from alarming, we are concerned about the longer-term implications of additional socialdevelopment commitments, and a restricted room for policy reversals in the case of a centre-rightvictory for Partido da Social Democracia Brasileira (PSDB) candidate José Serra in October.

As Brazil enters the 2010s and a new president is set to take office in 2011, the new administrationwill face a myriad of policy challenges over the coming decade. The impressive economicperformance under President Luiz Inácio Lula da Silva has significantly raised the bar for any futureadministration, leaving a challenging combination of policy objectives from continuing to improveliving standards and addressing a widening fiscal shortfall to meeting the security and infrastructuralchallenges ahead of the FIFA World Cup in 2014 and the Rio de Janeiro Olympic Games in 2016.

Brazil’s Q309 GDP reading once again demonstrates the resilience of the Brazilian consumer,supporting our view that it will be strong private consumption that will drive economic growthbeyond the current downturn. While headline real GDP remained in the red, at -1.2% y-o-y (animprovement from Q209’s -1.6%), household spending alone contributed 2.4 percentage points(pp) to real growth, an improvement from Q209’s 1.8pp contribution. Slumping capital investmentwas the main culprit behind Brazil’s negative Q309 real GDP reading, with the ongoing drawdownin inventory levels acting as the other significant drag.

Banco do Brasil is reportedly in discussions with a number of banks and companies to arrangea loan for the Belo Monte hydropower project. The move signals that the government is keen toget the project under way; however, BMI notes that the bank may be jumping the gun slightly asthe environmental licence is still pending for the controversial 11GW project. Banco do Brasil isattempting to arrange a loan of around BRL9bn (US$5.1bn) in order to help finance the project. Thebank is in discussions with five to six banks for the loan, and is also in talks with the companies thathave expressed an interest in building the hydropower project, according to the bank’s commercialdirector, Sandro Marcondes, speaking in a Bloomberg interview. Brazilian state development bank,BNDES, is also involved in the discussions. The development highlights the extent to which publicallyfunded projects are increasingly playing a prominent role in Brazil’s business environment

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