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Brazil Country Risk Reports Q2 2015

Brazil Country Risk Reports Q2 2015

Core Views

Brazil is on the cusp of an economic policy shift, with the appointment of an investor-friendly finance minister set to reverse the fiscal deterioration seen in the last few years and the central bank more strongly committed to reining in inflation. That said, these shifts will be slow to translate into stronger real GDP growth in light of a number of domestic and external headwinds.

We see little upside for Brazilian real GDP growth in the next few years, with growth set to accelerate to just 0.6% in 2015 and 1.3% in 2016, from an estimated 0.2% in 2014. Fixed investment will remain tepid in light of poor business confidence and a relatively weak business environment. Meanwhile, a deteriorating labour market and weak consumer confidence will constrain household consumption.

A greater commitment to tackling inflation will see the central bank hike the benchmark Selic target rate by 75 basis points (bps) to 12.50% by end-2015. This will bolster the bank's inflation fighting credentials but will not succeed in bringing headline inflation back to the midpoint of the Banco Central do Brasil's tolerance range (4.5% year-on-year).

The widespread public protests that took place in June 2013 marked a turning point for the Brazilian electorate. Public unrest will flare up intermittently until significant progress on promised reforms, including higher-quality public services and greater government transparency, begins to take shape.

Major Forecast Changes

We have downgraded our 2015 and 2016 real GDP growth forecasts to 0.6% and 1.3% respectively. Fixed investment growth will be more subdued than we initially anticipated, as business confidence will remain weak following the re-election of President Dilma Rousseff in October 2014. In addition, rising interest rates will limit consumers' take-up of credit, weighing on household spending.

We revised our 2014 nominal budget deficit forecast to 5.0% of GDP, from 4.0% previously, following significant fiscal deterioration in the last few months. We long expected the fiscal deficit to widen in 2014, although a stronger uptick in spending than we anticipated, combined with very weak revenue growth has seen us revise this forecast. Nevertheless, our view that fiscal consolidation is ahead remains in play, supported by the appointment of a new economic team, which will rein in expansionary fiscal policy this year.

Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Economic Reforms Ahead, Structural Improvements Out Of Reach
Brazilian policymakers are beginning to move in a more investor-friendly direction, but economic reform will be hindered by deep
divisions within the ruling Partido dos Trabalhadores and considerable legislative fragmentation.
Table: Reforms Taken And Hoped For Results
Long-Term Political Outlook
Economy To Dominate Policymaking
Stimulating Brazil's stagnating economy will figure prominently on the policy agenda during President Dilma Rousseff's second term.
In addition, the end of the PAC growth acceleration programme will challenge the government to continue improving Brazil's social
development metrics in order to provide the foundations for robust long-term growth.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
Anaemic Growth To Persist
In light of a poor business environment, weak consumer confidence and a lacklustre external environment, there is little upside for
Brazilian real GDP growth in the next several years.
Table: GDP By Expenditure
Fiscal Policy
New Economic Team To Reverse Fiscal Deterioration
Brazil's new economic team will begin to consolidate the government's fiscal accounts in 2015, following years of deterioration.
Table: Fiscal Policy
Monetary Policy
Elevated Inflation To Prompt Further Rate Hikes
Additional interest rate hikes are on the cards in Brazil in 2015, as the Banco Central do Brasil seeks to rein in price growth and temper
inflation expectations.
Table: Monetary Policy
Lower Oil Prices Offer Limited Respite For Current Account
A widening goodss trade shortfall will drag Brazil's current account further into deficit in 2015. Stronger goods and services exports will
help to narrow the external account deficit thereafter, but more moderate crude oil production and exports than we previously anticipated
will temper the pace of improvement.
Table: Curent Acount
Exchange Rate Policy
BRL: Sustained Depreciation In 2015
Weak growth and balance of payments dynamics, as well as an ongoing rally in the US dollar, will drive further depreciation in the
Brazilian real in the coming quarters.
Table: Exchange Rate
Table: Curency Forecast
brazil Q2 2015
Chapter 3: 10-Year Forecast
The Brazilian Economy To 2024
Q215: Days Of Easy Growth Are Gone
Substantial mineral wealth and one of Latin America's largest consumer bases will help keep investor interest rooted in Brazil over
the long term, but the next 10 years will not be easy for the economy. The consumer story is set for a period of slower growth while
infrastructure bottlenecks and a substantial tax burden will weigh on the country's business environment.
Table: Long-Term Macroeconomic Forecasts
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
Table: Operational Risk
Availability Of Labour
Crime Risk
Table: Latin America – Crime Risk
Table: Cri me Statistics
Chapter 5: Key Sectors
Table: Autos Total Market – Historical Data And Forecasts
Food & Drink
Table: Food Consu mptio n Indicators – Historical Data & Forecasts
Table: Hot Dri nk Value/Volume Sales, Production & Trade – Historical Data & Forecasts
Other Key Sectors
Table: Oil & Gas Sector Key Indicators
Table: Pharmaceuticals & healthcare Sector Key Indicators
Table: Infr astructure Sector Key Indicators
table: Teleco ms Sector Key Indicators
Table: Defence & Security Sector Key Indicators
Table: Freight Key Indicators
Chapter 6: BMI Global Assumptions
Global Outlook
New Era For Oil
Table: Global Asumptions
Table: Develop ed States, Real GDP Growt H, %
Table: Emerging Markets , Real GDP Growth , %

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