Brazil Country Risk Report Q2 2016
Over the long term, Brazil will experience only modest levels ofgrowth as structural headwinds limit any quick economic solutionsto challenges stemming from falling global commodity prices. Growthwill only return following two years of recession in 2015 and 2016.
The Banco Central do Brasil will back down from its promise tocut rates in 2016 and will instead hike the benchmark Selic rate by150 basis points (bps) in 2016. Inflation has continued to acceleratedespite the bank's attempts to stymie price increases throughmore than 700bps of rate hikes in the past two years. Capital hascontinued to flow out of Brazil, putting depreciatory pressure on thereal and feeding through to rising import costs.
The widespread public protests that took place in June 2013 markeda turning point for the Brazilian electorate. Public unrest will flare upintermittently until significant progress on promised reforms, includinghigher-quality public services and greater government transparency,begins to take shape. In line with this view, an ongoing corruptionscandal at national oil company Petrobras will continue to drivepublic protests in the coming months.
Major Forecast Changes
We have downgraded our 2015 real GDP growth estimate to -3.1%,from -2.7% previously. Significant labour market deterioration underpinsthis forecast change, as private consumption will be moresubdued than we previously anticipated.
We now expect Brazil's recession to deepen in 2016, and haverevised our real GDP contraction forecast in 2016 to 3.4%.
We have revised up out benchmark Selic rate forecast for 2016.
We now expect the Banco Central do Brasil to hike rates to 15.75%from 14.25%. This is a revision from our previous expectation forthe bank to begin a rate-cutting cycle in 2016 to spur growth.
- Executive Summary
- Core Views
- Major Forecast Changes
- Chapter 1: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Index
- Economic Growth Outlook
- Recession Will Deepen In 2016
- Brazil's recession will deepen in 2016 as the labour market experiences significant deterioration as corporate bankruptcies rise.
- Household spending will fall significantly as the unemployment rate increases, boosting the country's default rate and sending real
- wages lower.
- GDP By Expenditure Outlook
- TABLE: 10-YEAR GDP FORECASTS
- TABLE: PRIVATE CONSUMPTION FORECASTS
- TABLE: GOVERNMENT CONSUMPTION FORECASTS
- TABLE: GROSS FIXED CAPITAL FORMATION FORECASTS
- TABLE: NET EXPORT FORECASTS
- Fiscal Policy And Public Debt Outlook
- Fiscal Deficit To Deteriorate Amid Deepening Recession
- Given our view that the economic outlook for Brazil will deteriorate in 2016 while the ability to rein in spending will be hampered by
- political dynamics, we have downwardly adjusted our fiscal forecasts.
- Structural Fiscal Position
- External Trade And Investment Outlook
- Exports Set For Significant Contraction
- Brazil's current account deficit will expand sharply in 2016 as low commodity prices and a weak manufacturing sector weigh on export
- Outlook On External Position
- TABLE: FINANCIAL ACCOUNT INDICATORS
- Monetary Policy
- Rate Hiking Cycle Will Resume In H116
- The Banco Central do Brasil will resume its hiking cycle in 2016 as inflation heads higher due to rising capital flight and fiscal pressure.
- Higher interest rates will erode private consumption and investment as the financial system restricts lending.
- Monetary Policy Framework
- Currency Forecast
- BRL: Headed Even Lower In 2016
- Over the course of the next six months, the Brazilian real will continue its depreciatory trajectory as foreign capital continues to exit the
- country, placing downward pressure on the currency.
- TABLE: BMI CURRENCY FORECAST
- TABLE: BMI COMMODITY PRICE FORECASTS
- Chapter 2: 10-Year Forecast
- The Brazilian Economy To 2025
- 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 3: Political Outlook
- SWOT Analysis
- BMI Political Risk Index
- Domestic Politics
- Unifying PT Will Not Bolster Austerity Agenda
- President Dilma Rousseff will stave off impeachment by accommodating policies endorsed by the more left-leaning members of her
- PT party. However, this will preclude many fiscal austerity measures proposed by the government in its attempt to limit economic
- TABLE: POLITICAL OVERVIEW
- 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 4: Operational Risk
- SWOT Analysis
- Operational Risk Index
- Operational Risk
- TABLE: OPERATIONAL RISK
- Trade Procedures And Governance
- TABLE: IMPORT AND EXPORT DOCUMENTS
- TABLE: TRADE PROCEDURES BREAKDOWN
- TABLE: LATIN AMERICA – TRADE PROCEDURES AND GOVERNANCE RISK
- Vulnerability To Crime
- Chapter 5: BMI Global Macro Outlook
- Global Macro Outlook
- Unfinished Business In 2016
- TABLE: GLOBAL ASSUMPTIONS
- TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
- TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
- TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
- TABLE: BRAZIL – MACROECONOMIC DATA & FORECASTS