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Brazil Country Risk Report Q2 2016

Brazil Country Risk Report Q2 2016

Core Views

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
growth.
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
stagnation.
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

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