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Brazil Country Risk Report Q3 2015


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Brazil Country Risk Report Q3 2015

Core Views

Brazil is on the cusp of an economic policy shift. The appointmentof an investor-friendly finance minister is set to begin reversing thefiscal deterioration seen in the last few years and the central bankis more strongly committed to reining in inflation. That said, theseshifts will be slow to translate into stronger real GDP growth givena number of domestic and external headwinds.

We see little upside for Brazilian real GDP growth in the next fewyears. Significant headwinds to fixed investment and private consumptionwill see real GDP contract by 0.5% in 2015 before returningto growth of just 1.0% in 2016.

A greater commitment to tackling inflation will see the central bankhike the benchmark Selic target rate by another 75 basis points (bps)to 13.50% by end-2015. This will bolster the bank’s inflation fightingcredentials but will not succeed in bringing headline inflation backwith its 4.5% ± 2.0% tolerance band this year.

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 and 2016 real GDP growth forecaststo -0.5% and 1.0% respectively. In particular, fixed investment growthwill be more subdued than we previously anticipated, as an ongoingdrought raises investor concerns over the price and consistency ofpower supplies and the corruption scandal at Petrobras severelydampens business confidence.

We downgraded our average exchange rate forecast from BRL2.850/USD to BRL3.150/USD in light of a significant sell-off in the last fewmonths, as well as our expectation for more significant deteriorationin the country’s balance of payments dynamics than we previouslyexpected.


Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Petrobras Scandal Will Erode Rousseff's Governing Mandate
Brazilian President Dilma Rousseff will remain in power even as a corruption scandal at national oil company Petrobras has implicated
several members of the ruling legislative coalition.
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 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
Heading Into Recession In 2015
Higher taxes and electricity prices, combined with the fallout from a corruption scandal at Brazil's state-owned oil company, will see real
GDP contract in 2015. Headline growth will return to positive territory in 2016 but remain tepid by historical standards.
TABLE: Economic Activity
Fiscal Policy
Fiscal Shortfall Will Begin Narrowing
Brazilian fiscal policy will turn a corner in 2015. The government's new economic team will begin to reverse the significant fiscal
deterioration seen in the last few years, although political infighting will preclude a more significant cut in expenditures.
TABLE: Fiscal Policy
Monetary Policy
Hiking Cycle Has Further To Run
Brazil's central bank will tighten monetary policy further in the coming months, continuing a hiking cycle that began in April 2013.
This comes as consumer price inflation will remain near multiyear highs on the back of tax increases and significant currency
depreciation.
TABLE: Monetary Policy
Balance Of Payments
No Respite For Current Account In 2015
Brazil's current account deficit will continue widening in 2015, due in large part to structurally weaker goods trade dynamics.
TABLE: Current Account
Exchange Rate Policy
BRL: Poor Fundamentals Will Drive Further Depreciation
Further depreciation is on the cards for the Brazilian real in the next several quarters. A significant deterioration in the country's growth
and balance of payments dynamics, alongside a widening corruption scandal, will drive more substantial currency weakness than we
previously anticipated.
TABLE: BMI Currency Forecast
TABLE: Exchange Rate
Chapter 3: 10-Year Forecast
The Brazilian Economy To 2024
Q315: 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.
TABLE: Long-Term Macroeconomic Forecasts
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: Operational Risk
Legal Environment
TABLE: Latin America - Legal Risk
Costs Of Labour
TABLE: Latin America - Labour Costs Risk
TABLE: Average Annual Wages By Sector (BRL)
TABLE: Regulations Governing Flexibility Of Workforce
Chapter 5: Key Sectors
Defence & Security
TABLE: Defence Expenditure
Freight Transport
TABLE: Rail Freight
TABLE: Air Freight
TABLE: Maritime Freight
Other Key Sectors
TABLE: Oil and Gas Sector Key Indicators
TABLE: Pharma Sector Key Indicators
TABLE: Autos Sector Key Indicators
TABLE: Telecoms Sector Key Indicators
TABLE: Infrastructure Sector Key Indicators
TABLE: Food and Drink Sector Key Indicators
Chapter 6: BMI Global Macro Outlook
Global Outlook
Softening Growth Picture
Table: Global Assumptions
Table: Developed States, Real GDP GrowtH, %
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
Table: Emerging Markets, Real GDP Growth, %

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