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Brazil Business Forecast Report Q2 2014

  • January 2014
  • -
  • Business Monitor International
  • -
  • 59 pages

Core Views

Further exchange rate weakness, still-high interest rates and our
view for only a moderate pick-up in fixed investment inform our view
that real GDP growth will remain near 2013 levels this year. Indeed,
we forecast real GDP growth of 2.4% in 2014, only modestly higher
than our 2.3% estimate for 2013.
Elevated inflation will keep interest rates high in H114, but we believe
that a still-weak growth outlook, combined with more moderate price
pressures, will see the Brazilian bank move to ease monetary policy
in late 2014.
While the widespread public protests begun in June have largely
subsided, we believe that this marked a turning point for the Brazilian
electorate. As such, we anticipate that public unrest could flare
up again should political progress on reforms stall.

Major Forecast Changes

We have upgraded our 2013 real GDP growth estimate to 2.3%, from
2.0%, following indications that economic activity is likely to come
in stronger than we previously expected in late 2013. That said, we
modestly downgraded our 2014 real GDP growth forecast to 2.4%
(from 2.5% previously). We believe that exchange rate weakness
and still-high interest rates will temper private consumption growth,
while delays will continue to weigh on the infrastructure sector’s
potential, implying little acceleration in growth from 2013 levels.
Following 325 basis points (bps) of hikes since April 2013, we
anticipate only another 25bps to 10.75% in the coming months.
After a pause, we then expect a still-weak growth outlook and more
moderate inflation in H214 to prompt the central bank to cut rate to
9.75% by end-2014.
After more significant weakness than we expected in end-2013, and
in light of growing capital outflows, we have revised our 2014 average
and end-year exchange rate forecasts to reflect greater weakness.
We now forecast the real to average BRL2.350/US$ in 2014 (from
BRL2.300/US$ previously) and end the year at BRL2.450/US$ (from

Key Risks To Outlook

Downside Risks To Growth Forecast: A more significant tightening
cycle than we expect in early 2014, combined with another substantial
sell-off in the exchange rate could hit private consumption growth
hard, posing downside risks to our 2.4% real GDP growth forecast.
Further delays to major construction projects related to the FIFA
World Cup and PAC growth acceleration programme would also
pose downside risks to our 2014 growth forecast.
Upside Risks To Interest Rate Forecast: With inflation ticking up in
December 2013, the Brazilian central bank remaining concerned
about inflation expectation, and a more aggressive rate hike than
we expected in January, we highlight upside risks to our end-2014
interest rate forecast of 9.75%. Indeed, hawkish rhetoric by the central
bank and/or indications that inflation will continue to accelerate in
the coming months could cause us to upgrade our end-2014 Selic
rate forecasting, potentially forestalling our call for monetary easing
until 2015.
Downside Risks To Exchange Rate Forecast: Should the real take
another leg lower in the coming months, on the back of a change
in investor sentiment, we could see the unit depreciate more aggressively
than we currently expect. Such a scenario would pose
downside risks to our average and end-year exchange rate forecasts
for 2014 and 2015.

Table Of Contents

Brazil Business Forecast Report Q2 2014
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Opposition To Increasingly Challenge Rousseff's Re-Election Bid 8
We maintain our view that President Dilma Rousseff remains the candidate best positioned to win Brazil's October 2014 presidential
TABLE: Political Overview 8
Long-Term Political Outlook 11
Economy To Dominate Policymaking 11
With Brazilian real GDP set for a period of more moderate growth over the medium term, significant business environment challenges,
and growing competition for investment from Mexico, we believe that the economy will figure prominently on the country's policy agenda
over the medium term
Chapter 2: Economic Outlook 15
SWOT Analysis 15
BMI Economic Risk Ratings 15
Economic Activity 16
Another Year Of Unspectacular Growth In 2014 16
While stronger-than-expected GDP data in the year-to-date has seen us upgrade our 2013 real GDP growth forecast moderately, we
believe the economic recovery is unlikely to accelerate further in 2014
Exchange Rate Policy 19
BRL: Weak Fundamentals To Drive Further Depreciation 19
Balance Of Payments 21
Current Account Deterioration To Continue 21
While we are adjusting our current account forecasts for Brazil for the next few years to reflect narrower shortfalls, we maintain our view
that further deterioration is ahead This is underpinned by our view that export growth will remain modest and imports will tick higher, in
line with a recovery in the manufacturing sector, keeping the trade account in deficit
Fiscal Policy 23
Policy To Remain In The Spotlight 23
Brazilian fiscal policy will remain under intense scrutiny in the coming years, as a significant deterioration in the nominal and primary
budget balances has increased the prospect of a sovereign credit rating downgrade While we believe that an outright ratings
downgrade is unlikely before the October general election, there will be significant pressure on the next government to stem the
deteriorating trend or risk further ratings action
Monetary Policy 25
BCB To Shift From Tightening To Easing By End-2014 25
With growth set to remain relatively weak this year, we believe that the Banco Central do Brasil (BCB) will keen to begin easing
monetary policy in late 2014 once price pressures begin to moderate
Business Monitor International Ltd www businessmonitor com 3
Regional Sovereign Risk Ratings 27
Credit Deterioration Has Largely Run Its Course 27
The deterioration in the credit profile of Latin American and Caribbean sovereigns seen over the course of 2013 has largely come as far
as it will go after a substantial re-pricing of credit risk in the region
Table: Sovereign Risk Ratings - Evolution Of Ability To Pay 28
Table: Sovereign Risk Ratings - Evolution Of Willingness To Pay 29
Chapter 3:10-Year Forecast 33
The Brazilian Economy To 2023 33
Days Of Easy Growth Are Gone 33
Although substantial mineral wealth and one of Latin America's largest consumer bases will keep investor interest rooted in Brazil over
the long term, the next 10 years will not be easy for the economy Indeed, the consumer story is set for a period of slower growth in
the medium term while infrastructure bottlenecks and a substantial tax burden are likely to continue weighing on the country's business
Table: Long-Term Macroeconomic Forecasts 33
Chapter 4: Business Environment 37
SWOT Analysis 37
BMI Business Environment Risk Ratings 37
Business Environment 38
Institutions 38
Table: BMI Business And Operation Risk Ratings 38
Infrastructure 39
Table: BMI Legal Framework Rating 39
Market Orientation 41
Table: Top Export Destinations (US$mn) 41
Operational Risk 42
Autos 45
Chapter 5: Key Sectors 45
Autos 45
Table: Autos Sales By Segment - Historical Data And Forecasts, 2010-2017 45
Table: Autos Production By Segment - Historical Data And Forecasts 46
Table: Autos Economic Contribution 47
Table: Autos Trade - Historical Data And Forecasts 47
Food and Drink 48
Table: Food Consumption Indicators - Historical Data and Forecasts, 2012-2017 49
Table: Hot Drink Value/Volume Sales, Production and Trade - Historical Data and Forecasts, 2012-2017 51
Table: Mass Grocery Retail Sales By Format - Historical Data and Forecasts, 2012-2017 53
Other Key Sectors 55
Table: Freight Key Indicators 55
Table: Oil and Gas Sector Key Indicators 55
Table: Pharma Sector Key Indicators 55
Table: Telecoms Sector Key Indicators 56
Table: Defence and Security Sector Key Indicators 56
Table: Infrastructure Sector Key Indicators 56
Chapter 6: BMI Global Assumptions 57
Global Outlook 57
Momentum To Continue In H114 57
Table: Global Assumptions 57
Table: Developed States, Real GDP GrowtH, % 58
Table: Emerging Markets, Real GDP Growth, % 59

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