Core Views We expect Brazil's economic recovery to falter in 2014, as fixed investment will remain weak in light of falling business confidence. Moreover, we expect high inflation and poor consumer confidence to constrain private consumption growth. Elevated inflation will keep interest rates high in the coming months, but we maintain our view that the bank will switch its focus from reining in inflation to stimulating growth by year-end on the back of tepid growth and weak consumer confidence.
The widespread public protests begun in June 2013 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. We maintain our view that President Dilma Rousseff will win the October 2014 presidential election, and therefore we anticipate that major reforms are likely to be limited in the coming years. This implies only a modest reining in of expansionary fiscal policy and a continued piecemeal approach to improving the outlook for stateownedoil company Petrobras.
Major Forecast Changes We have downgraded our 2014 and 2015 real GDP growth forecasts to 1.8% and 2.2% respectively, as we anticipate that fixed investment growth will be more subdued than we initially anticipated, and moderate private consumption will not be enough to buoy the country's growth outlook.
With the Banco Central do Brasil (BCB) indicating that it would hold the Selic target rate steady despite high inflation, we adjusted our end-2014 interest rate forecast to 11.00%, anticipating that the bank will hold rates steady for the duration of the year. In addition, we forecast 100 basis points of rate cuts to 10.00% in 2015, as we expect the bank to shift its focus to stimulating growth in the coming quarters.
Table Of Contents
Brazil Business Forecast Report Q4 2014 Executive Summary.... 5 Core Views..5 Major Forecast Changes5 Key Risks To Outlook....5 Chapter 1: Political Outlook.. 7 SWOT Analysis.... 7 BMI Political Risk Ratings. 7 Domestic Politics .... 8 Presidential Election Is Rousseff's To Lose...8 We expect President Dilma Rousseff to win Brazil's 2014 presidential race, implying little scope for significant economic reform through 2018. We highlight, though, that the large core of undecided voters presents a risk to Rousseff's hopes for a second term, especially given our view that there will be little improvement in Brazil's macroeconomic position in the run-up to the October election. Table: Political Overview....8 Long-Term Political Outlook 10 Economy To Dominate Policymaking.10 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.. 13 SWOT Analysis.. 13 BMI Economic Risk Ratings. 13 Economic Activity.. 14 Investment Slowdown To Impede Growth....14 Brazil's weak Q114 GDP print helps confirm our view that the economy will continue to see tepid growth in the coming years as the consumption story dims and investment has yet to pick up meaningfully. Table: GDP By Expenditure 14 Northern Regions To Become A Growing Focus For Investors16 Brazil's northern regions will become an area of increasing investor interest in the coming years. Investment into heavy industry and infrastructure will bolster economic activity, while poverty reduction efforts by the government and an increase in formal employment will drive demand for financial services and bolster private consumption, attracting foreign investment into the se regions. Table: Key Infrastructure Projects16 Fiscal Policy.. 19 Debt Overhang To Tarnish Fiscal Consolidation...19 Decelerating revenue growth and rising spending will see Brazil's budget deficit peak at 3.4% of GDP in 2014, with a gradual reversal of these dynamics set to drive modest fiscal consolidation in subsequent years. Table: Fiscal Policy ...19 Monetary Policy. 21 Rate-Hiking Cycle Over, Cuts To Come In 2015 21 The Banco Central do Brasil will hold the benchmark Selic target rate steady at the current 11.00% level through end-2014 following 375 basis points of rate hikes since April 2013. Tab le: Monetar y Polic y.21 Balance Of Payments.. 23 External Account Set For Further Deterioration23 Brazil's balance of payments position will look increasingly vulnerable in the coming years on the back of rising current account shortfalls and shrinking financial account surpluses. Table: Current Account ....23 Exchange Rate Forecast.. 25 BRL: Depreciatory Trend To Persist...25 The Brazilian real will remain relatively well supported in the coming weeks, in part due to continued currency intervention by the central bank in light of high inflation. Tab le: BMI Curr ency For ecast ...25 Chapter 3: 10-Year Forecast 29 The Brazilian Economy To 2023.... 29 Days Of Easy Growth Are Gone.29 Although substantial mineral wealth and one of Latin America's largest consumer bases will help keep investor interest rooted in Brazil over the long term, the next 10 years will not be easy for the economy. Tab le: Lo ng-Term Macro eco nomic For ecasts ..29 Chapter 4: Business Environment 33 SWOT Analysis.. 33 BMI Business Environment Risk Ratings 33 Business Environment Outlook 34 Institutions.... 34 Tab le: BMI Busi ness And Operatio n Ris k Rati ngs ...34 Infrastructure 35 Tab le: BMI Lega l Fram ewor k Rati ng...35 TABLE : LABOUR FORCE QUALITY.36 Market Orientation.. 37 Table: TOP EXPORT DESTINATIONS37 Operational Risk .... 38 TABLE : TRADE AND INVESTMEN T RATINGS....38 Chapter 5: Key Sectors.. 41 Pharmaceuticals and Healthcare.. 41 Tab le: Pharmac eutica l Sales42 Table: Healthcare Expenditure Trends....43 Tab le: Gov ernment Healthcar e Expenditur e Trends ....43 Table: Private Healthcare Expenditure Trends...43 Telecommunications... 44 Tab le: Telecoms Sector - Mobi le...45 Tab le: Telecoms Sector - Wir eline....46 Other Key Sectors.. 49 table: Oil and Gas Sector Key Indicators.49 table: Food and Drink Sector Key Indicators...49 table: Infrastructure Sector Key Indicators.49 table: Autos Sector Key Indicators.50 table: Defence and Security Sector Key Indicators....50 table: Freight Key Indicators....50 Chapter 6: BMI Global Assumptions. 51 Global Outlook... 51 Global Recovery Still On Track..51 Tab le: Globa l Assumptio ns....51 Table: Developed States, Real GDP GrowtH, %.52 Tab le: BMI VERSUS BLOOMBERG CONSEN SUS REAL GDP GROWTH FORECASTS, %.. 52 Tab le: Em ergi ng Mar kets , Real GDP Growt h, %53