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Brazil Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views

Over the long-term, Brazil will only experience modest levels ofgrowth as structural headwinds limit any quick economic solutionsto the challenges faced from falling global commodity prices. Growthwill only return to the economy following two consecutive years inrecession in 2015 and 2016.Widespread public unrest, sweeping corruption scandals and deepeningpolarisation will keep political risk elevated over the comingquarters, weighing on investor sentiment and contributing to extremeuncertainty in terms of policy direction. Over a multiyear timeframe,the Brazilian electorate will demand progress on promised reforms,including higher quality public services and greater governmenttransparency.Major Forecast ChangesWe forecast the real will average BRL3.580/USD in 2016, ratherthan our previous forecast of BRL4.000/USD. This is due to a strongstart to the year for the currency, as well as a significant upgrade inour current account deficit forecast. We forecast the current accountshortfall will amount to 1.3% of GDP in 2016, the result of a sharpreduction in import demand and a rebound in exports.

Table Of Contents

Brazil Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Major Forecast Changes..5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
Economy Bottoming, But No Imminent Recovery..8
Brazilian economic activity is likely near a bottom,s with latest data showing that the pace of contraction is lessening. This is broadly
in line with our view that 2016 will mark the nadir for the economy, with real GDP contracting by 4.0%. We foresee a return to modest
growth of 1.0% in 2017 as improving sconfidence and minor business environment adjustments drive a recovery in fixed investment and
household consumption. However, a more robust expansion will remain out of reach as structural reforms to eliminate red tape, revise
the tax code and reduce labour market rigidity will be difficult to pass through the legislature.
GDP By Expenditure Outlook 9
TABLE: 10-YEAR GDP FORECASTS..9
TABLE: PRIVATE CONSUMPTION FORECASTS.9
TABLE: GOVERNMENT CONSUMPTION FORECASTS..9
Monetary Policy . 10
BCB Will Switch To Easing By End-201610
The Brazilian central bank will keep its benchmark interest rate elevated in the next few months in light of high inflation. With this
dynamic set to fade in late 2016, the bank will initiate an easing cycle, which will persist through 2017.
TABLE: GROSS FIXED CAPITAL FORMATION FORECASTS10
TABLE: NET EXPORT FORECASTS.10
Monetary Policy Framework 11
External Trade And Investment Outlook. 12
Improving Goods Trade Dynamics Will Cut Current Account Shortfalls12
Brazil's current account deficit will narrow over the coming two years, as imports contract while exports stage a modest rebound. That
said, weak investment in capacity will cap export growth, leading to sustained deficits in the years ahead.
TABLE: MONETARY POLICY FORECASTS.12
Outlook On External Position. 14
TABLE: CURRENT ACCOUNT BALANCE FORECASTS ..14
TABLE: TOP 5 GOODS IMPORTS..14
TABLE: TOP 5 GOODS EXPORTS.15
TABLE: FINANCIAL ACCOUNT INDICATORS.15
Fiscal Policy And Public Debt Outlook .. 16
Temer's Fiscal Reforms Will Make Modest Headway In 201716
The administration of interim Brazilian President Michel Temer will make some limited headway in stemming the rapid widening of
the fiscal deficit in the coming quarters, but amid a severe economic recession, the gap will remain wide by historical standards. Debt
sustainability will remain a top concern among investors, although a credit event is unlikely.
Structural Fiscal Position. 17
TABLE: FISCAL AND PUBLIC DEBT FORECASTS .18
Currency Forecast. 20
BRL: High Real Rates Underpin More Positive Outlook20
Following significant depreciation in recent years, the Brazilian real's rally in the last few months has brought the currency back to fair
value. We hold a neutral short-term view and expect gradual weakness over the longer term owing to our expectations of still-high
inflation.
TABLE: BMI CURRENCY FORECAST..20
Chapter 2: 10-Year Forecast. 23
The Brazilian Economy To 2025.. 23
Days Of Easy Growth Are Gone23
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.23
Chapter 3: Political Outlook. 25
SWOT Analysis 25
BMI Political Risk Index. 25
Domestic Politics.. 26
After Rousseff: A Long Road Towards Meaningful Reforms.26
Brazil's new President Michel Temer will shift economic policy towards the centre in the coming quarters, attempting to address many
longstanding concerns of investors. However, we remain sceptical regarding the breadth and depth of the reforms due to substantial
political tensions in the legislature and the country.
TABLE: POLITICAL OVERVIEW..26
Long-Term Political Outlook.. 28
Economy To Dominate Policymaking..28
Stimulating Brazil's stagnating economy will figure prominently on the policy agenda over the next several years. In addition, the
government will be challenged to continue improving Brazil's social development metrics in order to provide the foundations for robust
long-term growth.
Chapter 4: Operational Risk. 31
SWOT Analysis 31
Operational Risk Index.. 31
Operational Risk. 32
TABLE: OPERATIONAL RISK32
Market Size And Utilities .. 33
TABLE: LATIN AMERICA - MARKET SIZE AND UTILITIES RISK.34
Labour Costs .. 37
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE.. 38
Chapter 5:BMI Global Macro Outlook. 41
Global Macro Outlook. 41
Brexit Risk Casts A Long Shadow..41
TABLE: GLOBAL ASSUMPTIONS..41
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %42
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %..43
TABLE: MACROECONOMIC DATA and FORECASTS.45

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