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Brazil Country Risk Report Q1 2017

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

Core Views

Over the long term, Brazil will only experience modest levels of growth as structural headwinds limit any quick economic solutions to the challenges faced from falling global commodity prices. Growth will only return to the economy following two consecutive years in recession in 2015 and 2016. Widespread public unrest, sweeping corruption scandals and deepening polarisation will keep political risk elevated over the coming quarters, weighing on investor sentiment and contributing to extreme uncertainty 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 government transparency. Major Forecast Changes We expect Banco Central do Brasil will enact 100 basis points (bps) of rate cuts in 2017, as decelerating inflation and strengthening central bank credibility allow it to shift its focus to supporting economic activity. Nonetheless, our interest rate forecasts are above-consensus, as we believe the bank will pursue a more modest pace of rate cuts in order to ensure the stabilisation of inflation.

Table Of Contents

Brazil Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Economic Recovery Will Be Slow And Drawn Out.......................................................................................................................8
The Brazilian economy will begin to gradually recover over the coming quarters as sentiment improves and investment returns to
positive growth. However, the recovery will be weak and gradual given a large output gap and high levels of debt in the economy.
TABLE: MACROECONOMIC FORECASTS..............................................................................................................................................................8
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: 10-YEAR GDP FORECASTS.......................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................10
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: GROSS FIXED CAPITAL FORMATION FORECASTS..............................................................................................................................10
TABLE: NET EXPORT FORECASTS......................................................................................................................................................................10
Fiscal Policy And Public Debt Outlook.................................................................................................................. 11
Fiscal Reforms Will Support Debt Sustainability.......................................................................................................................11
Brazil's fiscal deficit will narrow modestly in 2017 as the economy emerges from recession. More substantial improvements in
the country's fiscal position will follow the passage of structural reforms that will reduce spending obligations and underpin debt
sustainability.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................13
External Trade And Investment Outlook................................................................................................................ 15
Narrower Current Account Shortfalls, But Little Room For Gains...........................................................................................15
Brazil's current account deficit will narrow further in 2017, driven by an improving goods trade balance as exports benefit from higher
average commodity prices. Nonetheless, weak investment into productive capacity will limit additional upside in the years ahead.
Outlook On External Position.................................................................................................................................. 16
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................16
TABLE: TOP FIVE GOODS IMPORTS IN 2015...................................................................................................................................................... 17
TABLE: TOP FIVE GOODS EXPORTS IN 2015..................................................................................................................................................... 17
TABLE: FINANCIAL ACCOUNT INDICATORS....................................................................................................................................................... 17
Monetary Policy........................................................................................................................................................ 18
Cautious Easing Cycle As Inflation Outlook Improves..............................................................................................................18
Brazil will enter a rate-cutting cycle in Q416 as inflation decelerates in light of currency gains and subsiding food price pressure.
Additional cuts will follow in 2017, as progress on fiscal reforms alleviates central bank concerns over structural drivers of price growth.
TABLE: MONETARY POLICY.................................................................................................................................................................................19
Monetary Policy Framework.................................................................................................................................... 20
TABLE: MONETARY POLICY FORECASTS.......................................................................................................................................................... 20
Currency Forecast.................................................................................................................................................... 21
BRL: High Real Rates Will Support Modest Appreciation.........................................................................................................21
The Brazilian real will strengthen modestly in 2017. Amid rising commodity prices and improving investor sentiment, decelerating
inflation and progress on fiscal reforms will drive capital inflows and support the unit over the coming year.
TABLE: BMI CURRENCY FORECAST.................................................................................................................................................................... 21
Chapter 2: 10-Year Forecast................................................................................................................... 23
The Brazilian Economy To 2025............................................................................................................................. 23
Days Of Easy Growth Are Gone...................................................................................................................................................23
Substantial mineral wealth and one of Latin America's largest consumer bases will help keep investor interest rooted in Brazil in 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
Cunha Investigation Risks Undermining Political Stability.......................................................................................................26
A criminal investigation into former Speaker of the House Eduardo Cunha presents a significant risk to the reform efforts of new
Brazilian President Michel Temer. A Cunha plea deal implicating Temer or ministers of his cabinet in the 'Lava Jato' corruption scandal
will further undermine the administration's weak mandate, curtailing its ability to pass legislation.
TABLE: POLITICAL OVERVIEW............................................................................................................................................................................. 26
Long-Term Political Outlook................................................................................................................................... 27
Economy To Dominate Policymaking.........................................................................................................................................27
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 RISK................................................................................................................................................................................. 32
Business Crime........................................................................................................................................................ 33
TABLE: MAIN ACTIVE CRIMINAL GROUPS..........................................................................................................................................................33
TABLE: BUSINESS RESPONSE TO RISK IN BRAZIL........................................................................................................................................... 35
Government Intervention......................................................................................................................................... 37
TABLE: BUSINESS TAXES..................................................................................................................................................................................... 37
TABLE: PERSONAL INCOME TAX.........................................................................................................................................................................38
Chapter 5: BMI Global Macro Outlook................................................................................................... 41
Global Macro Outlook.............................................................................................................................................. 41
Broad Recovery But Three Notes Of Caution.............................................................................................................................41
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................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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