Brazil:So far,so good
Brazil: So far, so good
The latest indicators suggest that economic activity expanded in 1Q17 in Brazilafter contracting in previous eight quarters. We estimate that GDP grew 1.2%QoQ in Q1 and we revised our 2017 GDP growth forecast to 0.7% from 0.3%,while aggressive monetary easing should pave the way for much stronger growthin 2018 (2.8%). Inflation continues to surprise on the downside. We cut our IPCAforecasts to 3.8% from 4.0% for 2017 and to 4.4% from 4.6% for 2018, and cutour year-end SELIC rate forecast further to 8.0%. We now expect the BCB to cutinterest rates by 125bps at the next COPOM meeting. The balance of paymentsremains in a very comfortable situation, a small current account deficit of only1% of GDP this year, which will be easily financed by resilient FDI flows. We cutour year-end FX forecast to BRL3.10/USD from BRL3.15/USD, assuming that thegovernment will pass its social security reform in Congress.
Political conditions seem to have improved somewhat, increasing thegovernment’s chances of passing the social security reform in Congress. TheTemer administration scored an important victory by passing the labor reform inthe Lower House in April. The social security reform cleared the Lower HouseSpecial Committee in early May and we expect it to clear the Lower House in June.
However, as the controversial reform continues to face strong resistance fromseveral sectors, we expect Congress to pass a watered-down version that willgenerate savings equivalent to approximately 60% of the government’s originalproposal. In our view, the ceiling on public spending and the social security reform alone will not be enough to restore fiscal sustainability - government will mostlikely have to implement additional measures, especially on the revenue side.
After the government passes the reform in Congress, we believe that marketparticipants will gradually turn their attention to the next presidential elections.
At this juncture, however, it is impossible to know whether the next president willmaintain the current government’s market-friendly economic orientation or shiftback to the populist policies that prevailed until former president Dilma Rousseff’simpeachment. For details, see Special Report.