Group Economics Emerging Market Research
Brazil Watch
Marijke Zewuster +31 20 3830518
From bad to worse
13 August 2015
Worsening fiscal and political woes, make it harder to break out of the vicious economic spiral Moody’s downgrade with one notch to lowest investment grade rating with a stable outlook, comes as a relief Still, also given negative outlook of S&P, risk of downgrade to speculative grade has not disappeared
Political woes worsen
Confederation of Industry (CNI), the July figure fell to 37.2 from
After less than a year in office, the approval rating of President
38.9 in June, while the Markit composite PMI fell to 40.8, from
Dilma Rousseff has fallen to unprecedented lows and support
41 in June. With unemployment continuing to rise and real
in Congress is also fading.
wages very rapidly eroding due to high inflation, the downward trend in consumer confidence has also continued.
The latest poll by Datafolha conducted in July shows that the percentage of respondents who believe the administration is
…while inflation is nearing 10%
“great” or “good” decreased to 8%, while the percentage who
Worries about fiscal consolidation on top of the existing
feel that the administration is “bad” or “very bad” rose to 71%.
economic and political problems resulted in a further fall of the
Furthermore, 66% of respondents said they want congress to
real. This, together with an increase in administered prices,
launch an impeachment process, up from 63% in April, and
feeds through to higher inflation. Therefore, the further 50 bp
38% now also believe that the president will be impeached,
increase in the Copom rate on 29 June to 14.25% came as no
against 29% in April.
surprise.
The call for impeachment will be one of the main themes of the
In July, inflation deteriorated even further, jumping to 9.6%
nationwide protests scheduled for Sunday 16 August. The
from 8.9% in June, while the real weakened to over BRL 3.50
turnout for these protests will probably be a key element for
against the USD. It is difficult to see how Brazil can emerge
the opposition in deciding whether to call for an impeachment.
from this vicious circle of a steepening recession, a worsening fiscal situation, a weaker real and higher inflation. Hence,
Business confidence
despite the fact that recent economic data point to a
index
deepening of the recession, one or two further rate hikes cannot be excluded.
70
Further tightening could still be necessary
60
%/ % yoy
50
20
40
15
30 10
11
12
13
14
15
10 5
Source: Bloomberg, CNI
0 04
05
06
The recession is deepening…
07
08
09
10
selic minus inflation
11
12
inflation
13
14
15
selic
In May, the economic activity index fell by -4.75% yoy after a 3.1% decline in April. The June figure, due to be published
Source: Bloomberg
today or tomorrow, could be slightly better due to a low comparison level, but the trend is expected to remain
Fiscal targets revised up
downwards.
In light of very disappointing fiscal results and taking into account a further deceleration of the economy and lack of
Industrial production continuous to shrink (Q2 2015, -6.7%
political support for key fiscal measures, the initial target for
yoy) and the same is true for retail sales. Meanwhile,
the primary surplus became totally unrealistic. It therefore
prospects remain grim. Business confidence has reached lows
seemed the government had no choice but to revise the
not seen in many years. According to figures from the National
primary surplus target.