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
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.
2
Brazil Watch – From bad to o worse – 13 Au ugust 2015
Still, the strong re eduction (from 1.1% of GDP to 0.2% for 201 15
CDS C spreads reflect increaased risks
and d from 2% to 0.7% for 2016) came c as an un npleasant
bp
surrprise. Meanwh hile, given the rapid r deteriorattion in the eco onomic and political situation,, even these ne ew targets mig ht
320
pro ove overly optim mistic.
280 240
ck of political To make matters worse, there iss not only a lac prove cost-cutting measures in i Congress, b but willingness to app the e lower house in n fact recently passed a bill to o raise the
200 160 120
wag ges of certain p public employe ees.
80 10
Grross governm ment debt lev vels have worrsened
11
12
13
14 4
15
% GDP So ource: Bloomberg
80 0 75 5
Growth figures revised furtheer down
70 0
e expected groowth to pick up in 2016, backe ed Until recently, we
65 5
y improved macro-economic ffundamentals and a stronger by global growth.
60 0 55 5
espite the nega ative impact off the political turmoil and the De Pe etrobras corrup ption scandal, tthe year 2015 was w seen as
50 0 00
02
0 04
06
08
10
12
14
16
tra ansitional. Initia ally, the necesssary fiscal adju ustments would d re esult in a deepe ening of the reccession, a furth her weakening of
Sou urce: EIU, ABN AM MRO Group Econo omics
the currency and d higher inflatioon. But eventua ally, improved c fundamentalss, increased co ompetitiveness macro-economic
A lo ower primary ssurplus coupled d with higher in nterest rates wi ll
ue to the weake er currency andd an improvem ment in confiden nce du
also have a detrim mental effect on nominal fisca al deficit and on n
wo ould break the current viciouss circle, paving g the way for
e gross governm ment debt leve el, Gross government debt ha s the
stronger growth.
alre eady surpassed d 60% of GDP P and could eas sily reach close e to 70% 7 by the end d of 2016.
owever, given the ongoing poolitical and fiscal woes it now Ho ap ppears that the e economy is m more likely to be e heading for a
Fis scal adjustmen nt remains key y for credit rating outlook
longer period of inertia after ann outright reces ssion in 2015. We W
The e deterioration in the fiscal ou utlook was the main reason
ave therefore fu urther lowered our growth forrecast for this year y ha
beh hind S&P’s ann nouncement off a negative outlook for Brazil ’s
fro om -1% to -2% and for 2016 ffrom 2% to 0% %.
BBB- rating this m month and for Moody’s M to dow wngrade Brazil to a3, putting it on n equal footing g with S&P. Baa
Ke ey forecasts for the t economy of Brazil B 2 2012
2013
2 2014
2015e
20 016e
Still the Moody’s m move came ass a relief. Mood dy’s changed th he
GDP (% yoy)
1.8
2.7
0.1
-2.0
0.0
outtlook from nega ative to stable, while markets feared a two-
y) CPI inflation (% yoy
5.4
6.2
6.3
8.8
5.9
-1.8
-2.9
-6.5
-6.5
-4.5
nottch downgrade, or at least a negative n outloo ok. Fitch’s ratin ng is still s two notchess above junk status, though with w a negative e
udget balance (% GDP) Bu
outtlook.
Government debt (% % GDP)
55
53
59
65
68
% GDP) Current account (%
-2.7
-4.0
-4.5
-4.0
-3.5
e risk of further downgrades h has investment grade rating and the
ment (% GDP) Gross fixed investm
20.2
20.5
19.7
18.2
18.0
erefore not disa appeared. If thiss happens, extternal finance w will the
vings (% GDP) Gross national sav
18.1
17.3
15.6
14.3
14.3
Fiscal developme ents remain keyy if Brazil is to maintain its
bec come more exp pensive, and th his will amplify the already diffficult economicc situation. These factors will also a drive up
USD/BRL (eop)
2.0
2.3
2.7
3.6
3.5
CD DS spreads, wh hich are alreadyy high compare ed to other
UR/BRL (eop) EU
2.7
3.2
3.2
3.6
4.1
BBB/BBB- rated ccountries.
Bu udget b alance, cu urrent acc. for 201 5 and 2016 are ro ounded figures So ource: EIU, ABN AMRO A Group Econ nomics
3
Brazil Watch – From bad to o worse – 13 Au ugust 2015
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