Brazil Watch Vicious circle
Group Economics Emerging Market Research Marijke Zewuster +31 20 3830518
21 September 2015 • • •
We have revised our economic growth forecast for 2016 down from 0% to -1% The BRL/USD is expected to end 2015 at 4.00, causing inflation to remain elevated On a positive note, we expect the current account deficit to decline more rapidly
Economy officially back in recession
rapidly, while international reserves remain high and create a
Q2 GDP figures showed a strong decline in domestic demand.
cushion against external shocks.
Overall GDP fell 2.6% yoy in Q2, after declining 1.6% in Q1. It is also the second quarter of negative qoq growth, after two
No signs of improvement from the fiscal front
previous quarters of almost zero growth, meaning that the
In July, the primary deficit rose to -0.7% of GDP. Given the
economy is also officially back in recession. A slump in
bleaker economic outlook, both the primary and the nominal
domestic demand (investment -12.3% yoy, consumption -2.6%
deficit will most likely widen over the next few months, instead
yoy) and the weaker real translated into a sharp drop in
of improving, resulting in rising government debt levels as well.
imports (-11.7%). Meanwhile, thanks to the same currency
This, combined with the fact that the government appears to
weakness, exports showed a strong increase (+7.2%). Looking
have lost control over the fiscal adjustment agenda, also
at the supply side, agriculture continued to see positive growth
seems to be the most important reason behind the recent
figures (1.8% yoy), while industry (-5.2%) and services (-1.4%)
downgrade. Meanwhile, the 2016 budget proposal sent to
continued to contract. Within industry, mining stands out as
congress, with a primary deficit of 0.5% instead of the just
growth figures remain strong (+8.1%).
recently lowered target of 0.7%, came as another shock to markets. The call for impeachment has flared up as well, which
GDP: exports up, imports down
further adds to uncertainty.
% yoy
Uncertainty results in further weakening of the real
40
A fear of more downgrades, the general economic malaise and
30
ongoing political turmoil, continues to exert downward
20
pressure on the real, which is already close to our revised
10
year-end estimate of BRL 4.00 against the USD. While
0
inflation remained stable at 9.5% in August, upward risks have by no means disappeared. It therefore seems highly unlikely
-10
that the Copom will lower interest rates anytime soon. We
-20 06
07
08
09
10
GDP
11 Exp
12
13
14
15
Imp
hence stick to our view that it is most likely they will remain on hold for quite a while. Still, another rate hike cannot be ruled out.
Source: Bloomberg Key forecasts for the economy of Brazil
Economic forecast for 2016 lowered to -1%
2012
2013
2014
2015e
2016e
Realising our -2% growth forecast for this year will require
GDP (% yoy)
1.8
2.7
0.1
-2.0
-1.0
some stabilisation of the recession over the coming months.
CPI inflation (% yoy)
5.4
6.2
6.3
9.0
5.9
-1.8
-2.9
-6.5
-7.0
-5.5
Although the performance of the external sector is encouraging in this respect, July production and retail sales
Budget balance (% GDP)
figures remained extremely weak, while the manufacturing PMI
Government debt (% GDP)
55
53
59
67
67
published at the end of August fell back to 45.8. The S&P
Current account (% GDP)
-2.7
-4.0
-4.5
-3.5
-3.0
cause economic conditions and sentiment to further
Gross fixed investment (% GDP)
20.2
20.5
19.7
18.2
18.0
deteriorate, while any relief from the delay in the Fed rate hike
Gross national savings (% GDP)
18.1
17.3
15.6
14.7
14.6
downgrade to BB+, the highest sub-investment grade level, will
will probably be minimal. For the moment, we are sticking to our forecast of -2% growth for 2015, but we have lowered our
USD/BRL (eop)
2.0
2.3
2.7
4.0
3.8
forecast for 2016 from 0 to -1%. There is no doubt that risks
EUR/BRL (eop)
2.7
3.2
3.2
4.0
4.3
remain tilted to the downside for both years. On a positive
Budget b alance, current acc. for 2015 and 2016 are rounded figures Source: EIU, ABN AMRO Group Economics
note, we see that the current account deficit is adjusting more
2
Brazil Watch – Vicious circle – 13 August 2015
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