151022 brazil watch

Brazil Watch

Group Economics Emerging Markets Research

22 October 2015

Recession intensifies Marijke Zewuster Head of Emerging Markets Research Tel: +31 20 383 0518 marijke.zewuster@nl.abnamro.com

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The economy is heading for a stronger contraction

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Confidence levels are reaching new lows

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Improvement in current account balance stronger than expected

Political saga continues The political saga is by no means over. The chance of an impeachment process seems small, but the threat is still there. Approval levels of President Rousseff remain at a historic low of less than 10% and the recent rejection of the 2014 fiscal accounts by the audit court could provide legal grounds for impeachment. Last week markets were further alarmed by false rumours that Finance Minister Levy might resign.

The situation is further complicated by the downgrade by S&P to BB+, one level below investment grade, and the recent downgrade by Fitch to the lowest investment grade (BBB-), while maintaining a negative outlook. And this is without even mentioning the structural weaknesses and the ongoing impact of the lava jato corruption scandal..

Business confidence continuous to fall index

70 60 50 40 30 10

11

12

13

14

15

Source: Bloomberg, CNI

Stronger contraction in Q3 After a 2.7% yoy fall in GDP -in Q2, it looks as if the contraction intensified in Q3. The economic activity index, a monthly GDP estimate, fell by 4.5% yoy in August, while the 12month moving average, which is a benchmark for the annual growth rate, dropped from 0% by year-end 2014 to -2.1% in August.

Insights.abnamro.nl/en

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Brazil Watch – Recession intensifies - 22 October 2015

Consumption, once the driver of economic growth, has plummeted. Consumer confidence is reaching new lows every month and retail sales were down nearly 7% yoy in August, the strongest decline in more than a decade. At the same time, business confidence continues to fall to unprecedented lows as well. This probably also explains why the manufacturing sector is unable to benefit from the weak currency. Industrial production fell by around 9% yoy in both July and August. The latest PMI data also point to a further contraction. With no signs of a recovery the recession is likely to continue well into 2016.

The downward risks to our current growth outlook have therefore significantly increased.

Strong external position a big difference with former recessions The contraction is the most lengthy and intense since the introduction of the plano real in 1994 and is comparable with the recession in the early eighties (start of the debt crisis) and the early nineties (aftermath of the debt crisis).

The big difference still is that international reserves are far stronger and foreign debt ratios and inflation much lower. To compare: in the early nineties, international reserves barely covered two months of imports and only one-third of short-term foreign debt. Today, however, reserves cover over a year of imports and several times the short-term debt.

Inflation, although stubbornly high at close to 10%, is also far from the hyperinflation levels in the early nineties. Inflation reached nearly 3000% in 1990.

On another positive note, the trade balance is back in positive territory and the current account deficit is declining faster than expected. Although a strong external position does not protect Brazil against home-grown problems, it does provide a cushion against the negative impact of lower commodity prices, an eventually tightening of monetary conditions in the US and increased risk aversion in general.

Key forecasts for the economy of Brazil

2012

2013

2014

2015e

2016e

GDP (% yoy)

1.8

2.7

0.2

-2.0

-1.0

CPI inflation (% yoy)

5.4

6.2

6.3

9.0

6.1

-1.8

-2.9

-6.5

-7.5

-6.0

Government debt (% GDP)

55

53

59

66

70

Current account (% GDP)

-2.7

-4.0

-4.5

-3.5

-3.0

Gross fixed investment (% GDP)

20.2

20.5

19.8

17.5

17.2

Gross national savings (% GDP)

18.2

17.4

15.6

13.9

13.3

USD/BRL (eop)

2.0

2.3

2.7

4.0

3.8

EUR/BRL (eop)

2.7

3.2

3.2

4.0

4.1

Budget balance (% GDP)

Budget balance, current account for 2015 and 2016 are rounded figures Source: EIU, ABN AMRO Group Economics

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Brazil Watch – Recession intensifies - 22 October 2015

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Last editing of this publication on 22 October 2015.

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