Brazil Focus
Group Economics Emerging Markets
07 December 2015
Recession rages on Marijke Zewuster Head Emerging Markets Tel. +31 (+31) 20 383 0518 marijke.zewuster@nl.abnamro.com
Economic decline accelerated in Q3
Growth estimates for 2015/16 adjusted to -3.5% and -2%
Political uncertainty remains considerable
Recovery of confidence still far away
2015 was a dramatic year and no improvement is in sight The economic decline accelerated this year, as the real retreated sharply and the political unrest continued to fester. The corruption scandal around the state oil company Petrobras is spreading ever-wider. Adding to the pervading sense of crisis, the speaker of the lower house, Eduardo Cunha of the PMDB, has opened the way for impeachment proceedings against president Dilma Rousseff. All this is making it increasingly difficult to drag the country out of the downward spiral. Whether the impeachment proceedings will actually go ahead has yet to be decided. But this latest move will almost certainly fan further unrest in the coming period. The proceedings will take months to complete, and the outcome is by no means a foregone conclusion. Moreover, whether a government under vice-president Eduardo Temer of the PMDB could achieve the much-needed revival of confidence is very much open to question. Clearly, Brazil faces many problems and the risks remain considerable.
Consumer confidence remains low index
20 10 0 -10 -20 -30 07
08
09
10
11
12
13
14
15
Source: Bloomberg
Growth estimates reduced again Based on the recent economic developments, we have adjusted the growth estimates from -3% to -3.5% for 2015 and from -1% to -2% for 2016. Growth is only expected to return to positive territory in 2017, but even then structural problems and the impact of
Insights.abnamro.nl/en
2
Brazil Focu us – Recess sion rages on o - 07 Dece ember 2015
restricttive economic policies will co ontinue to impede an exuberaant recovery. We W therefore mainta ain our growth projection of 1.5% for 2017.
Strong contraction n in third qua arter… The re ecently publishe ed growth figurres for the third d quarter were worse than expected, while contraction c in tthe first half of the t year was also a revised up . Compared to one quarter earlierr, the economyy shrank by 1.7%, after slowin ng by 2.1% in thhe second qua arter. Compa ared to a year ago, the declin ne was 4.5%, after a -3% in thee second quarte er. Domestic deman nd shrivelled evven further. Inv vestments plun nged almost 155% compared to o a year earlierr and private co onsumption fad ded by 4.5%. The strong decl ine in domestic c spending and the weak curren cy dampened imports by no less l than 20% y-o-y, but the export e ntain momentum m. Compared to t last quarter, exports fell 1.8 8%, though revivall failed to main still showing a modesst increase of 1.1% 1 compared d to a year earrlier. Evidently, the advantages of the we eak currency and a gradually fa alling wage cossts are still insu ufficient to t rising costss due to e.g. ta ax measures an nd more expennsive credit. Looking at the offset the supply y side, mining iss the only secttor that is still growing (+4.2% % yoy), while the stagnation in the processing ind dustry is worsen ning (-11.3% yoy).
Privatte consumptiion collapses s % yoy
10 8 6 4 2 0 -2 -4 -6 99
01
03 3
05 GDP
07
09
11
13
15
Private consumption
Source: Bloomberg
…and d the bottom iis not yet in sight… s Both th he latest industtrial output data and the purchasing manageers index (PMII) for the proces ssing industry p point to further contraction in the fourth quarrter. Industrial production shrank k in October byy 11.2% yoy an nd the November PMI of the pprocessing indu ustry slid to 43.8. New N orders decclined further, as a did the num mber of employeed. Export orde ers also decrea ased. At the sa ame time, there e was a strong increase in prooducer prices due d to the weak currency c and h higher taxes. One bright spot was the PMI foor services, wh hich advanc ced from 43.5 to 45.5. The ra ate of lending confirms c the piccture of accelerating decline e. Bank credit g grew by 8.1% in October, ma aking this the seecond consecu utive month of real-term contractiion. Consumerr credit has bee en falling in reaal terms since as a early as mid-20 014, and the do ownward path continued in October O with no minal growth a mere 3.3% versus s inflation of alm most 10%. All of o which points s to a further shharp decline in the fourth quarter.
…while inflation is s rising furthe er, as is the risk of an inteerest rate incrrease Despitte the economi c shrinkage, in nflation surged on the back off the weak currrency and higherr utility prices frrom 6.4% yoy at a end-of 2014 to almost 10% % now. In that same s period the central bank raise ed interest rate es from 11.75% % to 14.25%. T The latest intere est step in ppeared to ma rk the end of th he monetary tig ghtening cycle.. However, in view v of the July ap
3
Brazil Focu us – Recess sion rages on o - 07 Dece ember 2015
relentless inflationaryy pressure, furtther interest rate hikes are beecoming increa asingly probab ble, particularlyy if inflation rise es above 10%. Part of the infllationary press sure caused by the weak currencyy will disappea ar in the course of 2016. And tthe expected slight s ciation of the re eal during 2016 6 will probably reinforce this eeffect. Only the en can the apprec central bank start to ccautiously lowe er interest rates. But there wi ll be no questio on of an t being. expansive monetary policy for the time
Public c finances fu rther out of balance b Due to o the sharper co ontraction and the lack of political support fo for vital measurres, it soon becam me clear that the a the start of thhe year was un nrealistic. A e primary surplus target set at primarry deficit of 1% to 2% of GDP seems more likely. An addedd difficulty is th he higherthan-expected intere est expenditures due to the inc creased policyy rate. All this has led to a consid derable deteriorration of the no ominal public deficit and grosss public debt. The T nominal public deficit is expeccted to swell th his year to almo ost 10% of GDP P and the publlic debt to almostt 70%. Fortuna ately, the bulk of o the debt is de enominated in domestic curre ency, and is thus im mmune to the w weak real.
High CDS C spreads s index
600 500 400 300 200 100 0 1 10
11
12 Brazil
1 13
14 Mexico o
15
Source: Bloomberg
eterioration of tthe public finan nces and the lim mited prospectt of any improv vement were The de important reasons fo r S&P to down ngrade Brazil to o junk status (B BB+, with a neg gative outlook k) in Septembe er. The other credit rating age encies have maaintained their investment grade rating for the tiime being, but the recent esc calation of the ccorruption scan ndal and the politica al fall-out have increased the likelihood of fu urther downgraades. This is als so expres ssed in the CDS ore than 400, which w comparees very unfavou urably with S spread of mo countries with an inve vestment grade e rating.
No retturn to growtth until 2017 Whilst the next twist in the political narrative is diffficult to predictt, the current uncertainty looks likely to persistt and the impac ct of the corrup ption scandal w will also continu ue to be felt me time to com me. These facto ors are impedin ng the revival inn consumer an nd producer for som confide ence which is sso badly neede ed to put the co ountry back on track. Neverth heless, we do see e some bright sspots for 2016. The weak currency has madde the country more m compe etitive and this should help ex xports to recove er. Also positivve in this conne ection is the slight uplift u in commo odity prices tha at we expect in 2016 amid revviving global tra ade demand. Finally y, the weaker ccurrency will als so ultimately give a boost to inndustrial exporrts. Before the commodity boom m in 2004, indus strial products accounted for more than halff of exports e is still around d 35%. and the current share
4
Brazil Focu us – Recess sion rages on o - 07 Dece ember 2015
Presum mably, an uptu urn in industrial production will also contributte to a stronger recovery of the inv vestments. Thiss will ultimately y translate into an increase inn employment. First howev ver, unemploym ment will contin nue to rise sharrply, particularlyy in the first ha alf of 2016, and real wages will fa all further. So whilst w we are hopeful that thee negative grow wth spiral will be haltted in the cours rse of 2016, it will w not be until 2017 that acceelerating consu umer growth can liftt the economy out of the red figures. f And ev ven then, the reecovery will be e weak at best. In view of the w worsening public finances, spe ending cuts willl remain neces ssary and high in nterest rates wiill also continue e to take their toll t for a prolonnged period of time. t Not to mentio on the negative e impact of the structural prob blems that havee bedevilled Brrazil for so many years. y On bala ance, these pro ojections entail that the econoomy will have shown s no growth h between 2012 2, the year of the onset of falling commodityy prices, and th he end of 2017 - which makess a stark contra ast with the 200 04-2010 periodd when growth averaged more than t 4% per ye ear. All in all, th his is an economic downturn oof a magnitude e and duratio on unseen in re ecent history.
Down nward risks re emain consid derable The most important rrisks for the futture economic development liie in the countrry itself. But there are a also substa antial risks thatt are out of Brazil's control. Thhe dominant internal risk for the short term is tthe political situ uation. The pos ssible initiation of impeachme ent procee edings adds fre esh uncertainty y and may also spark social uunrest. And the everwidening involvemen nt of parliamenttary members in the Petrobraas corruption sc candal may e political decis sion-making prrocess. One im mportant external risk is that furtherr undermine the commo odity prices ma ay fail to achiev ve the expected recovery duee to e.g. a hard d landing in China.. The imminen nt interest rate hike in the US is another unw welcome factor. This will make investors less w willing to take risk, thus damp pening the flow w of capital tow ward emerging markets, in ncluding Brazil.. However, it sh hould be notedd that the intere est rate Brazil and the US is already so s wide that ann increase in US interest differential between B w probably ha ave less effect than in 2013 when w fears of a less accommo odative rates will policy in the US first came to the fore. An improve ed balance of ppayments, subs stantial nd a relatively low foreign deb bt also constituute a formidable e buffer. currency reserves an m unlikely, despite the econom mic malaise. Major payment probl ems thus seem
Key forecasts f for the economy y of Brazil 20 013
2014
2015e
2016e
20 017e
GDP (% % yoy)
2 2,7
0,2
-3,0
-2,0
1,5
CPI infla ation (% yoy)
6 6,2
6,3
8,8
6,6
5,2
-6,5
Budget balance (% GDP)
-2 2,9
-6,3
-9,0
-8,0
ment debt (% GDP P) Governm
53
59
67
72
74
Currentt account (% GDP))
-4 4,0
-4,4
-3,5
-3,0
-3,0
Gross fixed f investment (% % GDP)
20 0,5
19,8
17,6
17,2
1 17,2
Gross national n savings (% % GDP)
17 7,4
15,6
13,9
13,5
1 14,3
USD/BR RL (eop)
2 2,3
2,7
3,8
3,6
3,4
EUR/BR RL (eop)
3 3,2
3,2
4,0
3,4
3,7
Budget b alance, current acc. a for 2015, 2016 6 and 2017 are rou unded figures Source:: EIU, ABN AMRO Group Economicss
5
Brazil Focu us – Recess sion rages on o - 07 Dece ember 2015
All A publications of ABN AMRO O on macro-eco onomics, comm modities and se ector developm ments can be foound on: insigh hts.abnamro.n nl/en Follow F Group E Economics on Twitter: T https:///twitter.com/a abnamroecono omen O. It is solely intended to provide financial annd general information on economics. The infformation in this docum ment is strictly proprieta ary and is being supplie ed to This document has been prepared by ABN AMRO s for your informattion. It may not (in who ole or in part) be reprod duced, distributed or paassed to a third party or o used for any other purposes than stated abbove. This document is s informative in nature and you solely does s not constitute an offerr of securities to the pu ublic, nor a solicitation to make such an offer. r. eliance may be placed d for any purposes wha atsoever on the informa ation, opinions, forecassts and assumptions co ontained in the docume ent or on its completenness, accuracy or fairness. No representation n or No re warra anty, express or implie ed, is given by or on be ehalf of ABN AMRO, orr any of its directors, offficers, agents, affiliate es, group companies, or o employees as to the accuracy or completeness of the information n conta ained in this documentt and no liability is acce epted for any loss, aris sing, directly or indirecttly, from any use of suc ch information. The views and opinions expreessed herein may be subject s to change at an ny given n time and ABN AMRO O is under no obligation n to update the informa ation contained in this ddocument after the datte thereof. oduct of ABN AMRO Ba ank N.V., you should obtain o information on va various financial and oth her risks and any poss sible restrictions that yoou and your investmen nts activities may encou unter Before investing in any pro unde er applicable laws and regulations. If, after reading this document, you y consider investing in a product, you are advised a to discuss such an investment with yyour relationship manager or personal adviso or and chec ck whether the relevantt product –considering the risks involved- is appropriate a within yourr investment activities. The value of your inve estments may fluctuatee. Past performance is no guarantee for future e returrns. ABN AMRO reservves the right to make amendments a to this ma aterial. opyright 2015 ABN AM MRO Bank N.V. and affi filiated companies ("AB BN AMRO”). © Co