Brazil Business Forecast Q1 2007

Content

• Chapter 1: Political Outlook
  • BMI Core Scenario
  • SWOT Analysis
  • BMI Political Risk Ratings
  • Domestic Political Outlook
  • Lula Thwarted: Implications For The Next Term
  • President Luiz Inacio Lula da Silva fell short of an outright first-round victory in October's presidential election,
  • attracting 4861% of eligible votes Lula will face off on October 29 against the PSDB's Geraldo Alckmin,
  • who received a surprisingly high 4164% of the vote and is still the favourite to capture the presidency, in our
  • view But the tighter-than-expected first-round result in some ways represents a negative outcome from a
  • reform perspective We have revised down our short-term political risk rating from 710 to 690 as a result
  • Legislative Outlook
  • Deadlock Ahead In The Legislature?
  • The results of October's legislative elections mean that Brazil's Senate and National Congress will be splintered
  • along multiple party lines for another term No matter who wins the second-round presidential vote on October 29,
  • it is clear that the next president will encounter difficulty attracting sufficient support in the legislature
  • Table: Cabinet of Brazil - October, 2006
• Chapter 2: Economic Outlook
  • BMI Core Scenario
  • SWOT Analysis
  • BMI Economic Risk Ratings
  • Introduction
  • Caution Warranted, But The Future Is Bright
  • Despite disappointing growth figures released in Q206, we believe that the Brazilian economy has upside
  • potential While real GDP growth came in at a fairly robust 34% y-o-y in Q106, Q206 growth disappointed with
  • a dismal performance of 11% y-o-y That said, we are still expecting real GDP growth to come in at 35% in
  • 2006 and 2007 Indeed, the benign inflationary scenario, which has led the Banco Central do Brazil to
  • aggressively cut interest rates, coupled with the strong export sector and potential for fiscal reforms, will
  • help drive the economy
  • Economic Activity
  • Waiting For Growth
  • Real GDP growth in Brazil came in well below consensus estimates in Q206, reaching just 115% y-o-y
  • Nonetheless, we still think that expansion is on track to meet our 35% forecast for 2006, although this will
  • be partly contingent upon how quickly interest rate cuts feed their way through the broader economy Furthermore,
  • we anticipate that the economy will pick up steam in the longer term, with real GDP growth averaging 38%
  • over the forecast period
  • Table: Economic Activity - Historical Data And Forecasts
  • Balance of Payments
  • Current Account Looks Healthy
  • Brazil's current account surplus will not meet last year's record US$1428bn in either 2006 or 2007 However,
  • the resilience demonstrated by the current account, despite the strong real, has led us to upwardly revise
  • our forecasts
  • Table: Balance of Payments - Historical Data And FAorecasts 15
  • Monetary Policy
  • Benign Inflation Scenario
  • Recent data have confirmed our view that the central bank has been successful in anchoring long-term inflation
  • expectations We believe that this will allow the central bank to lower the benchmark Selic interest rate into
  • to single-digits by the end of the forecast period, with downside risks
  • Table: Monetary And Exchange Rate Policy - Historical Data And Forecasts
• Chapter 3: Special Report
  • BMI Sovereign Risk Ratings
  • Table: BMI Sovereign RIsk Ratings
  • Latin America
  • Table: Latin america Sovereign Ratings - Evolution of Willingness to Pay
  • Table: Latin america Sovereign Ratings - Evolution of Ability to Pay
• Chapter 4: Business Environment
  • BMI Core Scenario
  • SWOT Analysis
  • BMI Business Environment Risk Ratings
  • Legal Framework
  • Labour Force
  • Table: Demographic Indicators (2005)
  • Foreign Investment Policy
  • Table: Latin America Annual FDI Inflows
  • Table: Brazil, Annual FDI Inflows
  • Foreign Trade Regime
  • Table: Top Export Destination
  • Tax Regime
• Chapter 5: Key Sectors
  • Infrastructure
  • Industry Trends and Development
  • The Brazilian construction sector has witnessed strong performance over the years The construction projects
  • were earlier funded mainly through private sector investments BMI estimates an average construction growth
  • rate of around 5% over the forecast period 2006-2010
  • Table: Infrastructure Data and Forecasts
  • Pharmaceuticals & Healthcare
  • Overview
  • The Brazilian pharmaceuticals market is the largest in South America, and was valued at US$92bn in 2005
  • In recent months, growth in US dollar terms has been strong, largely due to favourable currency effects and rising
  • consumer demand IMS Health retail market data places year-on-year growth rates in May 2006 at around 42%,
  • although in local currency terms, local industry sources estimate the current rate of expansion at only 108%
  • Table: Drug Market and Health Expenditure Trends, 2004-2010