Brazil Business Forecast Report Q1 2009

Brazils Fundamentals Tested By Global Crisis

Brazil is among the best positioned economies in Latin America to weather the current financial storm and a rapidly deteriorating global macroeconomic outlook. In the Q109 Brazil Business Forecast Report we look at how the economy will be impacted by tighter liquidity conditions, and how the countrys economic policymakers and central bankers are acting to pre-empt a credit crisis on the ground. We have lowered our economic growth outlook for Brazil in 2009 on the back of fast slowing consumer credit growth, and expect the Banco Central do Brasil to abandon its monetary tightening cycle for the remainder of the year. Key to watch will be how volatile financial markets will affect investor risk sentiment and investment flows into Brazil.

The ruling Partido dos Trabalhadores (PT), while gaining firm ground in Brazils local elections on October 5, failed to deliver a decisive victory that would have boosted prospects for a PT presidency beyond 2010. With re-runs approaching on October 26 (second-round voting in state capitals where candidates did not secure 50% of the vote in the first round), we see little room for a dramatic change in the partys fortunes. We believe that President Luiz Incio Lula da Silva will need to cough up more political capital to ensure that vital coalition allies agree to run with his with his seemingly preferred presidential candidate for the 2010 election, Dilma Rouseff (Lula has yet to publicly back Rouseff as his preferred choice).

As the global growth outlook continues to deteriorate and heightened financial market volatility saw a decline in the value of the real, Brazils balance of payments dynamics are likely to undergo a considerable shake-up in 2009. Brazils current account made a decisive move into negative territory at the start of 2008 as strong domestic demand and the robust performance of the real have given way to a shrinking merchandise trade surplus. Moreover, rising foreign investment levels into Brazil over the years have led to larger investment income outflows on the back of reinvested earnings and dividend payments. Combined, this further pushed the countrys current account into deficit, widening to as much as US$20.6bn by August, the widest year-to-date current account shortfall since December 2001. Our forecast for a US$30.7bn (2.0% of GDP) current account deficit in 2008, therefore, remains firmly in place.

According to BNamericas, the Brazilian telecoms regulator, Anatel, intends to carry out a public consultation in Braslia on October 16, to discuss proposed changes to the telecoms law. The reforms to the telecoms law would allow for greater mergers and acquisitions, including operators acquiring competitors holding licences in different parts of the country. Brazils mobile market continues to report strong net additions, with strong competition present across the country. Each area has at least three operators, with up to six in some regions. This competitive market regularly sees 3mn new subscribers each month. With the passing of the amendment in the telecoms law, competition is expected to be stronger as operators will try to hold on to their positions.