Brazil Business Forecast Report Q3 2009

Publication Date	May 2009
Publisher	Business Monitor
Product Type	Report
Pages	64
ISBN Number	1744-8875
Product Code	BMI03890

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Summary

2009 Recession: Testing Brazil's Fundamentals The Q309 Brazil Business Forecast Report examines how Brazil's fundamentals will be tested by the current economic downturn - specifically how global macroeconomic headwinds will affect existing structural imbalances which are likely to come to the fore. While the core scenario of a recession remains firmly in place, credible economic management and a business-friendly administration should avert a deeper and more prolonged downturn. That said, several imbalances are starting to surface as the country's boom years come to an end. Particular concerns surround the highly rigid labour market and growing uncertainty over the government's fiscal position. Indeed, BMI sees increasing scope for a federal government primary fiscal deficit over the next two years, as tax proceeds dry up, and the administration of President Luiz Incio Lula da Silva steps up its public spending programme ahead of a crucial election campaign in 2010.

While So Paulo governor and member of the opposition Partido da Social Democracia Brasileira (PSDB), Jos Serra, remains ahead in the opinion polls as the likely successor to President Lula, recent comments by coalition Partido Socialista Brasileiro (PSB) member, Ciro Gomes, imply that Gomes could become a contender for the presidential election in 2010. Gomes's comments in late March expressed criticism at the rivalry between the ruling Partido dos Trabalhadores (PT) and the PSDB, and condemned the largest coalition partner, Partido do Movimento Democrtico Brasileiro (PMDB) for using its huge support base to stay in government regardless of which party wins the election. We do not rule out the potential for Gomes to nominate himself as a presidential candidate for 2010, especially given his views that the acting coalition is unlikely to survive once campaigning for the election gets underway.

BMI's baseline outlook for the Brazilian economy has fundamentally shifted towards our most pessimistic scenario. Having assessed the fourth quarter GDP data published by Brazil's Geographic and Statistical Institute (IBGE), we now see a sharper decline in output levels in the economy during the upcoming quarters. With little for the economy to fall back on aside from public spending programmes, we now feel that a prospective recovery during the final quarter of 2009 will not be sufficient to keep the full-year real GDP growth rate positive. As such, we are revising our economic growth outlook for Brazil to -0.6% (from positive 0.8% previously).

Britain's BG Group has announced a third subsalt oil discovery at Block BM-S-9 in the Santos Basin offshore Brazil. Drilling at the Iguau well hit light oil, similar to the two previous discoveries on the block, Carioca and Guar. The subsalt layer has the potential to radically alter the reserves profile both of Brazil and of those companies with exposure to the subsalt play. Brazil had proven oil reserves of 12.6bn barrels (bbl) at end-2007, according to the BP Statistical Review of World Energy, June 2008, and BMI is forecasting that proven oil reserves will increase to 18bn bbl by 2013, with upside risks to this view coming from more potential discoveries in the Santos Basin.

Content

Executive Summary
- 2009 Recession: Testing Brazil's Fundamentals
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Politics Ahead Of 2010: A Shifting Balance
- President Luiz Incio Lula da Silva is increasingly losing political control to the coalition Partido Movimento
- Democrtico Brasileiro (PMDB), which now controls both houses of parliament.
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Recession Unavoidable
- The record quarter-on-quarter 3.5% contraction in real GDP during the last quarter of 2008 is indicative of the
- severity of the ongoing economic downturn and has prompted us to adopt our most pessimistic scenario for the economy.
- Fiscal Policy
- Primary Fiscal Surplus To Erode
- With Brazil entering a recession and the government stepping up its public spending programmes, we expect the central
- government primary fiscal surplus to slip into a 0.9% of GDP deficit this year.
- Balance Of Payments
- Long-Term Investors To Stay Put
- With further widening of Brazil's current account deficit on the cards, the rapid 'hot money' outflows in recent months are
- a concern.
- Exchange Rate Policy
- BRL: Significant Strengthening Against Yen Ahead
- The Brazilian real could be in for sustained appreciation against major currencies such as the US dollar and Japanese yen
- in the next several months, as there are growing signs of a return in investor risk appetite.
- Banking Sector Outlook
- State Meddling To Distort Banking Sector
- The Brazilian state has decisively intervened in the banking sector by appointing a new head for state-run Banco do Brasil
- who will be more likely to respond to the government's recent calls for lower lending rates.
Chapter 3: 10-Year Forecast
- The Brazilian Economy To 2018
- From BRIC To Economic Powerhouse By 2018
- Vast natural resources, the emergence of an enormous consumer segment, and a prudent policy mix will keep investor
- interest in Brazil elevated over the coming 10 years.
Chapter 4: Special Report
- The Outlook For Global Banking
- Introducing Expanded Banking Coverage
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- Infrastructure
- Pharmaceuticals
Chapter 7: BMI Global Assumptions
- Global Outlook
List of Tables
- Table: Political Overview
- Table: ECONOMIC ACTIVITY
- Table: FISCAL POLICY
- Table: BALANCE OF PAYMENTS
- Table: EXCHANGE RATE POLICY
- Table: BRAZIL Long -Term Macroeconomic Forecasts
- Table: LOAN-TO-DEPOSIT RATIOS, Selected States
- Table: LOAN GROWTH (% CHG Y-O-Y), Selected States
- Table: COMMERCIAL BANKING BUSINESS ENVIRONMENT RATINGS, SELECTED STATES
- Table: BMI Business And Operational Risk Ratings
- Table: BMI Legal Framework Ratings
- Table: Latin America Annual FDI Inflows
- Table: BMI Trade Ratings
- Table: TOP EXPORT DESTINATIONS
- Table: Economic and Construction Data
- Table: Brazilian Drug Market Trends
- Table: GLOBAL ASSUMPTIONS
- Table: GLOBAL ASSUMPTIONS - LONG-TERM FORECASTS
- Table: Developed States, Real GDP Growth Forecast
- Table: EMERGING MARKETS, REAL GDP GROWTH FORECAST
- Table: Commodities
- Table: GLOBAL & REGIONAL REAL GDP GROWTH