Country Report Brazil April 2009

Outlook for 2009-10

• The harsh economic climate will make it more challenging for the ruling party to secure another mandate in October 2010.
• Although it is still early in the unofficial campaign, we believe that economic difficulties will favour the likely candidacy of Jose Serra, governor of Sao Paulo state for the PSDB.
• The solid financial position of the government and state banks will support countercyclical measures that will mitigate the impact of the global recession.
• However, this will not prevent the economy from slipping into recession (with real GDP declining by 1.5%) in 2009. A feeble global recovery in 2010 will constrain Brazil's growth in 2010 to a modest 2.7%.
• The combination of countercyclical fiscal measures and a sharp reduction in fiscal revenue growth will lead to a substantial decline in the primary surplus in 2009, to 2.5% of GDP. For 2010-12 the official target is now 3.3% of GDP.
• We expect inflation to fall to 3.5% by year-end, and remain stable in 2010, assuming some bottlenecks are tackled and the Real's volatility is contained.
• We now expect a narrower current-account deficit in 2009, mainly as a result of a projected sharp fall in profit remittances. This will contribute to a less marked currency depreciation.

Monthly review

• The popularity of the president, Luiz Inacio Lula da Silva, has declined for the first time in at least 18 months, although for now it still remains high.
• Brazil's emergence as an increasingly important player in the global stage was boosted by the G20 (group of the world's largest economies) meeting in April.
• New countercyclical measures announced by the government have included a new housing plan that envisages the construction of 1m homes.
• A tax break on auto production (which has a direct impact on final prices), which has helped to sustain sales, has been extended until end-June. New breaks were also conceded to other sectors.
• Demand and supply trends have continued to diverge. Industrial production was again weak, but there were indications of continued resilience in the retail market.
• Credit extended by private banks declined for a second consecutive month in February; state banks' have only a little ability to compensate.
• Chinese demand contributed to a slowing in the rate of export earnings' contraction in March.