Country Report Brazil August 2008

Outlook for 2008-09

• The political scene is increasingly dominated by early campaigning for the 2010 presidential election and October 2008 municipal elections, but rising inflation may become more of a political issue.
• Alleviating growing inflationary pressures will be the main economic policy priority in the remainder of the outlook period. This may mean slowed implementation of the flagship growth acceleration programme.
• The government will try to formulate its approach to new oil reserves. The adoption of a production-sharing framework with the private sector and the creation of a new state oil company are the main options under discussion.
• The Economist Intelligence Unit expects a further increase of 200 basis points in the overnight Selic rate before the end of this tightening cycle, taking it to 15% in the first quarter of 2009.
• We maintain our forecast of a relatively moderate slowdown of GDP growth to 4.6% this year, with a sharper deceleration next year, to 3.4%, and year-end inflation of 6.8% in 2008 and 4.6% in 2009.
• We have made upward revisions to our projection of the current-account deficit, to an average of 1.6% of GDP (previously 1.2%), chiefly on the back of signs of bigger outflows on the income account (mainly profit remittances).

Monthly review

• A police operation against Daniel Dantas, the owner of a prominent local investment bank, has highlighted serious dysfunctions in the relationship between the federal executive and the judiciary, and within the judiciary.
• The case has refocused attention on links between business and politicians, perceived judicial leniency towards the elite, and campaign financing.
• Following deterioration in inflation expectations, the monetary authority accelerated the pace of monetary tightening in July, raising the benchmark Selic overnight rate by 75 basis points, to 13%.
• Data for the first half of July indicate a slight easing of inflationary pressures, albeit only relative to a particularly poor performance in June; annual inflation was still running at 6.3%, well above the central target of 4.5%.
• Rising employment is helping sustain retail sales in the face of rising inflation and benign demographics are helping contain wage pressures.
• The Real has remained firm as capital-account inflows have held up, albeit markedly below 2007 levels. However, there are signs that short-term flows are playing a greater role, while trade finance is becoming more scarce.

Source: Country Report