Country Report Brazil December 2008

Outlook for 2009-10

• Lula will face a much more challenging environment as a deterioration in the economy will expose more starkly weaknesses in his government, such as legislative inertia and corruption.
• It is early to make a firm prediction for the October 2010 presidential election, but more difficult economic times seem likely to favour the candidacy of JoseSerra, the opposition governor of Sao Paulo state.
• Policymakers will be focused in the short term on restoring stability in the domestic financial markets.
• Despite concerns over the pass-through effects on inflation of the sharp currency weakening, we expect Copom to start an easing cycle before mid-2009 as domestic demand slows sharply.
• We forecast a sharp economic deceleration with real GDP growth slowing from an estimated 5.3% in 2008 to 2.4% in 2009 on the back of weaker credit growth and external demand, before recovering modestly to 3.2% in 2010.
• We expect the Real to end 2008 at R2.06:US$1. Further current-account deterioration will keep the Real under downward pressure in 2009 when it is expected to average R2.30:US$1 before recovering to R2:19:US$1 in 2010.
• The current-account deficit will now widen from 1.8% of GDP in 2008 to 2.2% in 2009, narrowing to 2% in 2010.

Monthly review

• In the aftermath of the municipal elections in October, the political scene has been dominated by intense political manoeuvring in Congress amid early preparations for the 2010 presidential race.
• The Partido dos Trabalhadores (PT) is facing difficulties in keeping its alliance with the Partido do Movimento Democratico Brasileiro (PMDB).
• The fiscal accounts booked another strong result in October on the back of the seasonal payments of income corporate taxes. This led the government to reaffirm its plans for anti-cyclical spending in 2009.
• Credit data for October and early November came out better than expected, partly reflecting the government's prompt reaction to the crisis. The decline in new loans was relatively modest.
• Despite a narrowing of the current-account deficit in October, trends in the merchandise trade balance do not bode well for future performance of the external accounts.

Source: Country Report

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52