Country Report Brazil February 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. Mr Lula da Silva will remain popular, but is constitutionally ineligible to stand for another term.
• We anticipate a close contest between Dilma Rousseff, Mr Lula da Silva's preferred candidate, and Jose Serra, the likely candidate of the opposition Partido da Social Democracia Brasileira (PSDB) in 2010.
• Increased lending by state banks, Central Bank support for corporate foreign debt rollovers and monetary easing will help mitigate, but not offset, the impact on Brazil of the sharp deterioration in external conditions.
• A downgrade in our projections for global growth, coupled with a worse than expected downturn in recent domestic economic indicators have prompted us to downgrade our forecast to a 0.4% contraction in real GDP in 2009.
• We expect inflation to fall to 3.5% by year-end, picking up in 2010 to 3.6%. The exchange rate is forecast to average around R2.50:US$1 in the outlook period, assuming a sharp contraction in foreign exchange inflows in 2009.
• With Brazil's terms of trade continuing to deteriorate in 2010, we envisage a widening of the current-account deficit from 1.8% of GDP in 2008 to 2.2% this year and 2.3% next, despite a sharp compression of import spending this year.

Monthly review

• The centrist Partido do Movimento Democratico Brasileiro (PMDB) has strengthened its bargaining position ahead of next year’s presidential election after winning the presidency of both houses of Congress.
• Both the ruling PT and the opposition Partido da Social Democracia Brasileira (PSDB) are seeking the PMDB's support ahead of the 2010 elections.
• Brazil's controversial decision to grant political asylum to Cesare Battisti, an Italian ex-guerrilla, has sparked a diplomatic row with Italy.
• Consumer price inflation recorded 0.48% month-on-month inflation in January after a more benign reading of 0.28% in December.
• December's industrial production contracted by 12.4% on a seasonally adjusted basis, a record fall in the series initiated in 1991. Inventories adjustment was magnified by credit constraints to corporates.
• Consumer credit data for December has confirmed some recent worrying trends of growth in expensive short-term lines, but a mild recovery in loans for vehicle acquisition has started to take place.
• The trade balance registered its first monthly deficit since 2001 in January 2009, but was back in the black in the first two weeks of December.

Source: Country Report

This report covers the following industry codes:
SIC Code: 1;10
NAICS Code: 11;212