Country Report Brazil July 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 is also becoming 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 also attempt to formulate its approach to new oil reserves. It seems likely to favour the adoption of a production-sharing framework instead of the current policy of concessions to the private sector.
• We now expect a further 250 (previously 200) basis points increase in the overnight Selic rate this year and a more prolonged tightening cycle, taking the Selic overnight rate to 15% in the first quarter of 2009.
• We maintain our forecast of GDP growth of 4.6% this year but we now expect growth of 3.4% in 2009 (previously 3.6%), reflecting upward revisions to our forecast for domestic interest rates and inflation this year.
• We now expect year-end inflation to reach 6.8% in 2008 (previously 6%), although we maintain our forecast of 4.6% in 2009.
• The current account will slip into deficit in 2008-09, which we expect to average 1.2% of GDP annually, on the back of a decline in the trade surplus.

Monthly review

• A survey carried out in June by Ibope, a leading local pollster, shows inflation is becoming a growing concern for the electorate.
• Strong performance by public companies has continued to support growth of fiscal revenue. With part of this likely to boost spending at the local level, the government will find it difficult to make fiscal policy less pro-cyclical.
• Continued food price inflation drove a 0.9% rise in the IPCA-15 inflation index in June, taking the annual rate to 5.9%, well above the 4.5% mid-point target.
• Concerns persist that strong domestic demand could become a factor in driving inflation in the future. Annual retail sales growth was 9.4% in April, only slightly slower than the 10% average growth for January-March.
• Reflecting rapidly rising import spending, the trade surplus for the first half as a whole contracted sharply, down to US$11.4bn, little more than half the size of the surplus recorded in the same periods of 2004-07.
• The currency has continued to appreciate despite a sell-off in the equity market. It may be partly supported by inflows of foreign exchange not being captured by official balance of payments data.

Source: Country Report