Country Report Brazil July 2009

Summary

The economic downturn will make it more challenging for the ruling party to secure another term in October 2010. The health of Dilma Rousseff (PT), president Lula's chosen successor, is causing uncertainty about her candidacy.
Although it is still early, 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, the economy will still undergo a recession (with real GDP declining by 1.2% in 2009, slightly better than last month's projection of a 1.5% fall). A feeble global recovery in 2010 will constrain growth next year to 2.7%.
A decline in fiscal revenue will erode the primary surplus to 2.4% of GDP, in 2009 before a cyclical pick-up in revenue allows it to rise to 3.2% of GDP in 2010. Lower interest payments will restrain the widening of the overall deficit.
We expect inflation to fall to 4.2% by year-end, and to remain largely stable in 2010, assuming bottlenecks are tackled and the Real's volatility is contained.
We expect the current-account deficit to narrow to 1.3% of GDP in 2009, before increasing to 1.5% of GDP in 2010.

A political dispute that has been simmering in the Senate in recent months over administration of its huge budget escalated in June, putting pressure on Jose Sarney, its president or step aside while investigations are made.
The affair causes problems for Lula as it threatens to weaken his fragile coalition majority in Congress, impairing governability in his final year in office, as well as his efforts to rally support for Ms Rousseff's candidacy.
On June 10th the Selic rate was cut by 100 basis points to 9.25%, accumulating 450 bp of easing since January, taking real rates to a historical low of 4%.
Despite the deterioration in its finances, the government extended tax breaks on certain goods, and announced measures to help Brazil's beleaguered capital goods industry, including tax breaks on 70 items and subsidised loans.
GDP fell by 0.8% quarter on quarter in the first quarter, confirming that Brazil entered a technical recession after a 3.6% drop in the previous quarter.
Investment and exports fell at double-digit rates, but private consumption grew, showing unexpected resilience in the face of higher unemployment.
Leading indicators point to continued weakness in the second quarter as the inventory adjustment in manufacturing continues.

Source: Country Report

This report covers the following industry codes:
SIC Code: 49
NAICS Code: 22