Country Report Brazil June 2008

Outlook for 2008-09

• Early campaigning for the 2010 presidential election and preparations for the October 2008 local elections, at which the ruling party stands to increase its share of mayorships, will continue to dominate the political scene.
• Revived efforts by the government to get a fiscal reform project approved by mid-2008 are likely to fail. We expect the project to be approved only in 2009.
• Stronger than expected revenue growth in recent months has prompted us to increase our forecast for the primary fiscal surplus to 4.1% of GDP in 2008 and 3.8% in 2009 (up from 3.8% and 3.4% of GDP previously).
• We now anticipate a further 200 basis points of tightening of the policy interest rate in 2008, to 14.25%, as the Central Bank adopts a determined stance to keep inflation on target in a context of strong demand growth.
• We believe that the impact of monetary tightening will be felt only from end-2008 onwards. Continuing strong pressures on food prices have prompted us to revise our inflation forecast for 2008 and 2009 up again.
• Stronger monetary tightening will weigh on domestic consumption growth, which, coupled with the effect of sluggish growth in the US, has prompted us to revise our growth projection for 2009 down again, to 3.6% from 3.8%.
• The current account will slip into deficit in 2008-09, which we expect to average 1.1% of GDP annually, on the back of a decline in the trade surplus.

Monthly review

• The government has revived efforts to get a fiscal reform project approved.
• A parliamentary inquiry on the use of corporate credit cards by government officials was concluded without pressing any charges.
• New accusations against Dilma Roussef, Lula's chief of staff and possible presidential candidate in 2010, have emerged. Ms Roussef is being accused of influence peddling in the sale of a Brazilian air company.
• The Partido do Movimento Democratico Brasileiro (PMDB), Brazil's largest party, has announced that it will not support the ruling Partido dos Trabalhadores (PT) in the municipal ballots of Sao Paulo and Rio de Janeiro.
• The government has announced an increase in its primary fiscal surplus target from 3.8% of GDP to 4.3% of GDP.
• Inflationary pressures have remained strong in May and early June.
• GDP data for the first quarter of 2008 revealed a deceleration in the pace of economic growth, which, nonetheless, has remained strong.