Country Report Brazil June 2009

Outlook for 2009-10

• 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, this will not prevent the economy from slipping into recession (with real GDP declining by 1.5%) in 2009. A feeble global recovery in 2010 will constrain Brazil's growth for that year to a modest 2.7%.
• The combination of countercyclical fiscal measures and a sharp reduction in fiscal revenue growth will lead to a substantial decline in the primary surplus in 2009, to 2.5% of GDP, before an increase to 3.2% of GDP in 2010.
• We expect inflation to fall to 3.9% by year-end, and to remain stable in 2010, assuming some 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 1.6% of GDP in 2010.

Monthly review

• Ms Rousseff's popularity has risen, but renewed concerns about her health have led Lula's allies in Congress to try to change the constitution to allow him to run for a third term, something the president continues to rule out.
• Lula visited China, Saudi Arabia and Turkey in May as part of his efforts to promote "south-south" relations and increase Brazil's role on the global stage.
• A resurgence in capital inflows in May, which led to a rally in the stock market, has caused renewed concerns about the risk of currency appreciation.
• The finance ministry has considered re-introducing last year's tax on capital inflows to curb peso appreciation, but for the time being the main policy tools will be currency intervention and interest-rate policy.
• The impact of the downturn on revenue and a widening of the social security deficit contributed to a deterioration in the 12-month running nominal deficit for the public sector to 2.3% of GDP in April.
• Economic indicators are mixed. Industrial output picked up a little, by 1.1% in April month on month, but down 14.8% year on year. Unemployment was 8.9% in April, but the impact on services is not yet evident.

Source: Country Report