Country Report Brazil March 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.
• Although it is still early in the unofficial campaign, we believe that economic difficulties will favour the likely candidacy of Jose Serra, governor of SaoPaulo state for the Partido da Social Democracia Brasileira (PSDB).
• Growing fiscal constraints will limit the government's ability to increase public investment in infrastructure, although we still expect countercyclical measures to mitigate the impact of the global recession.
• We now expect the government to miss its 3.8% of GDP primary surplus in 2009 and 2010 as a result of the negative impact of the crisis on tax collection.
• Further downgrades to our projections for domestic activity and external demand in the forecast period, will result in a sharper economic contraction in 2009 (real GDP is set to fall by 1.5%) and weaker growth (of 2.7%) in 2010.
• We expect inflation to fall to 3.5% by year-end, and remain unchanged at end-2006. The exchange rate is forecast to average R2.50:US$1 in the outlook period, assuming a sharp contraction in foreign exchange inflows in 2009.
• With Brazil's terms of trade deteriorating and dollar GDP falling this year, and despite a sharp import decline, we envisage a widening of the current-account deficit from 1.8% of GDP in 2008 to 2% this year and 2.1% next.

Monthly review

• The ruling Partido dos Trabalhadores (PT) has stepped up its efforts to raise the profile of Dilma Rousseff, the presidential civil chief of staff, as Mr Lula da Silva's successor in the 2010 presidential election.
• The Ministry of Justice presented a political reform project to the Chamber of Deputies. However, chances of approval are slim, not least because congressional priority will be given to issues related to the economic crisis.
• The monetary authority reduced the benchmark Selic by 150 basis points to 11.25% amid a sharp deterioration of domestic economic conditions. Real GDP contracted by 3.6% quarter on quarter in the fourth quarter of 2008.
• The economic slowdown led to a contraction in federal government revenue in January, resulting in a marked narrowing of the primary surplus.
• Industrial production data for February showed continuing signs of sharp weakness, although retail sales continued to book a strong performance.
• Commodity exports staged a recovery in February, while the pace of import contraction increased.