Country Report Brazil May 2009

Outlook for 2009-10

• The harsh economic climate will make it more challenging for the ruling party to secure another term 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 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 in 2010 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 3.3% of GDP in 2010.
• We expect inflation to fall to 3.5% 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 1.2% of GDP in 2009, before increasing to 1.4% of GDP in 2010.

Monthly review

• Recent news that Dilma Rousseff, the ruling party's likely presidential candidate, is fighting lymphatic cancer have raised uncertainty about her candidacy, although doctors say her chances of a cure are high.
• In the meantime, it has become increasingly likely that Ciro Gomes, a deputy and experienced politician from a small left-wing party, will also stand as a presidential candidate for the third time.
• Revelations of financial malpractices by lawmakers from many political parties further undermined the image of Congress and reduced prospects of advances in approving important reforms before end-2010.
• Weaker economic activity has continued to weigh on the government's fiscal performance and led the Central Bank to reduce the benchmark Selic interest rates by 100 basis points to 10.25% (which was the third consecutive cut).
• Economic indicators have continued to reveal a mixed picture. Industrial production remains weak, while confidence and credit data showed improvements and retail sales growth continued to recover.
• Strong Chinese demand for Brazil's commodities helped to underpin a strong trade surplus in April.

Source: Country Report

This report covers the following industry codes:
SIC Code: 47;65;60;37;10
NAICS Code: 48;53;52;336;212