Country Report Brazil November 2008

Outlook for 2009-10

• Lula will face a much more challenging environment as a deterioration in the economy will expose more starkly weaknesses in his government, such as legislative inertia and corruption.
• It is early to make a firm prediction for the October 2010 presidential election, but more difficult economic times seem likely to favour the candidacy of JoseSerra, the opposition governor of Sao Paulo state.
• Policymakers will be focused in the short term on restoring stability in the domestic financial markets.
• Despite concerns over the pass-through effects on inflation of the sharp currency weakening, we expect Copom to keep rates on hold in the remainder of 2008 and an easing cycle to start before mid-2009.
• We have further revised down our forecast for real GDP growth in Brazil to 2.4% (previously 2.7%) in 2009 and 3.2% in 2010 (previously 3.9%) on the back of expectations for even weaker global economic conditions.
• We now expect the Real to end 2008 at R1.99:US$1 and 2009 at R2.15:US$1 (previously R2.33:US$1 and R1.30:US$1 respectively), before an improvement in economic conditions in 2010.
• The current-account deficit will now widen from 1.8% of GDP in 2008 to 2.2% in 2009, narrowing to 2% in 2010.

Monthly review

• Most Brazilian voters favoured continuity at recently held municipal elections (the first round took place on October 2nd 2008 and the second round on October 26th).
• The ruling Partido dos Trabalhadores (PT) overall gains were undermined by its failure to regain the Sao Paulo mayorship.
• The severe deterioration of the global financial crisis prompted local authorities to respond by adopting a series of measures aimed at cushioning the real economy from the financial fallout.
• The Federal Reserve will establish temporary reciprocal currency swap lines with the central banks of Brazil, Mexico, Singapore and South Korea.
• Although the latest available economic data still indicate a robust pace of economic expansion, recent announcements of postponed investment plans and production cuts do not bode well for future performance.

This report covers the following industry codes:
SIC Code: 60;13
NAICS Code: 52;211