Country Report Brazil November 2009

Outlook for 2010-11

• With the economic recovery gathering momentum in the run-up to the October 2010 election, the ruling PT will be better placed to gain a third term. The contest is too close to call but broad policy continuity will prevail.
• Dilma Rousseff (PT), Lula's preferred successor, will benefit from some transfer of his popularity, but Jose Serra, the likely PSDB candidate, currently leads her in the polls by 15-20%, owing to his higher public recognition.
• GDP will grow by 4.8% in 2010 (revised up from 3.8% last month), as we now envisage a firmer domestic-demand-led recovery, buoyed by public spending ahead of the elections and the lagged impact of monetary easing.
• Local policy tightening and a weaker performance in the US and OECD countries after the stimulus wanes will lead GDP to decelerate to 4.5% in 2011.
• A cyclical decline in fiscal revenue and tax breaks will erode the primary surplus to 1.2% of GDP in 2009, before a pick-up in revenue with the recovery lifts it to 2.7% by 2011.
• Assuming that the Real is relatively stable, we expect inflation to rise towards the 4.5% central target in 2010 as higher wage agreements contribute to keeping inflation from easing to OECD levels.
• After narrowing to 1% of GDP in 2009, the current-account deficit will widen to 3% of GDP in 2011, as the trade surplus goes into deficit.

Monthly review

• After a bout of party-switching season one year before the presidential election, small political parties allied to the government have grown at the expense of opposition parties, including the major traditional players.
• The PSB, a small left-wing party, continues to back Ciro Gomes's bid to run for as its presidential candidate rather than supporting Ms Rousseff's bid, even though it is part of the governing coalition.
• In a controversial step that has upset financial markets and raised concerns about government intervention, on October 19th the government imposed a 2% tax on portfolio inflows to curb the appreciation of the Real.
• Policymakers are seeking to exclude some investments and draw on the sovereign wealth fund to meet the 3.3% of GDP primary target in 2010.
• Leading indicators suggest that GDP will grow by 1.5-2% in the third quarter on a quarter-on-quarter basis, as Brazil's recovery from recession continues.
• Consumer prices rose by 0.24% in September and by 4.3% on a 12-month basis. Food price disinflation has been muted in contrast to trends in international prices, owing to rigidities in credit, land and labour costs.

Source: Country Report