Country Report Brazil September 2008

Outlook for 2008-09

• The political scene will remain dominated by early campaigning for the 2010 presidential election and preparations for the October 5th 2008 municipal elections.
• Alleviating inflationary pressures and formulating a new policy approach towards recently discovered large oil reserves will be the main economic policy priorities in the remainder of the outlook period.
• The adoption of a production-sharing framework with private oil companies and the creation of a new state oil company are the main options under discussion. Taxes on the oil sector may increase as well.
• We expect a further increase of 125 basis points in the overnight Selic rate, taking it to 15% in the first quarter of 2009. We forecast year-end inflation of 6.8% in 2008 before it declines to 4.6% in 2009.
• Stronger than expected second-quarter GDP data have prompted us to increase our forecast for GDP growth in 2008 from 4.6% to 5.3%. But we still expect growth to decelerate sharply to 3.4% in 2009.
• The current account is forecast to post deficits of 1.6% of GDP both in 2008 and 2009, chiefly on the back of a deteriorating trade balance.

Monthly review

• Marta Suplicy, the candidate of the ruling Partido dos Trabalhadores (PT) for the Sao Paulo mayorship, has continued to lead voting intentions.
• Relations between the federal police and the judiciary remain strained after it emerged that telephone conversations of members of the Supreme Court and politicians have been tapped by the federal intelligence agency.
• The government has sent to Congress suggestions for a political reform bill, but chances of progress on this front remain slim.
• Inflationary pressures have decreased in recent weeks on the back of falling food prices. Nonetheless, the monetary authority increases interest rates by a further 75 basis points, taking the benchmark Selic to 13.75%.
• The government has announced its intention to change the current fiscal regime by adopting nominal (rather than primary) targets from 2010 onward. It also reaffirmed its intention to achieve a balanced nominal budget.
• Real GDP growth accelerated to 6.1% year on year in the second quarter, driven by robust private consumption and investment growth.
• Brazil's financial markets have been strongly affected by the global credit crunch in recent weeks and the Real has come under considerable strain.