Country Report Brazil September 2009

Outlook for 2009-10

• The economic downturn will make it more challenging for the ruling party to secure another term in October 2010. The health of Dilma Rousseff (PT), Mr? Lula's preferred successor, is causing uncertainty about her candidacy.
• We believe that economic difficulties will favour the likely candidacy of Jose? Serra, governor of Sao Paulo state, for the PSDB. He currently leads in the polls with 37%, well ahead of Ms Rousseff and Ciro Gomes (PSB) on 15-16%.
• The solid financial position of the government and state banks will support countercyclical measures that will mitigate the impact of the global recession.
• However, the economy will still undergo a recession (with real GDP contracting by 1% in 2009). A fragile global recovery in 2010 will constrain growth next year to 3.3% (revised up from 2.7% last month).
• A decline in fiscal revenue will erode the primary surplus to 1.9% of GDP, in 2009 before a cyclical pick-up in revenue allows it to rise to 3.5% of GDP in 2010. Lower interest payments will restrain the widening of the overall deficit.
• We expect inflation to fall to 4.1% by year-end, and to remain stable in 2010, assuming the Real remains relatively stable.
• We expect the current-account deficit to narrow to 1.3% of GDP in 2009, before widening to 1.5% of GDP in 2010.

Monthly review

• Lula's succession plans have been set back by the fall-out from a crisis in the Senate over ethical standards, a poor showing in the polls for Dilma Rousseff (PT), Mr Lula's preferred successor, and the emergence of rival candidates.
• The handling of regional tensions over Colombia's decision to allow the US expanded use of its bases underscore Lula's unwillingness to act as a strong counterbalance to Venezuela's radical nationalist president, Hugo Chavez.
• The ruling coalition is expected to approve a 0.1% financial transactions tax in September that expired in 2007 to bolster revenue next year.
• The public sector primary surplus in June narrowed to R3.4bn (US$1.7bn), down from R10.3bn a year earlier, reducing the first-half primary surplus to R35.3bn and the 12-month surplus to R60bn, equivalent to 2% of GDP.
• Capital expenditure by Petrobras, the state oil company, in the past 12 months amounted to R65bn, equivalent to over 2% of GDP.
• Manufacturing grew by only 0.2% in June from May. But real retail sales growth picked up in the second quarter and the July jobs report showed the first robust job gains this year, signalling the economy is picking up.