Country Forecast Brazil November 2017 Updater

Country Forecast Brazil November 2017 Updater

  • November 2017 •
  • Report ID: 325630


  • Governability will be weak following a crisis that erupted in May, sparked by corruption allegations directly implicating the president, Michel Temer. The Economist Intelligence Units expects him to survive, but, if not, Rodrigo Maia, the leader of the lower house of Congress, is likely to see out the term (to end-2018), pursuing similar economic policies. The next direct elections will be in October 2018. We assume that a candidate from a centre-right party will prevail.
  • We now expect full approval of social security reforms (complementing a bill approved by Congress at end-2016 capping spending to inflation) to be delayed until 2019, sustaining concerns about the fiscal outlook. As revenue picks up with economic recovery, the fiscal and debt dynamics will gradually stabilise. Equally, as the primary fiscal deficit swings to a surplus, the rise in the public debt/GDP ratio will slow, peaking at 91% in 2020-22.
  • The Banco Central do Brasil (the central bank) embarked on a long easing cycle in October that we expect will take the Selic policy rate down to 7% by end-2017. The monetary authorities are more committed to achieving the mid-point of the inflation target range (3-6% currently but set to fall incremen-tally in the next few years) than in the past, and we now expect fairly close target convergence in 2018-22.
  • Policy adjustments will consolidate the recovery that began in 2017 after a deeper recession in 2014-16. A slowdown in China in 2018 and in the US in 2020 will dampen the upturn, however. Growth will average 2.4% annually in 2018-22, assuming that the next government pursues sound policies.
  • The current-account deficit will widen from an estimated 0.5% of GDP in 2017 (reflecting weak import demand) to 2.9% of GDP by 2022 as the recovery boosts imports. The Real will weaken close to R3.7:US$1 by end-2022, staying vulnerable to volatility from changes in global conditions.
  • Brazil has the world's fifth-largest population. Following the 2014-16 recession, a gradual economic recovery is finally underway, and will enhance Brazil's market size (US$2.5trn by 2022) and attractiveness.
  • Despite improvements, a burdensome tax regime will remain one of the weakest areas of the business environment. Investment in infrastructure through a concessions programme will help to ease logistical bottlenecks, but upgrading and extension will take time, partly because of the fallout from a corruption scandal at Petrobras, the state oil company, which has affected construction companies.


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