Widespread public unrest, sweeping corruption scandals, and deepening polarisation will keep political risk elevated over the coming quarters, weighing on investor sentiment and contributing to extreme uncertainty in terms of policy direction. Over a multiyear timeframe, the Brazilian electorate will demand progress on promised reforms, including higher-quality public services and greater government transparency.
Over the long-term, Brazil will only experience modest levels of growth as structural headwinds limit any quick economic solutions to the challenges faced from falling global commodity prices. Modest growth will only return to the economy following two consecutive years in recession in both 2015 and 2016.
Major Forecast Changes
We have downgraded our 2016 real GDP growth forecast to -4.0%, from -3.4% previously. Growth will be constrained by deep declines in investment.
We forecast that the real will average BRL4.000/USD in 2016, rather than our previous forecast of BRL4.600/USD. This is due a strong start to the year for the currency, as well as a significant upgrade in our current account deficit forecast. We forecast the current account shortfall will amount to 2.1% of GDP in 2016, the result of a sharp reduction in import demand.
While we still expect the BCB to hike rates to manage inflation, the pace of these hikes will likely be more subdued than we originally believed. We forecast an end-2016 rate of 15.00%, versus our previous projection of 15.75%.
The political situation is subject to considerable uncertainty, not least because the way it depends heavily on how courts rule on various proceedings, involving allegations of corruption and abuse of power at the highest levels of government.
Given Brazil's exposure to industrial metals and agricultural goods, an abrupt change to the prices of these commodities would have a major impact - either positive or negative - on the country's economic outlook.
|e/f= BMI estimate/forecast; Source: National Sources, BMI|
|Real GDP growth, % y-o-y||0.1||-3.8||-4.0||1.0|
|Nominal GDP, USDbn||2,416.0||1,772.4||1,559.1||1,629.0|
|Consumer price inflation, % y-o-y, eop||6.4||10.7||8.0||5.2|
|Exchange rate BRL/USD, eop||2.66||3.96||3.90||4.05|
|Budget balance, % of GDP||-6.0||-10.4||-10.5||-9.1|
|Current account balance, % of GDP||-4.3||-3.3||-2.1||-1.9|
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