BRL: downside risks, moderate decline expected - BBH
According to Masashi Murata, from Brown Brother Harriman, high yields, solid trade surplus, and expectation for fiscal reform should continue to support the Brazilian real. They forecast USD/BRL at 3.30 by year-end.
Key Quotes:
“Brazil’s inflation pressures have eased as February IPCA slowed to 4.76% y/y, which is the lowest since September 2010. The Brazilian economy is still contracting but is about to touch the bottom. Q4 GDP decreased 2.5% y/y, which is the least negative growth since Q1 2015. The trade account remains firm. The February 12-month trailing trade surplus increased to $51.0 billion, the largest since the data started in 1995. Exports turned upward in H2 2016 with the rise in commodity prices, such as iron ore and bauxite. The current account is still in deficit but foreign direct investment fully covers it.”
“The Brazilian central bank, Banco Central do Brasil (BCB), continues to cut rates, easing by 200bp since October 2016. BCB is likely to keep cutting rates to support the economy in 2017. COPOM members see the inflation outlook developing favorably, while the economic recovery was delayed more than anticipated. In the most recent weekly economist survey by BCB, Selic rate is expected to drop to 9.00% by the end of 2017.”
“The outlook for Brazil’s fiscal condition remains uncertain. The Brazilian government has pushed through austerity measures, which include capping public spending and raising the retirement age from 54 years to 65 years as pension system reforms. Despite the reforms, the fiscal condition continues to worsen as primary budget deficit has been high even as January public net debt rose to 46.4% of GDP, the highest since September 2006.”
“The real has been steady to firmer even after Trump’s victory in the US presidential election in November 2016. The real rose 3% YTD against the dollar, following a 22% rise in 2016. High yields, solid trade surplus, and expectation for fiscal reform should continue to support the real.”