Brazil: Economy strengthening for real - BBH

The Brazilian economy has finally come within sight of recovery as Markit Brazil composite PMI rose to 50.4 in April and May, which is the highest since February 2015 while the Q1 GDP rose 1.0% q/q, the first rise since Q4 2014, explains Masashi Murata, Research Analyst at BBH.

Key Quotes

“The external accounts remain in good shape. The trade surplus is at the highest level since data started in 1991. The current account deficit will stay around -1% of GDP in 2017, down from -3.3% in 2015. The inflow of foreign direct investment has increased since H2 2016 and fully covers the current account deficit.”

“Inflation pressures continue to ease under weak growth and past tightening of monetary policy. May IPCA inflation slowed to 3.6% y/y, which is the lowest since May 2007 and well below the 4.5% target. The Brazilian central bank – Banco Central do Brazil (BCB) – has cut rates by 400 bp since October 2016. BCB is likely to keep cutting rates to support the economy in 2017, and the Selic rate is expected to drop to 8.50% by the end of 2017.”

“The political situation remains confused. Last month, local media reported President Temer approved hush money payments to jailed former House Speaker Eduardo Cunha. Temer’s administration, and Temer himself, denied alleged efforts to keep Cunha from testifying. We believe the Temer administration will have trouble keeping fiscal reforms on track, and so fiscal conditions are likely to keep worsening. The primary budget deficit could reach -3% of GDP this year from -2.4% in 2016. The heightened uncertainty regarding the speed of the process of reforms and adjustments in the Brazilian economy is still the biggest downside risk.”

“Slower inflation, high yields, and solid external accounts should support the real, but the poor economic outlook and political turmoil could largely depress it.”