Recession continues while inflation
Brazil recorded in 2015 the worst economic
recession in 25 years. Real GDP contracted by
-3.9%, after stagnating in 2014 (+0.1%).
investment plunged by -14% y/y, down to 2009 level. Although the fall is
slowing down with -9.2% y/y in Q2 2016 after -17.2% y/y in the previous
quarter, investment remains the main drag on growth.
Financing conditions have tightened, with
companies bearing the brunt. National credit outstanding for non-financial
corporations has decreased by -3.4% y/y in July 2016, after a +10% average
rise in 2014 and +15% in 2013. At the same time, banking interest rates
have shot up. These now stand at above 20% on average for
Rates for non-earmarked resources are above 30%
while earmarked resources stand at 12%. Companies struggle to repay loans.
Non-performing loans have risen to 5.2% of the total credit for
non-earmarked non-financial companies in July 2016 up from 4.5% in January
The contraction in private consumption slowed
down in Q2 2016: -4.9% y/y after -6.3% y/y in Q1 2016 and -6.9% y/y
in Q4 2015. The labor market keeps deteriorating, with the unemployment
rate reaching 11.6% in July 2016 after 8.6% a year earlier.
Inflation has eased somewhat, but remains high
at +8.7 y/y % in July 2016, a rate still far above the Central bank’s
target (4.5% +/- 1pp). The key rate (SELIC) been hiked by +300bps between
October 2014 and July 2015. It stands at 14.25% ever since. However,
because inflation abated, the local currency faces less pressure. With
budgetary austerity measures in place, monetary policy could ease in coming
In 2015, net exports contributed positively to
growth on the back of a moderate growth in exports (+6%), and collapsing
imports, which plunged -14% y/y. Over the first half of 2016, this trend
remained. Exports kept growing: +8.5% in Q1 2016 (y/y) and +4.2% in Q2 2016
(y/y). Imports remained on a decreasing trend with -23.2% in Q1 2016 and
-10.6% in Q2 2016.
The recession is forecast to continue easing
over the coming quarters. The Brazilian economy should go back to positive
growth in the first quarter of 2017. All in all, we expect real GDP to
contract by -3.5% in 2016, and to resume moderate growth in 2017 (+0.6%).
Corporate insolvencies will continue their sharp rise: +22% in 2016 after
+25% in 2015.
Public finances in rapid deterioration
After more than 6 months of political turmoil,
the Brazilian Senate removed Dilma Rousseff from the presidency in late
August. We do not expect new elections to take place anytime soon. Interim
President Michel Temer, who took the office in May 2016, should thus
complete his term as president and remain in the position 2018. This is
despite lackluster approval ratings - below 15%.
The country’s fiscal accounts deteriorated
sharply in 2015. Public deficit widened to -10.3% of GDP, up from -6.0% in
2014 and -3% in 2013. This decline can be traced back to a spike in payment
of interests on public debt, which reached 8.5% of GDP in 2015 (vs. 5.5% in
The primary fiscal balance was in deficit in
2014 (-0.6%), the first in the country’s history. It widened to -2% of GDP
in 2015. We expect it to near -10% of GDP in 2016. The situation might
improve a bit in 2017 thanks to better financing conditions that should
help roll the public debt and the implementation of austerity measures.
However, public debt is expected to remain on an upward trend, exceeding
95% in 2017.
The government presented to the Congress a
constitutional amendment project in May 2016. It seeks to set a spending
ceiling by limiting growth in primary spending to the inflation rate,
reduce mandatory health and education spending, cut subsidies and tax
breaks, and increase some taxes for some time. The program is still under
In early September, the government unveiled a
new austerity package. The measures, which amount to USD17bn, include a
freeze on new hires and wages in the public sector, a cut in the number of
ministries, and reduced spending on social housing and health. Moreover, a
privatization program was launched, It is focused on the oil sector, power
rights, and infrastructure concessions.
External imbalances are adjusting rapidly
The absorption of external imbalances has been
impressive. The merchandise balance (of goods) reached in July a surplus of
USD40.5bn over 12 months, a record since 2007. This is owed to the free
fall in nominal imports (-30% since the last peak in Jan-14). As a result,
the current account deficit has fallen to -1.6% of GDP in June, down from
-4.5% a year ago.
Despite a downturn over the last months, strong
FDI inflows have remained above USD60bn, enough to cover the entire current
account deficit. However, net portfolio inflows tumbled since the beginning
of the year and are now in negative territory. A similar fate befell other
investment inflows since Q3-2015. Foreign exchange reserves remain at
comfortable levels, and can cover more than 15 months of imports.
Investors’ appetite seems to be recovering.
After depreciating by more than -40% against the USD over 2015, the BRL has
rallied since the beginning of the year (+11%). The stock market has been
bullish with BOVESPA rising by more than +30%. Moreover, Brazil issued
sovereign bonds worth USD1.5bn with a 2047 maturing date. The offer was a
success. Order books reached USD6bn, and the offer was more than 4 times