Brazil: And now for something different - BNP Paribas CIB
Thursday 20 October 2016

As BNP Paribas marks 20 years in Brazil, Sandrine Ferdane and Marcelo Carvalho share their views on Latam's largest economy.

For the past few years, BNP Paribas' forecasts of Brazil's unfavourable growth and inflation prospects have been consistently ahead of the consensus view. But with a new administration in place, I have a revised outlook on the nation.

Sandrine Ferdane, Country Head of BNP Paribas Brazil shares her views on the economic outlook for Brazil and speaks about BNP Paribas presence in Brazil. 

The administration's economic team under Michel Temer has a golden opportunity to engineer a turnaround if - as expected - he builds sufficient support in Congress to implement unpopular, but much-needed measures.

Source: National treasury, BNP Paribas. *dotted lines are BNPP forecast
The top priority is to put Brazil's fiscal accounts back on track. The government proposal to introduce a rule to cap fiscal spending could become a major historical milestone in Brazil's policy framework. Freezing spending in real terms tackles the problem of excessive spending, and offers a structural, long-term solution for the country's fiscal accounts. To be sustainable, however, the rule would also require curbing Brazil's large, fast-growing social security expenses. Indeed, the government plans to present a social security reform later this year, for a 2017 congressional vote.

Amid improved markets abroad and much better policy prospects at home, the outlook for the Brazilian Real has strengthened dramatically compared to earlier in the year.  In turn, the combination of a stronger currency, the deepest recession in Brazil's history and much reinforced central-bank credibility is re-anchoring inflation expectations and pulling down actual inflation.

Source: IBGE, Macrobond, BNP Paribas. *dotted lines are BNPP forecast.
Falling inflation rates should give the central bank room to cut rates, provided the fiscal authorities do their part. A new central bank board has opted to refrain from jumping the gun by cutting too soon. Instead, to reinforce its inflation-fighting credentials and firmly re-anchor inflation expectations, the bank has stayed on hold for longer than many observers expected.
Source: BCB, Macrobond, BNP Paribas. *dotted lines are BNPP forecast.
However, once the central starts cutting, it could cut a lot. I expect a total of 525bp rate cuts in the upcoming easing cycle, bringing the policy rate from 14.25% to 9.0% by early 2018. Such easing is much more aggressive than what is expected by many economists, or what is priced in by the local yield curve. But I firmly believe expectations and pricing will continue to shift in this direction in coming quarters.    
The combination of a much healthier fiscal and monetary policy mix should boost market sentiment and spur local confidence, paving the way for a growth recovery. Given a dismal start to the year, it is already too late for average real GDP growth in 2016 to be much better than -3.0%. However, confidence indicators are already rebounding under the administration. As the economy seems to have finally found a bottom and recovery resumes going into next year, we see real GDP growth topping 2% in 2017.
Supporting the economic recovery in Brazil are sectors including renewable energy and infrastructure: an additional 1,500MW of installed capacity annually, along with the privatisation of airports and improvements to ports, toll roads, railways and the waste management sector should shore up the economy
Risks remain, of course. Domestically, congressional approval and then actual implementation of unpopular (but necessary) measures will be a key test of the administration's willingness and ability to carry out the needed work.
External risks remain, too, mainly in the form of the US Federal Reserve and China. Should prospects for Fed rate hikes roil international markets, or should China's underlying structural problems resurface, that would not be good news for Brazil. If the outlook is for no more than moderate and gradual Fed tightening, with broader global liquidity staying abundant, Chinese growth remaining sufficiently robust and international commodity prices proving relatively resilient, emerging market economies such as Brazil should benefit. Coupled with bold policy corrections at home, for the first time in many years, Brazil could have a positive outlook for its future.

Sandrine Ferdane
Brazil Country Head at BNP Paribas
Marcelo Carvalho
Head of Latam Economic Research at BNP Paribas
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