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