Analysts at Rabobank suggest that after having recently emerged from a deep recession, one of the worst since the 1900’s, Brazil’s economic outlook hinges heavily on the maintenance of an orthodox economic policy and continuity of economic, fiscal reforms.
Key Quotes
“Putting Brazil on a sustained growth track will not be an easy task for the next administration, as it will have to lead an important agenda of structural changes, amid a fragmented political system.”
“Primarily, Brazil has to address urgently an important debt sustainability risk. We sense the ability to muddle through with a fast-rising debt is limited (if any at all), especially as global financial conditions turn tighter.”
“Some of the lingering difficulties and challenges facing the Brazilian economy are as excessive red taping, bad infrastructure, low savings/investment, reduced formation of human capital, closed economy, non-independent agencies, and shortcomings in regulatory frameworks.”
“The next administration will need help from Congress, in a number of necessary (or urgent) initiatives such as pension reform and other constitutional measures to increase budget flexibility, tax reform, administrative reform, better sector regulation. In other areas, good diagnose and policy goodwill is necessary to advance in infrastructure concessions and privatizations, new trade agreements.”
“As we have been advocating for quite a while, the reliance on this year’s political outcomes make this a very tricky environment for the economy and the markets.”
“Our baseline scenario projects Brazilian CDS at 150bps by yearend assuming the election will prompt the market to anticipate (correctly) an effective pension reform in 2019, consistent with yearend BRL at 3.40. There are different political outcomes, though. An alternative is a (risk) scenario where there is goodwill by the next administration but little (perceived) political space for deep reforms, leading to CDS of 350bps, FX rate at 4.40.”
“Another alternative (i.e. risk) scenario is no goodwill nor room for reforms (pre-announced by new leaderships), taking Brazil CDS to levels similar to those in late 2015 – when the country lost the investment grade status. In our calculation, the USD/BRL could spike to around (a whopping) 5.25, under these circumstances. In these risk scenarios, deterioration in market/economic conditions and expectations could lead to a double-dip.”
“While we continue to assume reforms in 2019, the outlook for this year’s presidential election remains cloudy. This may still be soon to read much into electoral surveys, as the campaign has not really started. There is room for changes in voting intentions as electoral debate intensifies in the media, political alliances shape up and actual party nominations and economic plans emerge. Moreover, there is still a large pool of undecided voters, and frontrunners still show voting intention rates below the historical average for this time of year.”
“In any case, with a short campaign ahead (only starting in mid-August) we sense this election has potential to produce volatility until the very last days (in October).”
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