Brazil: Improving domestic outlook versus external headwinds – Rabobank


Analysts at Rabobank, see the Brazilian economic Q2 forecast consistent with full-2019 GDP growth of 0.5-0.6%, meaning the third year in a row with the economy rising by 1% or less. For 2020, despite global headwinds, they expect some better traction (especially from investment) on the heels of lower policy interest rate, easier local financial conditions and a reform-led boost in confidence.

Key Quotes: 

“In recent days, external headwinds (i.e. trade war escalation and global economy slowdown) haven’t given Brazilian assets a break, despite of signals of an improving domestic outlook. If short term fundamentals (e.g. globally stronger USD) do explain part of the BRL sell-off, our models suggest there may still be some influence of noisy technicals (or premium build-up). And the latter could be partly associated with the deterioration of markets and outlook in Argentina.”

“We have reasons to believe that our neighbor’s woes should have limited spillover effects for Brazil after the dust settles. And that partly helps explain why we still see USD/BRL around 3.70-3.80 for the end of this year (which looks like a bold, if not outdated estimate right now).”

“Brazilian exports to Argentina means just 0.8% of Brazilian GDP, so that it takes a slump in Argentinian economic activity to subtract just a few tenths out of Brazilian GDP. Brazil also has a more solid external position, given the low current account deficit, the plentiful direct investment and the hefty FX reserves.”

“Brazil is experiencing low levels of inflation and anchored inflation expectations, while Argentina is facing big pressures that are about to intensify in the short run. August IPCA-15 released this week showed another downside surprise in the headline, with core inflation trends slowing further from already muted levels, much below the Brazilian Central Bank’s mid-target. Not a coincidence that BCB is likely to cut interest rate before year-end (to a new historical low of 5%), whereas the BCRA has recently hiked rate (by a full 11% to whopping 75% in nominal terms).”

“For the coming week, the macro highlight is the release of 19Q2 GDP data (Thu.). We look for a slight sequential growth of 0.2% q/q (less than 1% annualized), with the economy moving sideways in the first half. That underscores the weakest GDP recovery after the worst recession on record.”

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