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helps explain why we still see USD/BRL around 3.70-3.80 for the end of this year (which looks like a bold, if not outdated estimate right now).”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.”