Brazil: The easing cycle is about to end - BBH

Brazil’s economy continues to recover as Q3 GDP grew at 1.4% y/y, the most since Q1 2014, notes Masashi Murata, Research Analyst at BBH.

Key Quotes

“The economy should continue to recover in 2018. Brazilian consumer credit has bottomed out due to lower rates. Low inflation and improved labor conditions should support private consumption. Business confidence has improved and industrial capacity utilities have gradually risen under a stabilized Chinese economy. Fixed capital formation could start to increase in Q1 2018.”

“The external account remains in good shape. Brazil’s current deficit stayed at 0.6% of GDP in Q3, which is the lowest it has been since Q1 2008. It is expected to marginally worsen to 1.4% in 2018, but this would be offset by the inflow of foreign direct investments (FDI). FDI to Brazil has been steady with the 12-month total near $7.0 billion.”

“Brazil’s inflation pressures have been low. October IPCA slowed to 2.7% y/y, well below the 4.5% target and in the bottom half of the 2.5-6.5% target range. The Brazilian central bank – Banco Central do Brasil (BCB) – cut rates by 50bp in December as expected. BCB has cut rates for the 10th straight meeting, with a total reduction of 725bp since October 2016. BCB suggested it may cut rates by  25bp in February 2018, but the easing cycle is about to end. The Brazilian economy will likely continue to recover, and inflation could start  to accelerate.”

“The political situation remains unclear. Brazilian President Temer has tried to pass a pension reform bill but it would take more than four months to be approved. 250 to 260 lawmakers are currently in favor of pension reform, while 120 to 150 remain undecided. The Senate will not take the reform bill up until February 2018 even if the reform bill passes the Lower House.”

“High yields and a solid external account should support the real, but political risks could largely depress it.”