One year into the Temer administration, what is the forecast for Brazil? Check out our Economic Focus report.

1. P:slide pack+FocusMay 2017Brazil Economic Focus May 2017..docx
1. Brazil’s economic recovery is slower than expected, but positive figures are finally
coming. In February, the Brazilian Central Bank Economic Activity Index (IBC-Br) registered
its fastest increase since 2010, growing by 1.31% month on month. In March, we saw the
first consolidated numbers for activity in Q1 2017. After decreasing for eight quarters in a
row, IBC-Br shows that economic activity in Q1 2017 was positive, it grew 1.12% quarter on
quarter. Industry activity grew by 1.1% growth, despite lower than expected activity in March
(1.8% reduction). Retail sales grew by 3.3%, putting an end to eight consecutive declines.
The services sector, which represents one third of Brazil’s GDP and has been suffering from
the economic downturn, decreased by 2.3%.
2. Better than expected results on the
monetary front reaffirm positive
expectations. After a long period missing
the Central Bank’s 4.5% target, inflation
finally ceded and reached 4.08% in April –
its lowest rate since July 2007. Analysts
expect this decline will allow the Central
Bank to further accelerate the pace of
monetary easing, a movement so far
constrained by what some considered overly cautious behaviour. Brazil’s base interest rate
(Selic) is currently at 11.25% and market consensus is that it will reach 8.5% by year end.
Lower interest rates are a key component for investments to resume and to drive economic
growth in the coming years.
3. Figures on the external front are also encouraging. March saw the first monthly
current account surplus since 2007 and the best monthly result since 2005. In the last
12 months, Brazil’s current account deficit amounted to USD 20.5 billion (1.1% of GDP) –
the highest trade surplus for April since 1989. Brazilian exports in April 2017 were 27.8%
higher than in April 2016. There was a significant increase in export value (22.1%),
particularly for commodities. Imports, in turn, increased by 13.3% over the same period. The
positive results in the external account help to explain the recent behaviour of the Brazilian
Real (BRL), which remained stable despite an increasingly turbulent political environment.
4. These developments are reflected in better leading indicators and growth projections.
Business and consumer confidence increased by 19.7% and 16.6% respectively, compared
to Q1 2016. The OECD’s leading indicator for March also indicated acceleration in economic
growth for the coming six months. At the same time, financial institutions and consultancies
revised upwards their GDP expectations. Itau revised Q1 2017 GDP growth projections from
0.5% to 1.4%. Santander followed a similar path and revised up its expectations for Q1 2017
(but maintaining a 0.8% projection for the full year), highlighting the positive impacts of
industrial production in December and the first signs of an agricultural “super crop”. The
World Bank also increased its forecast for Brazil’s GDP growth from 0.5% to 0.7% in 2017.
5. Foreign investors are surfing on the wave of the government’s latest infrastructure
concessions. Foreign direct investment (FDI) totalled USD 7.1 billion in March, more than
All Quiet on the Western Front
BRAZIL ECONOMIC FOCUS: May 2017
3.20%
7.34%
6.89%
2%
3%
4%
5%
6%
7%
8%
Real Interest Rate

2. P:slide pack+FocusMay 2017Brazil Economic Focus May 2017..docx
covering the current account deficit. The increased participation of foreign players in the
concessions market was the highlight of the government’s latest concession. According to
the consultancy GO Associados, 37.7% of the £4.8 billion expected to be raised through the
concessions will come from foreign firms, and 26% will be from Brazilian firms with foreign
capital.
6. Nonetheless, important indicators remind us of the long way to go before achieving a
vigorous and sustainable recovery in Brazil. Unemployment reached a new peak in
March, jumping to 13.7%, from 13.2% in February, and partially overshadowing the
improvement in real wages caused by falling inflation. Analysts expect the upward trend in
unemployment to continue until the end of the first semester of 2017, as the impact of the
economic contraction is not yet complete. At the same time, the negative monthly results for
industry and retail show the recession is not over just yet. Finally, on the fiscal front, good
primary balance results from January (surplus of BR L36.7 billion) were partially
overshadowed by the poor results of February (BRL3.5 billion deficit) and March (BRL 11
billion deficit). Overall Q1 2017 saw a government budget surplus (excluding interest
payments) of BRL 2.2 billion, but the monthly trend is worrying as it indicates a trajectory of
appalling results through the rest of the year.
7. Most importantly, Brazil’s
economic recovery depends on
the government’s success in
approving an unpopular social
security reform. The Finance
Ministry has already seen its
original text watered down to pass the first approval phase in Congress. Changes made by a
Lower House committee have reduced projected savings from the reform to between 50-
74% of the originally expected amount savings. (The table above projects different scenarios
depending on the reform’s trajectory). Further changes to the reform are likely, so the
reform’s impact on public accounts remains to be seen. A worse than expected result will
become a significant constraint to Brazil’s sustained recovery.
8. Notwithstanding these risks, we remain cautiously positive about the government’s
success, as recent successes show Temer’s continuing support in Congress. On 26
April 2017, the Lower House of Congress approved the government’s proposed labour
reform (which still needs the Senate’s vote). By approving unpopular changes to Brazil’s
rigid labour legislation from the 1940s, Temer’s government showed its considerable support
in Congress. However, the tight voting majority sent a warning on the coming Social Security
reform vote, which will require a stronger (three fifths) majority, and is even more unpopular.
Reforming Brazil’s pension system is urgent, and although supported by business, it remains
highly unpopular. More than 70% of the population are against it, and politicians will care
more and more about that as the 2018 elections draw closer.

3. P:slide pack+FocusMay 2017Brazil Economic Focus May 2017..docx
9. Truth is, recovering from the deepest economic recession in documented history will
be harder than expected. In October 2016, LCA Consultancy (in line with many other
optimistic analysts) projected GDP growth of 1.5% in 2017. The economic challenge in Brazil
remains huge however. Temer’s government is making progress – perhaps more than some
would have expected given his low popularity (9% at present). There is still a long way to go
before that Brazil is on the path to a sustainable long-term recovery.
Monthly Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17
Inflation (12 mth.
accum.)
9.28 9.32 8.84 8.74 8.97 8.48 7.87 6.99 6.29 5.35 4.76 4.57 4.08
Benchmark Interest
Rate
14.25 14.25 14.25 14.25 14.25 14.25 14.00 13.75 13.75 13.00 12.25 12.25 11.25
Unemployment (%) 11.2 11.2 11. 3 11.6 11.8 11.8 11.8 11.9 12.0 12.6 13.2 13.7 n/a
Exchange Rate end
of period (BRL/USD)
3.45 3.60 3.21 3.24 3.24 3.25 3.18 3.40 3.26 3.12 3.09 3.17 3.20
Trade Balance (US$
bn.)
4.9 6.4 4 4.6 4.1 3.8 2.4 4.7 4.4 2.7 4.6 7.2 7
Exports (US$ bn.) 15.4 17.6 16.7 16.3 17 15.8 13.7 16.2 15.9 14.9 15.5 20.1 17.7
Imports (US$ bn.) 10.5 11.1 13.8 11.8 12.9 12 11.4 11.5 11.5 12.2 10.9 12.9 10.7
FDI (US$ mi) 6820.4 6145.5 3917.4 208.3 7207.7 5273.6 8399.6 8592.9 15409.5 11528 5306.3 7109.1 n/a
UK exports - goods
(US$ mi)
248.7 190.3 190.7 169.6 204 225.4 182.5 150.9 175.8 127.7 127.9 209.1 126.5
UK imports - goods
(US$ mi)
203.8 256.1 235.3 202.6 278.6 284.6 294 245.3 189.5 223.1 161.5 237.9 190.2
Key Macroeconomic Indicators