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Oxford Analytica Daily Brief

Prospects for Brazil in 2016


Tuesday, November 10 2015
An Oxford Analytica Prospect
Brazil will enter 2016 amid severe recession and profound political crisis. Unpopular
President Dilma Rousseff will continue to struggle in her relationship with Congress,
including her own coalition. Her government will focus its efforts on avoiding an
impeachment or abrogation of her mandate, as well as implementing an austerity
programme. Despite the political, fiscal and economic crises, Brazil will try to convey a
positive image during the Rio de Janeiro August 2016 Olympics, in which security will be
the main concern.

What next
Even in the somewhat more likely scenario, in which Rousseff manages to remain in
office, governance could become even more problematic, as allies attempt to distance
themselves from the executive. Corruption investigations could further shake politics,
possibly forcing the ousting of the speaker of parliament. The economy will remain in
recession for much of 2016 at least. The best hopes lie in the beginning of a mild recovery
in the last months of the year.
Analysis
The severe crisis leaves few areas of the economy untouched:
GDP will contract by probably over 3% this year, and fall again in 2016.
Unemployment was at 7.6% in September 2015, 2.7 percentage points up year-onyear, and could reach double digits soon.
Despite the recession and the fact that the Central Bank has increased the benchmark
interest rate to 14.25%, inflation will end 2015 at some 10.0% and is currently forecast
to end 2016 near 6.5%.
This widespread deterioration takes place against the backdrop of a serious worsening of
the public finances. The government expects the public-sector primary deficit to reach
0.9% of GDP this year, while gross federal debt is forecast to finish the year slightly under
70% of output -- much higher than in comparable emerging markets.

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A protest against Brazil's President


Dilma Rousseff in front of the National
Congress, in Brasilia (Reuters/Adriano
Machado)

Strategic summary
Brazil will face another year
of deep recession.
There will be little progress
in addressing entrenched
economic problems.
Rousseff opponents may
reassess the possible
gains from ousting her.

Oxford Analytica Daily Brief


Prospects for Brazil in 2016

Economic angst
The Brazilian economy faces three sets of problems:
Short-term
Short-term problems include the recent fiscal deficit and leap in inflation. Such problems
result from both misguided policy choices during Rousseff's first term (2011-14) and the
exacerbation of structural problems, whose extent became clearer as the consumptionand commodity-driven growth of recent years lost momentum, leading to revenue losses
(see BRAZIL: Consumer slowdown points to worn growth model - June 14, 2013).
Structural
Structural problems include the 'inexorable' rise in government spending, which is largely
determined by constitutionally earmarked expenditure -- not least in the pension system,
which has a yawning deficit, even though the country's population still is relatively young.
Entrenched
Deeper problems have rendered the country unable to grow at sustainably high rates for
the last four decades. These include Brazil's poor business climate, low investment levels
and meagre productivity gains, especially compared with economies that have developed
rapidly over this period (see BRAZIL: Political crisis crimps urgent reform hopes - October
6, 2015).

Austerity woes
Orthodox Finance Minister Joaquim Levy has struggled in his attempts to implement an
austerity programme this year, largely thanks to the hurdles created by an unruly
Congress (see BRAZIL: Governance will become more challenging - September 17, 2015).
This will not change next year:
The government needs to maintain its focus on immediate fiscal problems, so that any
relief will not suffice to put Brazil on the road to sustainable growth.

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Oxford Analytica Daily Brief


Prospects for Brazil in 2016

Even that promises to be an uphill battle, with a Congress prone to creating further
spending even during a fiscal crisis.
In fact, the government seeks to achieve a primary surplus of 0.7% of GDP, but this is both
too optimistic, given the political difficulties in achieving it, and insufficient to stem the rise
of public debt.
Headwinds and contingencies
The economy will continue to struggle beyond the country's fiscal problems. Although
there is a chance recession could recede towards the end of 2016, Brazil also faces the
risk of recording another year of contraction near or above 3% of GDP (see BRAZIL:
Recession will be long and recovery tepid - August 5, 2015).
Many factors will slow growth:
Consumer and business confidence are at or near record lows.
Given high inflation, monetary policy will continue to hinder rather than support growth.
The main construction companies will hold back investment as they assume a
defensive position after finding themselves at the centre of the massive corruption
scandal involving their contracts with state-controlled oil company Petrobras.
Petrobras itself will limit investment as it struggles with a large debt pile.
Political risks and external shocks are the main contingencies.
Congress will become even less likely to support fiscal retrenchment as the calendar
draws close to the October municipal elections. A key risk is that Levy resigns, given
Rousseff's half-hearted support and the fierce opposition of several members of her
Workers' Party (PT) to his austerity drive.
A sharper-than-expected slowdown in China, Brazil's main trading partner, could also affect
the economy.
While it has been largely priced in, a gradual increase in US interest rates could still
attract capital to dollar-denominated assets, further weakening the real and making
inflation harder to control.

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No duplication or transmission is permitted without the written consent of Oxford Analytica
Contact us: T +44 1865 261600 (North America 1 800 965 7666) or oxan.to/contact

Political risks loom large for


the economy

Oxford Analytica Daily Brief


Prospects for Brazil in 2016

The one bright spot in the economy is the recent improvement in its balance of payments.
The massive depreciation of the real this year has hit imports and given exports muchneeded relief.
The trade balance is already in surplus and the current account deficit is expected to fall
from 104 billion dollars in 2014 to 65 billion in 2015, possibly turning into surplus in two
years' time (see BRAZIL: Trade surplus rises amid economic crisis - November 2, 2015).
Impeachment politics
The political agenda will be largely driven by efforts by the opposition to oust Rousseff (see
BRAZIL: Impeachment unlikely, but Rousseff is not safe - August 17, 2015). While the
outcomes of these efforts remain open, it is more likely than not that Rousseff will end the
year as president.
Given the depth of the recession, potential beneficiaries of Rousseff's ouster -- including
the opposition and the Democratic Movement Party (PMDB) of Vice-President Michel
Temer and House Speaker Eduardo Cunha -- will assess carefully whether it is worth
inheriting power at this point.
Moreover, even when deeply affected by corruption scandals, the PT remains a strong
party with links to influential social movements. Rousseff has shown ability to survive in
power despite several months of extremely low popularity and a number of massive popular
protests.

However, Rousseff's government will probably see its support continuing to erode even
among its nominal allies, especially the PMDB. In an increasingly difficult situation in
corruption investigations, Cunha could well lose the speakership, but before that he will
use every opportunity to undermine the president.
Olympic opportunity
In August, Rio de Janeiro will host the Olympic Games. After the relative success of the
2014 football World Cup, Brazil will try to show its best face internationally. Much will
depend on the efficiency of security operations in a city that seems to have lost the
momentum it had achieved in anti-urban violence efforts earlier in the decade.

Oxford Analytica 2015. All rights reserved


No duplication or transmission is permitted without the written consent of Oxford Analytica
Contact us: T +44 1865 261600 (North America 1 800 965 7666) or oxan.to/contact

The political crisis shows no


sign of abating