IMPORTANT NOTICE:

The information in this PDF file is subject to Business Monitor International Ltd’s full copyright
and entitlements as defined and protected by international law. The contents of the file are for
the sole use of the addressee. All content in this file is owned and operated by Business
Monitor International Ltd, and the copying or distribution of this file, internally or externally, is
strictly prohibited without the prior written permission and consent of Business Monitor
International Ltd. If you wish to distribute the file, please email the Subscriptions Department at
subs@bmiresearch.com, providing details of your subscription and the number of recipients
you wish to forward or distribute this information to.

DISCLAIMER
All information contained in this publication has been researched and compiled from sources believed
to be accurate and reliable at the time of publishing. However, in view of the natural scope for human
and/or mechanical error, either at source or during production, Business Monitor International Ltd
accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions
affecting any part of the publication. All information is provided without warranty, and Business Monitor
International Ltd makes no representation of warranty of any kind as to the accuracy or completeness
of any information hereto contained.
 ISSN: 0969-5966

December 2017 Contents

Vol 34 Issue 12

Latin America Monitor

Fiscal Outlook Hangs In
The Balance 3
BRL: Strength Has Run
Brazil Its Course 4

Political Uncertainty Will Constrain Recovery Few Drivers For Construction

BMI View: Brazil will exit recession in 2017 and grow modestly in 2018, driven by a Recovery 6
cyclical recovery of private consumption and stronger exports. Nonetheless, invest-
ment will remain on the sideline due to political uncertainty, limiting growth over
the medium term.

Brazil will see a modest acceleration in economic activity growth over the coming
quarters, as a cyclical recovery of private consumption and export growth pull the
economy out of recession. Nonetheless, fiscal consolidation efforts will undermine
public consumption and uncertainty over the outlook for labour and pension reforms
will keep major investment on the sidelines, constraining growth. The upcoming election
campaign is likely to drive volatile shifts in business sentiment, as the likelihood of a
competitive anti-establishment presidential candidate will threaten the durability of
reforms initiated over the last year.

We maintain our real GDP growth forecasts at 0.4% in 2017 and 1.7% in 2018 (see
Copy Deadline: 20 October 2017
'Recovery Looks More Cyclical Than Structural', June 30). Our forecasts are slightly more
downbeat than Bloomberg consensus, which stands at 0.6% and 2.2%, respectively, Analysts: Jeffrey Lamoureux
reflecting a more subdued investment outlook in light of significant political uncertainty.
Editor: Katherine Weber
In Q217, real GDP expanded 0.3% y-o-y, led by exports and private consumption, while
Sub-Editor: Mia Kilroy
...continued on page 2
Subscriptions Manager: Lyan Chan

Few Drivers For Construction Recovery 6 Marketing Manager: Julia Consuegra

Production: Anshu Kumar

Political turmoil, deep public sector budget cuts and economic weakness will
continue to dampen construction activity in Brazil over the coming 12 months,
prompting a further downgrade in our growth expectations for 2017 and 2018.
Private investment into existing brownfield assets will remain elevated, however,
greenfield construction intensive projects will remain unattractive given a lack of
confidence in the market.

REGIONAL INDICATORS
Latin America 2015 2016e 2017f 2018f Head Office
Nominal GDP, USDbn 5,328.1 4,925.3 5,527.4 5,886.9 2 Broadgate Circle, London
Population, mn 631.2 637.9 644.4 650.9 EC2M 2QS, UK
GDP per capita, USD 8,440.6 7,721.1 8,577.1 9,044.8
Real GDP growth, % 0.4 -0.5 1.5 2.3
Company Locations
Inflation, % 7.7 9.6 6.5 4.9
London | New York | Singapore
Goods Exports, USDbn 998.1 971.7 1,077.6 1,123.3
Hong Kong | Dubai | Pretoria
Goods Imports, USDbn 1,046.1 963.5 1,031.0 1,080.8
Notes: e/f = BMI estimate/forecast. Source: BMI
Subscriptions Contact:
© 2017 Business Monitor International Ltd. All rights reserved.
All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or
organisations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International Tel: +44 (0)207 248 0468
Ltd, and as such no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor
International Ltd.
All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the Fax: +44 (0)20 7248 0467
time of publishing. Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of
any information provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions
affecting any part of the content. email: subs@bmiresearch.com
 Brazil | December 2017

LATIN AMERICA RISK INDEX

BMI's Country Risk Index scores countries on a 0-100 scale, evaluating short-term and long-term political stability, short-term economic
outlook, long-term economic potential and operational barriers to doing business. For a detailed methodology, visit bmiresearch.com or
contact us using the details on page 1.

RISK INDEX TABLE

Short Term Long Term Operational Country
Political Economic Political Economic Risk Risk
Chile 70.6 65.2 83.2 67.8 64.8 69.8
Uruguay 71.5 57.3 75.3 62.6 54.3 62.4
Mexico 56.9 65.4 64.7 64.0 51.2 58.6
Peru 64.2 65.8 62.5 65.7 49.9 59.8
Brazil 57.5 55.4 68.9 61.9 48.5 56.9
Colombia 66.5 61.5 62.4 64.7 48.3 58.4
Argentina 63.8 50.8 61.6 51.3 46.6 53.5
Ecuador 52.5 55.8 51.1 56.8 47.9 52.3
Venezuela 30.6 30.2 44.8 38.2 29.7 34.0
Regional Average 59.3 56.4 63.8 59.2 49.0 56.2
Global Average 63.5 52.1 62.2 52.9 49.8 55.0
Source: BMI

BRAZIL – ECONOMIC OUTLOOK

...continued from front page

investment remained in a deep contraction, falling 6.5%. Monthly economic activity Recovery Getting Underway
Monthly Economic Activity, % y-o-y
has been choppy, contracting in three of the first seven months of the year but growing
1.4% y-o-y in July.

A modest rebound in consumption will drive the recovery over the coming quarters. The
labour market has stabilised, as net formal job creation has remained positive over the five
months between April and August, bringing the unemployment rate down from 13.7% in
March to 12.6% in August. Consumer sentiment is off its 2015 lows and retail sales have
begun to rebound, expanding 3.1% y-o-y in July, the latest data available. Inflation is its
lowest level in a decade and will remain modest into 2018 (see 'BCB To Shift To Neutral In
2018', September 9).
Note: Blue line denotes 6mma. Source: BCB, BMI

Exports will offer key support. Real exports grew 2.5% y-o-y in Q217, making the external
sector among the economy's few bright spots (see 'Election Will Drive Risk Of Capital
Outflows', September 20). The primary sector has driven gains, reflecting rising iron ore
output and rebounding agricultural production. While the export gains from stronger
agricultural production will likely fade over the coming months, strong growth in semi- Consumption Showing Improvement
Consumption Indicators
manufactured and manufactured goods exports suggest that demand for industrial
output is growing. Industrial production expanded in five of the first seven months of
the year.

Investment in fixed assets will be limited due to substantial political uncertainty. Industrial
capacity utilisation remains low, around 77.0%, indicating a sizable output gap to be filled
before new capacity becomes needed. Moreover, capital imports fell 23.4% y-o-y in the
year through August, indicating little move toward capacity building. President Michel
Temer's diminished political capital has darkened the outlook for pension and sector
reforms likely to be enacted before the general election campaign begins in earnest. Source: IBGE, BMI

www.bmiresearch.com Page 2
 Brazil | December 2017

Brazil has not yet enacted structural changes that could lower the cost of doing business Export Gains Supporting Production
Industrial Sector Indicators
and encourage sustainable investment growth.

Moreover, we believe that the public's dissatisfaction with the country's established
political parties will underpin a volatile campaign that throws into question the outlook for
further reforms in the years beyond 2018 (see '2018 Election Initial Thoughts: Corruption
Critical To Outlook', August 22). As a result, investors are likely to hold off on major new
commitments pending the results of the election.

Source: IBGE, BMI

BRAZIL – ECONOMIC OUTLOOK

Fiscal Outlook Hangs In The Balance

BMI View: Brazil will gradually narrow its fiscal deficit over the coming years, although the government will utilise ad hoc measures
to meet its fiscal targets. Additionally, policy uncertainty will undermine sovereign credentials and place upside pressure on risk
premiums on Brazilian assets.

• Brazil's fiscal deficit will narrow over the coming years, as rebounding economic activity Gradual Narrowing Remains Base Case
Budget Balance
supports revenue growth while a spending cap amendment constrains expenditure
growth.
• Nonetheless, a range of ad hoc measures to provide extraordinary revenues and
spending cuts will be necessary to ensure the government meets its fiscal targets.
• Additionally, pension reforms will be barebones, if enacted at all, which will leave
significant uncertainty over a key driver of fiscal sustainability.
• Policy uncertainty and rising debt will weigh on the country's sovereign credentials and
underpin risk premiums over the coming quarters.

Our core views on Brazil's fiscal outlook are unchanged. In the year through July, the f = BMI forecast; Source: BCB, BMI

latest data available, revenues and expenditures have come in line with our expectations.
We forecast a general government deficit of 8.0% of GDP in 2017 and 7.2% in 2018, little
changed from 8.1% and 7.1% previously (see 'Pension Reform Set To Challenge Next
Administration', June 15).

Revenue growth is likely to pick up over the coming months as the economic recovery
gains steam. The economy has exited recession, growing 0.3% y-o-y in Q217 as private
consumption and exports rebounded. In turn, tax collections have begun to rise, growing
5.4% in the year through July. Additionally, in March, the government eliminated payroll tax
breaks for 50 industries, which should bolster intakes over the coming months.

Non-interest expenditure growth will remain constrained, in part as an across the board
budget cut enacted in March begins to take effect. In the year through July, central
government non-financing expenses have grown 3.8%, slightly below average inflation of
4.0% over the same period. That said, the government has released BRL12.8bn in previously
frozen funds, which will offset some of the potential savings.

www.bmiresearch.com Page 3
 Brazil | December 2017

The government will also pursue a range of ad hoc measures to meet its fiscal targets, Still On The Rise
Gross Government Debt, % of GDP
which it recently relaxed. In August, the government revised its primary deficit target for
2017 and 2018 to BRL159bn (2.4% of GDP in 2017), from BRL139bn and 129bn, respectively.
Subsequently, it announced that it would lay off approximately 60,000 public sector
workers over the coming months. It also began a broad effort to privatise state-owned
assets including railways, ports and Eletrobras, the region's largest electricity producer.
With an accumulated general government primary budget shortfall of BRL51.3bn through
end-July, we expect the government will finish the year within target.

Our baseline assumption is that the privatisation effort will have modest success. While
it is difficult to assess the potential value of the assets set for sale, particularly given the
f = BMI forecast; Source: Fazenda, BMI
likely legal complexities surrounding the sale of a company as large as Eletrobras, Brazil's
large market retains appeal to foreign investors despite a relatively weak growth outlook
and regulatory hurdles. We believe that our revenue forecasts represent a conservative
estimate of the potential gains from asset sales.

That said, the balance of risks lie s to the downside. We maintain our view that Brazil's fiscal
sustainability depends on the enactment of pension reforms, which have an increasingly
difficult path to enactment. While we have long believed that pension reforms were unlikely
to do more than establish a minimum retirement age, significant tension within President
Michel Temer's ruling coalition makes it increasingly possible that reforms will not be enacted
ahead of the 2018 general election. Either way, we believe the next administration will likely
be forced to revisit the issue of pension reforms. Without substantive adjustments to the
pension system's generous benefit structure, social security expenditures would steadily
grow as a proportion of government spending and make the spending cap amendment
unviable unless the system is reformed.

Concern over the government's fiscal trajectory will underpin relatively weak sovereign
credentials and elevated risk premiums on Brazilian assets. We forecast gross general
government debt to reach 73.7% of GDP in 2017 and 76.9% in 2018, up from 69.9% in 2016.
Combined with uncertainty over policy direction in light of the upcoming election, this will
weaken the country's sovereign credentials. All three major credit ratings already rate Brazil
as sub-investment grade with negative outlooks.

BRAZIL – ECONOMIC OUTLOOK

BRL: Strength Has Run Its Course

BMI View: The Brazilian real will likely trade sideways over the coming months and depreciate over the coming year. A weakening
real yield differential with the US and the potential for bearish sentiment ahead of the 2018 general election will drive downside
pressure on the unit although total return outperformance versus the US dollar is likely to continue.

Short-Term Outlook (three-to-six months)

We are neutral on the Brazilian real over the short term. In line with our view, the unit has strengthened over recent months as bearish
sentiment has reversed and commodity prices have continued to rally (see 'BRL: Short-Term Strength Will Fade In 2018', July 6). Indeed,
the unit has outperformed our expectations. As a result, we have upgraded our forecast average for 2017 to BRL3.18/USD, from BRL3.25/
USD previously.

www.bmiresearch.com Page 4
 Brazil | December 2017

That said, we do not expect the currency to appreciate significantly more in 2017. We Rally Likely Played Out
Exchange Rate, BRL/USD
forecast the unit to end the year at BRL3.20/USD, in line with the current spot rate. Brazil's
real yield spread with the US, adjusted for default risk, is declining, and its terms of trade
are weakening as the rally in iron ore, a key export, unwinds. Additionally, current positive
sentiment is likely to weaken in light of an increasingly difficult outlook for reforms over the
coming months.

Long-Term Outlook (six-to-24 months)

We maintain our view that the real is highly likely to see spot depreciation over the coming
years due to the country's inflation differential with the US. We forecast the unit to average
BRL3.30/USD in 2018 and BRL3.44/USD in 2019.
Source: Bloomberg, BMI

Although inflation has fallen significantly over the last year, we expect it to pick up over the
coming quarters and continue to outpace the US over the long term (see 'BCB To Shift To
Neutral In 2018', September 6). Crucially, higher inflation will not be offset by a higher real
GDP growth rate, as a lack of substantial reforms and political uncertainty ahead of the 2018
general election will undermine investment. As a result, depreciation will be necessary in
order for Brazil to remain competitive.

Additionally, we do not believe that investors have begun to price in risks to policy direction
from 2019 onwards. The October 2018 general election will undoubtedly be its most
consequential since 2002, as it will determine whether or not Brazil continues along a path
toward growth-supportive reform (see '2018 Election Initial Thoughts: Corruption Critical
To Outlook', August 22). We believe that the public's deep dissatisfaction with the political
elite will create opportunities for outsider candidates with populist agendas to mount
competitive campaigns, which will threaten the continuity of reforms pursued under
President Michel Temer. Volatile shifts in sentiment are likely to drive currency movement
over the coming quarters.

Nonetheless, real bond yields will remain elevated relative to the US, which should ensure
that the currency outperforms in total return terms. Even as Brazil enters an era of single-
digit benchmark interest rates, we expect real rates will remain attractive.

Risks To Outlook
Risks to our view are weighted to the downside. More aggressive rate hikes in the US than
we currently anticipate, or any signs of global credit stress, could strengthen the dollar
against EM FX, weakening the real. Additionally, bearish sentiment surrounding the election
campaign could trigger a sell-off that would push the unit into a weaker trading range.

BRAZIL – CURRENCY FORECASTS

Spot 2017 2018
BRL/USD, ave 3.18 3.18 3.30
BRL/EUR, ave 3.75 3.52 3.68
BCB Selic Target Rate, % eop 8.25 7.50 7.50
Last updated September 28 2017. Source: Bloomberg, BCB, BMI

www.bmiresearch.com Page 5
 Brazil | December 2017

DATA & FORECASTS

2013 2014 2015 2016e 2017f 2018f 2019f
Population, mn 202.41 204.21 205.96 207.65 209.29 210.87 212.39
Nominal GDP, USDbn 2,470.3 2,454.9 1,801.3 1,797.0 2,065.7 2,086.8 2,140.3
GDP per capita, USD 12,204 12,021 8,745 8,653 9,869 9,896 10,076
Real GDP growth, % y-o-y 3.0 0.5 -3.8 -3.6 0.4 1.7 1.9
Industrial production, % y-o-y, ave 2.1 -2.9 -8.2 -6.5 2.5 2.8 3.0
Consumer price inflation, % y-o-y, ave 6.2 6.3 9.0 8.8 3.4 3.5 4.2
Consumer price inflation, % y-o-y, eop 5.9 6.4 10.7 6.3 2.8 3.9 4.5
Central bank policy rate, % eop 10.00 11.75 14.25 13.75 7.50 7.50 8.00
Exchange rate BRL/USD, ave 2.16 2.35 3.33 3.49 3.18 3.30 3.44
Exchange rate BRL/USD, eop 2.36 2.66 3.96 3.26 3.20 3.41 3.48
Budget balance, BRLbn -157.5 -343.9 -613.0 -562.8 -522.4 -496.5 -460.7
Budget balance, % of GDP -3.0 -6.0 -10.2 -9.0 -8.0 -7.2 -6.3
Goods and services exports, USDbn 279.6 264.1 223.9 217.8 253.2 260.8 271.1
Goods and services imports, USDbn 325.6 318.8 243.1 203.2 221.2 241.2 252.1
Current account balance, USDbn -74.8 -104.2 -59.4 -23.5 -11.8 -30.8 -37.6
Current account balance, % of GDP -3.0 -4.2 -3.3 -1.3 -0.6 -1.5 -1.8
Foreign reserves ex gold, USDbn 358.8 363.6 356.5 365.0 389.5 401.2 413.2
Import cover, months 14.0 14.5 16.5 18.8 20.1 19.4 19.1
Total external debt stock, USDbn 483.8 556.9 543.4 563.0 519.0 511.4 512.2
Total external debt stock, % of GDP 19.6 22.7 30.2 31.3 25.1 24.5 23.9
Crude, NGPL & other liquids prod, 000b/d 2,114.1 2,346.3 2,527.0 2,614.1 2,784.9 2,936.4 3,073.6
Total net oil exports (crude & products), 000b/d 19.3 147.9 462.2 604.9 765.5 889.8 982.6
Dry natural gas production, bcm 21.4 22.7 23.1 23.9 25.2 26.2 27.1
Dry natural gas consumption, bcm 39.2 41.6 43.7 41.5 42.1 43.0 44.3
e/f = BMI estimate/forecast;.Source: National Sources, BMI

BRAZIL – INDUSTRY OUTLOOK

Few Drivers For Construction Recovery

BMI View: Political turmoil, deep public sector budget cuts and economic weakness will continue to dampen construction activity
in Brazil over the coming 12 months, prompting a further downgrade in our growth expectations for 2017 and 2018. Private invest-
ment into existing brownfield assets will remain elevated, however, greenfield construction intensive projects will remain unattrac-
tive given a lack of confidence in the market.

Latest Updates
• We have downgraded our forecast for Brazil's construction activity, with a 3.6% contraction now estimated for 2017 and growth of
just 1% for 2018. The anticipated nascent recovery, primarily related to public sector investment and a revival in confidence, has not
materialised, with leading indicators still firmly negative. A recovery is still expected in 2018, but growth will return at a weaker pace.
• Brazil's construction sector will return to growth from 2018, accelerating in 2019 when the impact of the concessions programme
– Projeto Crescer – will generate the greatest construction activity. The concessions programme was expanded in August 2017, to
include 57 additional assets. We maintain our expectation that the airport, port and energy assets will garner the greatest interest
from private investors.
• Upside to growth is presented by the government's BRL50bn 'Avançar' (Advance) programme, intended to stimulate economic
activity and employment through construction activity. The public works programme will provide capital for projects to be
developed through to 2018. The lion's share (BRL20bn) will go towards transport sector projects. Limited concrete impact has been
noted thus far, and with the transport industry value equal to BRL61bn, the impact is unlikely to offset the major public spending cuts
the sector is suffering from.
• Investment into the infrastructure sector is expected to remain stable, focused primarily on brownfield assets and therefore not
supporting construction activity. Foreign direct investment into infrastructure reached USD11.7bn in January to April 2017, from
USD1.9bn in the same period in 2016. Asset acquisitions remain popular amongst Chinese investors and developers and institutional
investors, who are drawn in by the low asset prices and longer term growth prospects. In particular, transport, water and power
assets have proven attractive to investors.

www.bmiresearch.com Page 6
 Brazil | December 2017

• Two railway projects will provide a strong signal of investor confidence in Brazil with Sustained Weakness, No Signs Of Recovery
Construction Employment And Cement
auctions due to take place over the next 12 months – the FIOL (H2 2017) and Norte- Consumption, % Chg y-o-y
Sul (Q1 2018). Railways have been notoriously challenging to develop as concessions
and therefore this will be a major test for investor sentiment toward Brazil and the
regulatory changes made by the Temer government. Chinese companies have
indicated they will bid on the FIOL project following investments into related port
infrastructure.

Structural Trends
2017-2019: Slow Recovery For Growth
We have further downgraded our outlook for Brazil's construction sector in 2017, with a
contraction of 3.6% expected. Factors expected to drive growth in the second half of the Source: Bloomberg

year have failed to materialise owing to continued cuts to public spending, sustained
economic weakness and the detrimental impact of the deepening political turmoil on
investor confidence. Cement consumption is down 7.1% in the first six months of the
year, whilst construction employment is down 9.4% over the same period – a significant
deterioration compared to the 1.8% decline seen in 2016. With construction industry value
registering a 6.6% contraction in the first half of the year, we have thus downgraded growth.

Public spending has been a major drag on investment, and we expect limited improvement
as Temer's government remains committed to improving Brazil's fiscal position and revenue
generation is showing no signs of recovery. Public investment reached its lowest level in 10
years as of July 2017, with public works projects hit especially hard, such as those under
Recovery Pushed Back
the Growth Acceleration Programme (PAC), down 40% since 2013 (the last year of positive Construction Industry Value LHS And Real Growth RHS
(2015-2026)
growth for the construction sector). One particular area that has dragged on growth is
reduced investment into the Minha Casa Minha Vida public sector housing programme.
Following an audit and several rule changes in 2016, the government was expected to revive
investment into the programme (informing our more positive outlook previously), however,
only 150,000 houses have been contracted in the first five months of 2017, against a target
of 610,000 for the year as a whole, and compared to 763,000 contracted in 2016.

Potential upside to the construction sector is offered by the government's new public
works programme (Avançar). In an effort to provide a shorter term boost to the economy
and the construction sector – which has been one of the hardest hit – the government
f = BMI forecast, Source: IBGE, BMI
has launched the new BRL50bn infrastructure investment programme. The programme
will direct public funds to infrastructure projects which can begin construction in 2017 and
2018 in order to stimulate the economy and generate jobs. The transport sector will see the
greatest portion of funds – BRL20bn (with highways receiving the most at BRL16bn) – with
50 projects highlighted by the Ministry of Transport for inclusion. We have seen little sign of
progress or impact on activity from this programme and therefore are maintaining it as an
upside to the forecast rather than integrating it into our view.

CONSTRUCTION AND INFRASTRUCTURE INDUSTRY DATA

2016e 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f 2026f
Construction industry value, BRLbn 305.03 307.07 323.29 345.64 370.78 398.87 427.90 458.73 492.62 532.67 575.13
Construction Industry Value, Real Growth, % y-o-y -5.16 -3.62 0.96 1.69 1.40 1.64 1.59 1.58 1.76 2.50 2.35
Construction Industry Value, % of GDP 4.9 4.6 4.6 4.6 4.6 4.7 4.6 4.6 4.6 4.6 4.6
Infrastructure industry value, BRLbn 96.02 98.96 104.75 113.02 120.56 129.69 139.37 149.96 161.65 174.94 189.13
Infrastructure industry value real growth, % y-o-y -5.3 -1.2 1.5 2.7 0.8 1.6 1.8 2.0 2.2 2.6 2.5
e/f = estimate/forecast. Source: IBGE, BMI

www.bmiresearch.com Page 7
 Brazil | December 2017

With investor confidence waning and no sign of improvement in construction activity, we Recovery Waning
Consumer And Industrial Confidence Index
have also downgraded the pace of recovery in 2018 (to 1%), pushing back the greatest
impact of a recovery into 2019 (1.7% growth). Improvements in both consumer and
industrial confidence seen since late 2016 have started to wane as of Q217, largely owing
to continued political turmoil – with charges repeatedly raised against leading political and
business figures including President Temer and former Presidents Rousseff and Lula. We
do not expect any marked improvement in confidence over the next 12 months in the run
up to Brazil's 2018 election (in October). Approval ratings for Temer's government stand at
around 7% raising the potential for an anti-establishment or outsider candidate to do well in
an election that remains too early to call according to our Country Risk team.
Source: FGV
Recovery Hopes Pinned On Projeto Crescer
In order to encourage infrastructure investment, greater focus has been placed on using
the concession model to invest in infrastructure, however, this will take several months, if
not years, to filter through to activity (indeed it is only factored into our forecast from late
2018 and primarily in 2019/2020). In order to attract investors and reduce risk, many of the
concessions are brownfield and come with maintenance or upgrade requirements over the
concession period, which can be multiple decades, meaning limited potential to provide a
concentrated boost to the construction sector.

Indeed, while investment into Brazil's infrastructure sector will remain elevated compared
to recent years this will have limited impact on construction activity. The infrastructure
sector accounted for more than 50% of direct investment into Brazil in the first four months
of the year, growing from USD1.9bn in Jan-Apr 2016 to USD11.4bn in the same period in
2017. The figures reflect the success of the initial auctions under Projeto Crescer, in addition
to acquisitions by private equity companies and Chinese investors capitalising on low
valuations as Brazil's indebted companies seek to offload assets. We do expect investment
levels to slow as the new political crisis around President Temer evolves.

That being said, our expectation of a recovery in 2018/2019 is contingent on the partial Housing Market Making A Comeback
Mortgage Lending By Brazil's Savings & Loans System
success of Projeto Crescer, the government's concession programme, which in August (SBPE) & Growth
was expanded by a further 57 projects. The programme has got off to a solid start and in
line with our expectations – it has been expended twice as precedent and confidence has
built. However, many of the early projects auctioned were in more attractive sectors such
as energy, ports and airports. Riskier assets in the highway and rail sector have yet to be
tested, where returns have been less appealing and investors have generally been domestic
players, in addition, new miscellaneous assets such as the National Mint and Warehouses
and Supply Centres have little to no precedent making their success questionable.

Private Housing Support For Non-Infrastructure Construction

Brazil's residential building market is expected to recover in 2018, supported primarily by Source: Abecip

private housing as budget cuts have hit activity in the Minha Casa Minha Vida public housing
programme. Early signs that a nascent recovery is on the horizon for the private sector are
supported by the central bank's aggressive interest rate cutting cycle. This, combined with
a stabilisation in unemployment rates and consumer confidence, indicates demand is likely
to return to the housing market. Indeed, the steep contraction in mortgage lending seen
over 2015 and 2016 is easing. However, with homebuilders focusing on reducing inventory,
it will take several months for this to feed through to new construction and therefore we
expect a recovery only in 2018.

www.bmiresearch.com Page 8