Political Turbulence and Worse Growth Perspectives
The Temer administration has won some important victories, in particular the wide approval margins in the two floor votes in the Chamber of Deputies and first one in the Senate on the proposed constitutional amendment (PEC) to cap spending growth in real terms. But alongside this unquestionable success, the degree of political uncertainty has been rising recently. Worries are becoming stronger over the government’s increasing fragility and the frustration regarding the outlook for renewed economic growth. We believe the turbulence is still far from significantly eroding the government’s political strength to win approval of the key reform measures. But success in this respect depends more strongly than before on the president’s skill in reacting to the new challenges.
In 2016, GDP should contract by 3.5%, and for 2017 we project growth of only 0.5%. Household consumption and gross fixed capital formation are set to decline this year by 4.5% and 10.5%, respectively. Also, industrial production in 2016 should shrink by 7.1%, with the year average unemployment rate climbing to 11.3%, while for next year we project industrial output will grow by 0.5% and the average jobless rate will rise to 12.7%.
The inflation rate should be 6.7% in 2016, dropping to 4.8% in 2017 and finally reaching the central target of 4.5% in 2018. These projections are based on average exchange rate of R$3.49/US$ in 2016 and R$ 3.40/US$ in 2017, with the SELIC rate reaching 10% at the end of 2017.
We project a trade surplus of US$ 45 billion in 2016 (exports of US$ 185 billion and imports of US$ 140 billion), and a surplus of US$ 35 billion in 2017. Global economic growth will remain sluggish, at around 3%, compromising Brazil’s exports, and with domestic demand still weak imports will grow fitfully at best.
With expenditures frozen in real terms, the margin for error that exists in the primary surplus projections is restricted to errors in forecasting economic growth, with obvious reflections on recurring revenues. To minimize this type of error, the government has been pointing towards non-recurrent revenues, may avoid increasing the tax burden an assure meeting the primary surplus estimates.
Now read on...
Register to sample a report