Brazil’s deteriorating fiscal position, the widening of the current account deficit as commodity prices plummet and an unfortunate policy mix have made Brazil very vulnerable to external shocks and shifts in global risk sentiment. The re-election of Mrs Rousseff provides only slight hope that structural reforms will be pushed forward in her new term as president, given that over the past four years in office she has done little, or rather nothing, to revive the slack economy. Due to domestic policy misalignment, Brazil’s dependence on commodity exports and having China as its main trading partner, the outlook for the economy is not particularly rosy, in our view. As commodity prices are likely to stay very low and the outlook for the Chinese economy remains uncertain and rather weak, we expect virtually no growth this year, with only around 0.4% y/y, followed by around 1.4% y/y growth in 2015. We expect inflation to remain elevated and average 6.2% y/y this year and 6.8% y/y in 2015.
The longer term outlook for Brazil and its economic performance is highly dependent on whether economic reforms are implemented. We see a particular need to open up the Brazilian economy aggressively to foreign investment and competition in order to spur Brazilian productivity growth, which has been extremely weak for decades. However, we remain sceptical about Mrs Rousseff’s willingness to push reforms, as she failed in her previous term. This said, the medium-term outlook for Brazil and the Brazilian market is more dependent on global factors such as Fed tightening, weak Chinese growth and lower commodity prices than on whether or not Mrs Rousseff will push reforms through after the elections.
Despite the results of the presidential elections, we maintain our USD/BRL forecasts of 2.55, 2.55 and 2.55 in three, six and 12 months respectively.
Recommended Content
Editors’ Picks
EUR/USD steady below 1.0800 after US PCE meets expectations
EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair barely reacted to US PCE inflation data, with the Greenback shedding some pips. Fed Chair Jerome Powell set to speak ahead of the weekly close.
GBP/USD hovers around 1.2620 in dull trading
GBP/USD trades sideways above 1.2600 amid a widespread holiday restraining action across financial markets. Investors took a long weekend ahead of critical United States employment data next week. Fed Chair Powell coming up next.
Gold price sits at all-time highs above $2,230
Gold price holds near a fresh all-time high at $2,236 in thinned trading amid the Easter Holiday. Most major world markets remain closed, although the United States published core PCE inflation, the Federal Reserve’s favorite inflation gauge.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.
Key events in developed markets next week
Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.