Brazil: Reigniting growth is key in 2017 - Nomura

Analysts at Nomura note that 2016’s improvements in economic policy and better political coordination provided Brazil with a significant market opportunity.

Key Quotes

“As most of that improvement has been already realised, 2017 is likely to be more challenging as there should be less positive surprises/further improvement on the agenda. While most of those economic/political milestones were helped by the start and ongoing approval of structural reforms and fiscal consolidation, the real test will be if this virtuous cycle turns into faster and sustainable growth.”

“In our view, significant further BRL strength could be derived from: a) faster progress on fiscal consolidation that leads to faster growth or b) from an eventual significant drop in political noise from the current administration. Currently, we believe neither outcome is immediately possible. Similar to Mexico, a 2018 Presidential transition could see slow moving agreements in the local political arena. Despite this, there are still a few positive factors that could support BRL including:

1) Brazil having a relatively low degree of trade openness in comparison with its other regional peers. This may help Brazil transit through a higher US rate environment.

2) Brazil is also not as exposed to the US as Mexico and it is not viewed as a “target” of negotiations for better “trade deals.” However, it is exposed to China (its main trading partner), and our Nomura chief China economist expects headline China GDP growth to remain stable at around 6.5-6.6% from Q1 to Q3 2017.

3) High carry has also helped BRL outperform other more “trade exposed” loweryielding regional currencies. Even as the easing cycle unfolds, Nomura economics still expects the Selic rate to end the year at 10% p.a. In addition, Brazil still has a low stock of government debt denominated in USD, at around 3% of total liabilities.”

“If the global backdrop allows, we believe BRL may still outperform its other regional peers because of relative fundamentals and still significantly high carry. Despite this, we see a slow pace of appreciation, as Banco Central do Brasil (BCB) still needs to dismantle its current FX swaps programme, where the central bank is exposed to BRL weakness from a monetary and fiscal perspective.”