Diplomacia e Relações Internacionais

Nouriel Roubini e a economia brasileira: o profeta do apocalipse anuncia crise...

Today's Monitor, Mar 28, 2014

Nouriel Roubini

SPOTLIGHT

Brazil: Has it Hit Bottom?

This is part of a series of Spotlights updating our views on the global economy and asset markets this year and next.

Bottom line: Brazil’s growth outlook has marginally worsened in the face of persistent constraints: A lack of domestic drivers, an extended monetary-tightening cycle, depressed investor confidence and insufficient policy responses. Despite better-than-expected Q4 GDP numbers, a rough start to the year and a probable extension of the Brazilian Central Bank’s (BCB) hiking cycle into 2015 have prompted us to revise our 2014 and 2015 growth forecasts downward. Our end-2014 forecast for the Brazilian real still stands at 2.4 to the dollar—unchanged from our forecasts last year. Following the BCB’s February decision, we now see the key interest rate (the Selic rate) reaching 11% by year-end, but near-term real appreciation could allow the BCB to take a marginally more dovish stance. Our October presidential election scenario remains mostly unchanged: President Dilma Rousseff is the favorite, but the opposition still has a serious chance of scoring a victory. Although policy making would be more pragmatic and market-friendly under the latter scenario, we would also expect a second Rousseff administration to correct some of its previous blunders.

What has changed: Brazil’s GDP numbers surprised to the upside in Q4, but the start of the year was marked by anxieties about the risk of contagion from the turmoil in Argentina and signs of China’s deceleration. All in all, recent developments have led us to slightly revise down our forecasts for 2014 (which were already pessimistic) and 2015 (which remain somewhat optimistic). At the turn of the year, the real was seen as one of the most fragile emerging market currencies—especially following Argentina’s devaluation and the release of China’s soft December PMI reading—but it has recently regained some strength. We now expect the Selic to end the year at 11% (we were expecting 11.25% before the February decision), but recognize the final 25-bp hike we expect in April will depend on the strength of incoming data.

Us vs. consensus: Consensus projections for Brazil’s 2014 growth have steadily fallen over the past few months, but should rise when Q4 data are factored in. As a result, our once-below-consensus forecast is now mostly in line with analysts’ estimates, but will settle slightly below consensus after the revision cycle. Despite our 2015 GDP growth projections, we remain significantly above consensus for next year due to our expectation of a post-election improvement in policy making. On monetary policy, our projection for the Selic has gone from above consensus to generally in line with consensus, although markets continue to price in too many hikes.

Macroeconomic Dynamics

Despite generally disappointing data for industrial production and retail sales in late 2013, Q4 GDP surprised to the upside (0.7% q/q), providing additional statistical carry-over for 2014. However, a bumpy start to the year has led us to marginally reduce our 2014 GDP forecast. Even if exports provide a lift to growth this year on a weaker real, we see little room for consumption to be much stronger than it was in 2013, and the temporary factors that drove investment last year (scheduled projects, base effects) will not re-occur. Tighter financial conditions and political uncertainty in the run-up to the October elections have also made for a bleaker growth outlook.

Recent inflation readings came in marginally below our expectations, prompting a small revision to our average inflation forecast for the year (from 6.2% y/y to 6.0%); however, elevated inflation expectations, a weaker real (on average), high services-sector inflation and increases in regulated prices all continue to paint a poor picture for the CPI. The BCB’s lack of credible inflation-targeting framework (the official 4.5% goal has not been actively pursued for the past few years) is feeding into elevated inflation expectations (5.7% y/y in 2015), and bringing these down would require changes in both monetary and fiscal policy (particularly the latter).

On average, the real will be weaker in 2014 than it was in 2013, although we may not see much more depreciation from current levels. The weak currency will help rein in Brazil’s wide current account gap, but we still expect a deficit of over 3.0% of GDP for 2014.

Policy Implications

Following the BCB’s 25-bp Selic hike in February, we now expect a final 25-bp increase in April. Given our call for emerging market capital flows to stabilize through the year and for the real to weaken marginally (supported by very high nominal and real rates), we also see a less worrisome external financing scenario, while the domestic growth scenario has worsened. These two factors have kept the BCB from adopting a more hawkish stance, despite elevated inflation expectations. We highlight that the currency remains a key variable to watch.

Coupled with investors’ negative assessment of Brazil’s past policy choices, the prospect of a credit-rating downgrade this year led the government to announce a budget cut in February. Although the move is a step in the right direction, Brazil’s low-growth scenario impairs implementation.

Roubini Views on Critical Issues

Our views on the most important economic issues, with a selection of alternative insight from various sources

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