With Michel Temer's government conquering their first victories in congress, how will Brazil's Economy line up for the following months? This question is answered in this month's Focus Economics Report issued by the Economics Team of the UK Mission in Brazil.

1. 1. As political uncertainty has gradually been dissipated, specialists forecast a modest economic recovery.
Relative enthusiasm regarding Brazil’s performance has dominated current analysis. There are reasons for
optimism: growth projections are improving, interest rates fell for the first time in four years, inflation is
gradually ceding and trade balance accumulated a historical record surplus of more than £31 bn until October.
Moreover, when compared with Brazilian past crises and crises in other countries, Brazil’s drama is less scaring
(see slide pack attached). These figures, however, should be taken with a pinch of salt: the key domestic risk
now is that the government fails to deliver on its fiscal consolidation strategy.
2. Growth is predicated to resume if fiscal reform is completed by year end. If the fiscal reform moves forward,
forecasts project a recession of 3.3% in 2016 and about 0.5% growth in 2017. Temer’s fiscal consolidation
agenda is composed by three main lines of action:
a. A constitutional amendment establishing a cap for fiscal expenditures at all levels of government. The
proposal is considered the major policy initiative of Temer’s government and has already passed two
votes in the lower house. It still needs two votes in the Senate and there is a high probability of approval
despite considerable social objection.
b. A proposal for social security reform, which has been announced but not sent to Congress yet. This
reform is more controversial among analysts and faces stronger social and political opposition than the
constitutional amendment. It is, however, essential for fiscal consolidation: the current social security
system represents 40% of the government’s primary spending. Without the social security reform there
will be no fiscal consolidation.
c. A multibillion dollar plan for infrastructure concessions and privatizations, dubbed Crescer (“to grow”).
The package, announced on September 13, presented 34 projects ranging from railroads, ports and
airports to mining, energy and oil & gas. The government aims to attract around £16 bn in foreign direct
investment until 2018.
3. Government’s progress on the fiscal consolidation strategy was reflected in the reduction of interest rates
on October 19. The Central Bank cut Brazil’s interest rates to 14% p.a., after keeping it stable at 14.25% p.a.
since July 2015. The decision took into account better-than-expected inflation behavior as well as the
beginning of the fiscal adjustment. The cut was welcomed by the market, which bet on a reduction of 25 b.p.
or 50b.p. The Central Bank’s hawkish approach suggests that there will be no surprises or rough movements.
Many believe that this cut will inaugurate an easing cycle and anticipate that the Monetary Policy Committee
(Copom) will reduce Brazil’s base interest rate (SELIC) again at its next meeting by end November. According
to the official statement, however, further cuts will depend on a favourable evolution of factors leading to
greater confidence in getting inflation down to the 4.5% target by the end of 2017.
4. Rising optimism among market agents throughout 2016 has been mirrored both in the Brazil risk, measured
by Credit Default Swaps (CDS), and in the stock market, measured by the index performance for Ibovespa.
CDS almost halved from 500 b.p. in January 2016 to 274 b.p. in late October. During the same period, the
Ibovespa index skyrocketed from less than 40.000 points to 64.000 – reaching its highest level since April
BRAZIL ECONOMIC FOCUS: November 2016
Economic recovery: house of cards

2. Monthly Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16
Inflation (12 mth. accum.) 10.71 10.36 9.39 9.28 9.32 8.84 8.74 8.97 8.48 7.97
Benchmark Interest Rate 14.25 14.25 14.25 14.25 14.25 14.25 14.25 14.25 14.25 14.0
Unemployment (%) 9.5 10.2 10.9 11.2 11.2 11. 3 11.6 11.8 11.8 n/a
Trade Balance (US$ bn) 0.9 3 4.4 4.9 6.4 4 4.6 4.1 3.8 2.4
Exports (US$ bn) 11.3 13.4 16 15.4 17.6 16.7 16.3 17 15.8 13.7
Imports (US$ bn) 10.3 10.3 11.6 10.5 11.1 13.8 11.8 12.9 12 11.4
FDI (US$ mi) 5454.7 5920.4 5560 6820 6145 3917.3 78 7208 5233 n/a
UK exports (US$ mi) 147.3 238.8 174.3 248.7 190.3 190.7 169.6 204.0 225.4 182.5
UK imports (US$ mi) 161.3 254.1 236.3 203.8 256.1 235.3 202.6 278.5 284.6 294.0
GDP (% var. Quarterly data)
Key Macroeconomic Indicators
-0.3 -0.6 (to be released on 30 Nov, 2016)
2012. Moreover, Brazilian exchange rate
against the US dollar appreciated from over
R$4.00/US$1 in January to R$3.19/US$1 in late
October (see charts beside).
5. President Temer has built a strong coalition,
but re-intensification of political uncertainties
can delay reforms and be a drag on growth. In
the October municipal elections, Temer’s
coalition has taken over 81% of Brazil’s city
halls – analysts believe this will help to put rest
to the “coup d’état” speech adopted by
Rousseff’s supporters after her impeachment.
Former speaker of the Lower House Eduardo
Cunha is now under preventive arrest and has
called President Michel Temer and former
President Lula as defence whiteness. Leading
judge of Lava Jato, Sergio Moro, has already
requested both politicians’ testimony. An
eventual plea-bargain deal could reach the
President and members of his trust, shaking the
still delicate political balance.
6. President Temer is putting sizeable efforts in
rebuilding Brazil’s international credibility and
there are signs of an inflection in foreign
policy. On the one hand, contrasting with Rousseff’s little care for foreign matters; Temer has personally
engaged to promote Brazil as a great investment destination again. On the other hand, there is certain
continuity in terms of agenda: under Temer, the BRICS group remained a priority. In mid-October he went to
the 8th
Summit in Goa, India, where he promoted Brazil as a major global player as well as a business-friendly
country with huge economic potential. Temer also went to Japan accompanied by the Ministers of Foreign
Affairs; Finance; and Development, Industry & Trade.
7. Less adverse macroeconomic and financial external environment for emerging markets economies should
contribute to domestic recovery – but surfing on this wave hinge on Brazil doing its homework. The current
juncture offers a window of opportunity to push for long and much-needed structural reforms, but these will
involve difficult negotiations. Changing the route back to growth will require consistent and elevated
commitment from politicians before they can profit from an economic recovery – a pledge that remains to be
seen.