Prospects for 2017 show a better year for Brazil. Most bet for a country gradually creeping out of recession with lower interest rates and consolidation of fiscal reform agenda as leading crutches. Nonetheless, 2017 is expected to deliver more. And let’s not forget Lava Jato, which will continue to haunt the corridors of Brasilia throughout 2017.

1. 1. Prospects for 2017 show a better year for Brazil; at least from where we stand. Financial markets and
the majority of analysts bet for a country gradually creeping out of recession with lower interest rates
and consolidation of fiscal reform agenda as leading crutches. Meanwhile, in Brasilia, government sets
the first stones for moving forward with long needed structural reforms and parades a rarely seen
willingness to open up the economy.
2. Looking back at January 2016, low expectations for the year ahead were the consensus. In the most
optimistic scenario, GDP was expected to contract by 2.8%, while the most pessimistic forecasts
predicted a 6% contraction for the period. The Real was at its lowest level against the dollar since its
creation in 1994. Interest rates were expected to surpass 15%. At 10.7%, inflation barely beat President
Rousseff’s 11% approval rating.
3. 2016 was the year that never started. After Rousseff’s suspension from the Presidency in May, Vice-
President Michel Temer took over and swiftly espoused a reformist agenda. These reforms aim to
address old structural problems, such as an unsustainable government’s spending framework; a social
security system that doesn’t reflect the current balance sheet or demographics; and an unfriendly
business environment (123rd
position in the doing business index), marked by complex taxation,
bureaucracy and poor social and physical infrastructure - not to mention corruption.
4. Temer progressed in important reforms, sending a positive signal; nonetheless, these have limited
short-term economic impact and are still modest compared to what is needed. The government chose
long term reforms with a package that includes measures on improving the microeconomic
environment and a spending cap that freezes government expenditure in real terms for at least the next
decade. Nonetheless, the best case scenario (in which government manages to pass the social security
reform in 2017) still shows public gross debt ratio to GDP skyrocketing to 83% until 2020 before it starts
to decrease.
5. However, some good news should be expected for this year:
a. Lower inflation rates: equally lead by the strong economic downturn and a welcomed credibility
boost brought by a new President,
the Central Bank was able to deliver
by end 2016 an average inflation of
6.3%, within the target upper band of
6.5%. For 2017, market analysts
expect inflation to be close to the
4.5% target.
b. Lower interest rates: concrete signs
of stabilized inflation allowed the
Central Bank to boost a so far timid
BRAZIL ECONOMIC FOCUS: January 2017
A brighter but challenging year ahead
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Benchmark Interest Rate (SELIC)
Central Bank of Brazil; Santander projections

2. loosening cycle initiated in October. After keeping the benchmark interest rate (SELIC) stable at
14.25% since July 2015, the Bank drove it down to 13% at present. For end 2017, SELIC is expected
to reach a “more civilized” single digit level.
c. Higher (or at least stable) GDP growth: no one is expecting another year of recession. While the
government forecasts a relatively optimistically GDP growth of 1%, businesses are confident of a
slow recovery in consumption levels, although still cautions on new investments. Even the IMF’s
more pessimistic projection of 0.2% would still be considered a successful 2017 in the current
Brazilian reality.
6. Meanwhile, shifts in the international landscape boosted risks associated with emerging markets, but
impacts in Brazil remain uncertain. As expected by most, the immediate short term reactions to
Trump’s election hit Brazil hard, with the Real plunging by 6% in the two days following the results in
the US. Nonetheless, the actual impacts of a new (and yet unknown) international dynamics for Brazil
remain uncertain – while higher US interest rates could damage a potential investment-lead economic
recovery, fiscal stimulus from Trump would likely increase Brazil’s iron-ore exports. At the same time,
China and a better-than-expected recovery in commodity prices will not drive Brazil’s return to growth,
but won’t impair it either. Finally, Brexit may mean new opportunities for Brazil as a non-EU UK looks
for alternative markets and partners.
7. In an accident of timing, historically closed Brazil is looking to open up to trade just when global
protectionism is on the rise. Optimistically, Brazil hopes to conclude EU-Mercosur FTA by the end of
2018 and ambitions to sign an early UK-Mercosur FTA. Any progress in terms of liberalizing trade will be
quite transformative for Brazil in the long term.
8. All in all, the path for recovery is set and the first steps were given; the real challenge lies in moving
forward. The government managed to approve hard reforms and relevant changes in 2016 and this
goes beyond the expenditure ceiling cap. Pre Salt exploitation rules were relaxed; business friendlier
management at State companies such as Petrobras and Eletrobras led strict disinvestment and
deleveraging plans; BNDES grew smaller, prioritizing projects with higher social returns than private
gains, and national champions lost access to subsidized lending; a microeconomic reform package
provided relief for households and companies and easier credit restructuring for SMEs. Nonetheless,
2017 is expected to deliver more. The first big challenge lies in approving an unpopular social security
reform, followed by a controversial labour reform and a tax reform with the potential to hurt important
interest groups. And let’s not forget Lava Jato, which will continue to be a surprise element in 2017.
Monthly Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17
Inflation (12 mth.
accum.)
10.36 9.39 9.28 9.32 8.84 8.74 8.97 8.48 7.87 6.99 6.29 n/a
Benchmark Interest
Rate
14.25 14.25 14.25 14.25 14.25 14.25 14.25 14.25 14.00 13.75 13.75 13.00
Unemployment (%) 10.2 10.9 11.2 11.2 11. 3 11.6 11.8 11.8 11.8 11.9 12.0 n/a
Exchange Rate end of
period (BRL/USD)
3.98 3.56 3.45 3.60 3.21 3.24 3.24 3.25 3.18 3.40 3.26 3.12
Trade Balance (US$
bn.)
3 4.4 4.9 6.4 4 4.6 4.1 3.8 2.4 4.7 4.4 2.7
Exports (US$ bn.) 13.4 16 15.4 17.6 16.7 16.3 17 15.8 13.7 16.2 15.9 14.9
Imports (US$ bn.) 10.3 11.6 10.5 11.1 13.8 11.8 12.9 12 11.4 11.5 11.5 12.2
FDI (US$ mi) 5920.4 5557.4 6820.4 6145.5 3917.4 208.3 7207.7 5273.6 8399.6 8592.9 15409.5 n/a
UK exports (US$ mi) 238.8 174.3 248.7 190.3 190.7 169.6 204 225.4 182.5 150.9 175.8 n/a
UK imports (US$ mi) 254.1 236.3 203.8 256.1 235.3 202.6 278.6 284.6 294 245.3 189.5 n/a
Quarterly 2016 Q2 Q3 Q4
GDP (% var. QoQ) -0.6 -0.8 *
Key Macroeconomic Indicators
* Data to be released on 07 March 2017.