How does Brazil’s economic forecast look? After hosting the 2016 Olympic Games and finalizing the impeachment process of Dilma Rousseff, the question that remains is how the country’s economy will shape up over the coming months. Check out the latest Economic Focus Report by the British Diplomatic Mission for September 2016.

1. 1. Temer government must turn good intentions into tough actions. During interim period, Temer has
survived on the benefit of doubt. The price for building political support was high, £11.6bn in debt relief
to state governments (up till 2018), £12.3bn in increased wages to civil servants (up till 2019). Initial
wins, however, calmed negative reactions. Government sent, and Congress approved: the 3% GDP
(£40bn) primary deficit for 2016; the budget law for 2017 limiting expending to 2016 inflation; and the
constitutional amendment extending government’s discretion over 30% of mandatory spending (DRU).
However, the pre game is over now. With impeachment concluded, the market expects adjustment to
proceed in fact and rapidly.
2. What is expected next:
 Confirmation of attractive concession and privatization programme. A package including
concessions and privatization opportunities was the first big announcement of Temer’s
confirmed presidency. The new Secretariat for Partnerships and Investments (PPI) presented 34
projects ranging from railroads, ports and airports to mining, energy and oil and gas. Changes
include bilingual tenders, increased time between tenders and auctions and commitment for
environmental and auditing (by Federal Audit Court) pre-clearance. Privatizations announced
include three state sanitation companies (in RJ, PA and RO), in addition to the lottery strand of
Caixa (Loteria Instantânea). The Government calculates £5.7 in revenue only in 2017. Market
analysts hope for better return rates, less bureaucracy and greater legal certainty. Confirmation
will come with the first tenders, which are expected for the beginning of 2017.
 Amendment to the Constitution establishing nominal cap for expenditure. The Government is
expected to send Congress a legislative proposal for limiting primary spending increases to the
previous year’s inflation. The change will mean zero real expenditure growth, including on
health and education. It will not be enough to fix the negative fiscal scenario, but seen as a
strong and important first step for stabilizing debt/GDP upward trend. The proposal is expected
by the beginning of October, the final vote in
December. The measure needs 3/5 of the votes
in Lower House and 2/3 in the Senate.
 Social security reform. The current system is
unsustainable, and reform is urgent. Social
security accounts for more than 40% of
mandatory spending, and is not included in
nominal expenditure cap proposal. In the short
term, the deficit should reach £28bn by the end
of 2016 (4% GDP). In the long term, by 2060, it
could surpass 11% of GDP. The market
specialists expect a first proposal by year end. The Government has already mentioned
establishing a 65 years old minimum retirement age, gradual convergence between retirement
age for women and men, and reviewing special regimes, such as those allowing early
retirement for teachers. But reform is unpopular and union leaders strong.
BRAZIL ECONOMIC FOCUS: September 2016
Impeachment and the economy
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
asaush
InvestorsTrust Index (MtMvariation)
source:Confederação Nacional da Indústria

2. 3. Positive shock of change in Government supports an incipient recovery. Since the start of the
impeachment proceedings, leading indicators show continuous recovery (Brazil composite leading
indicator experienced a 10% increase from January to August 2016). First signs of stabilization came in
1Q 2016, with GDP results presenting softer than expected fall: 0.3% contraction relative to 0.8%
market consensus. Initial sparks of recovery are seen in 2Q 2016. Investments lead the way, with 0.4%
growth after two and a half years of contraction. Industry follows boosted by exports, growing for the
first time in five quarters, by 0.3%. Nonetheless, domestic consumption remains weak and a constraint
to service sector recovery (responsible for 72% of Brazil’s GDP), hurt by still rising unemployment, high
level of indebtedness, and falling real wages.
4. 4. But post-impeachment will reveal the true
alignment of forces. Confidence can change
quickly. With Temer confirmed as President, key
interest groups revert to cash in on their
support. Export businesses spoke first, already
expressing concern over the strengthening
Brazilian Real despite Central Bank’s firm
position to reduce intervention. Other sources
of pressure include Unions as opposition to
labor market reforms, and major health and
education coalitions in Congress as key opponents to the spending ceiling. The alignment of such forces
will determine how fast Brazil will converge towards fiscal stability and the appetite for other reforms.
Key Macroeconomic Indicators
Monthly Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Aug- 16
Inflation (12 mth. accum.) 10.71 10.36 9.39 9.28 9.32 8.84 8.74
Benchmark Interest Rate 14.25 14.25 14.25 14.25 14.25 14.25 14.25
Unemployment (%) 9.93 10.00 10.20 10.62 10.91 11. 3 11.6
Trade Balance (US$ bn.) 0.9 3.0 4.4 4.8 6.4 3.9 4.5
Exports (US$ bn.) 11.2 13.3 16.0 15.4 17.5 16.7 16.3
Imports (US$ bn.) 10.3 10.3 11.6 10.5 11.1 12.8 11.7
Quarterly 2016 Q1 Q2 Q3 Q4
GDP (% var. QoQ) -0.3 -0.6
0.89%
-1.32%
-1.24%
0.16%
-1.20%
0.82%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16
Industrial activity indicator (MtMvariation)
source: FGV