MACRO REPORT: Brazil through Q2

Wednesday, September 14, 2016

Brazil's former president Dilma Rousseff was impeached on August 31, confirming President Michel Temer as head of state and ensuring his economic agenda will be carried out through 2018.

Temer, from the right-leaning PMDB, is focused on pulling the country out of a recession with fiscal reforms. Both labor and pension reform proposals have been extremely unpopular, with unions criticizing what they say is the undermining of workers' and retirees' rights, particularly when it comes to the proposed minimum retirement age of 65 for both men and women in the public and private sectors, and the possibility of a longer working day.

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Brazil's GDP declined 4.6% in the first six months of the year, while in the 12 months through June, it contracted 4.9%. According to analysts consulted in the central bank's latest weekly survey, GDP will contract 3.18% in full-year 2016. 

Current 12-month inflation is at 8.97%, well above the target of 4.5% and the ceiling of 6.5%. The latest average inflation forecast for end-2016 from analysts consulted by the central bank is 7.36%.

Brazil's FX rate was 3.285 reais per US dollar at market close on September 12. The latest projection for the local currency at end-2016 is 3.25 reais per US dollar.

On August 31, the central bank's monetary policy committee decided to keep the Selic benchmark interest rate at 14.25% for the ninth consecutive time, confirming the expectations of most analysts. The central bank's latest weekly survey projected a year-end rate of 13.75%.

Unemployment in the quarter ending in July reached a record high of 11.6%. It was 0.4 percentage points higher than the previous quarter and 3.0 percentage points higher than in the same quarter of last year.

Expectations are that Brazil's trade surplus will reach US$50bn by year-end. August saw a surplus of US$4.14bn and total surplus year-to-date is US$32.37bn.

This year, Brazil has allowed for a fiscal deficit no greater than 170.5bn reais (US$51.3bn). The latest data released by the ministry of finance, however, shows that the government registered a deficit of 51.07bn reais between January and July. In the last 12 months ending in July, the deficit was 163.3bn reais. July alone saw a deficit of 18.6bn reais.

The country's current administration is exceedingly unpopular, with a majority of the population demanding elections be pushed forward to October instead from next year. The latest polls from Ibope show that 66% of Brazilians don't trust the current president and 53% don't approve of the way he is running the country. Temer is struggling to maintain control over his government and is expected to have difficulties passing fiscal reforms. He has also been the subject of various protests calling for him to be removed since he became president after Rousseff's impeachment.