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Brazil: Economic Recovery Conditional On Future Reforms

Monday April 2, 2018 comments

Analysts at Rabobank suggest that nearly two years after political events paved the way for a rational, consistent economic policy as the Brazilian economy and assets have been largely favored.

Key Quotes

“With a little additional help from one-off events and a supportive global backdrop, the sound policymaking fostered improvement in broad financial conditions and real activity momentum. Past the worst recession in decades, the (gradual) recovery is consolidating and spreading across the sectors. Inflation and interest rates have fallen to historical lows. Balance of payments remains solid (yet with some cyclical help).”

“Fiscal policy continues to be the Achilles heels of the Brazilian economy. Despite a cyclical improvement in the budget performance (as faster activity gears up tax collection and discretionary spending remains under lid), the “time bomb” of mandatory expenses has not been dismantled. Quite the opposite, as the pension reform was pushed back to (at least) after the election. Without a comprehensive overhauling of constitutional spending rules – especially via deep changes in Brazil’s overly generous social security system – government debt will not stabilize (even in the long run) and the economy will be (at some point) dragged back into recession, with inflation, interest rate and FX expected to jump through the roof in time.”

“The urgent necessity to finish off the set of budgetary reforms started in the current administration (even better if those are complemented with other macro and micro adjustments) make this year’s general election a critical one for the Brazilian economy. While financial market seems comfortably sedated by constructive (probability-adjusted) expectations about the outcomes ahead, the fact is that the election outlook still looks very uncertain, and the execution of key reforms is far from a done deal for any electoral scenario. The results will (definitely) matter.”