Brazil Economic Forecasts and Risk Ratings

Recession coming to an end but slow growth ahead

After a deep and prolonged recession, Brazil is beginning to show signs of recovery. The March Purchasing Managers’ Index (PMI) figures, while still reflecting economic contraction, reached their highest since February 2015, while industrial production data also indicated a less severe recession. In addition, the monthly index of economic activity in January and February 2017 showed strong expansion. This trend is expected to continue through the first quarter and would end 11 consecutive quarterly declines. S&P Global forecasts that Brazil’s economy will likely stabilize in 2017 and resume growth in 2018.

While PMI indicators have improved in recent months, Brazil’s government must still pass politically unpopular reforms to fix its huge fiscal gap: Gross fiscal debt amounts to 70% of GDP, which borders on unmanageable levels. On the positive side, lower inflation—due to reduced demand during the recession—will allow Brazil’s central bank to continue to cut the policy rate. Moreover, Brazil’s exchange rate remains relatively strong, supported by a sizeable trade surplus and capital inflows. Brazil already has a highly diversified industrial base, abundant natural resources and great domestic market potential; if it can balance its public finances, it would significantly increase its long-term appeal to foreign investors.

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April 2017 Forecast Highlights

March Purchasing Managers’ Index (PMI) figures for manufacturing amounted to 49.6; although they still show Brazil is in contraction (below 50), this is the best result since February 2015 and shows the industry may soon exit the recession. The PMI for services amounted to 47.7, the best result since March 2015.
Significant revisions to the methodology on measuring commerce and other sector activity might imply that Brazil’s GDP actually expanded in the first quarter of 2017, which would mean the end of a deep and long-lived recession. S&P Global forecasts the recession will end in the second quarter, but the aforementioned changes may bring forward growth.
Inflation will drop further, allowing Brazil’s central bank to continue cutting the policy rate aggressively

Medium- and Long-Term Forecast

While the medium-term outlook is mixed, long-term prospects for the Brazilian economy remain relatively positive
High domestic interest rates constrain growth prospects for Brazil
On a more positive note, unlike the rest of Latin America, Brazil has a diversified industrial base and remains a major force in the region

Brazil Medium-Term Outlook Economic Growth, 2015-2019

Country Risk Rating for Brazil

Following Dilma Rousseff’s impeachment, Michel Temer was officially sworn in as president on August 31. He is expected to serve until 2018, but fresh corruption allegations are threatening his stay in office. While Brazil’s economy is starting to show signs of recovery, it has been going through a deep and prolonged recession. GDP contracted by 3.6% in 2016 and unemployment surged to 11.3%; anemic growth of just 0.2% is forecast for 2017. Temer will prioritize maintaining political stability and tackling an unsustainable fiscal deficit that will require the approval of an unpopular austerity program by Congress. Fiscal retrenchment efforts will open the door for the privatization of airports and power distributors. Foreign investment is constrained by heavy taxation, outdated labor laws, corruption and an excessive state bureaucratic burden.

A note on our risk ratings: S&P Global derives country risk ratings for 206 countries, based on six separate ratings in each country: political, economic, legal, tax, operational and security with 22 detailed sub-aggregate risks. These ratings allow you to quantify risk with greater specificity with a scoring system based on a 0.1-10 logarithmic scale. Seven risk bands, from low to extreme, allow you to compare and contrast risk between countries and regions.

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