29
Brazil Economic Outlook FIRST QUARTER 2018
Brazil Economic OutlookFIRST QUARTER 2018
Brazil Economic Outlook 1Q18
Brazil: recovery gains momentum,
but risks do not recede
1. The growth of the Brazilian economy has surprised upwards
during 2017. That and the improvements in the global
environment, especially the acceleration of global growth,
reinforce the prospects for a (cyclical) recovery of the activity. We
have thus revised upwards our growth forecasts Brazil. We now
estimate growth to have reached 1.0% in 2017 and expect it to
increase to 2.1% in 2018 and 3.0% in 2019
2. Inflation has already bottomed out, but its acceleration from
now on will be gradual, allowing the Central Bank to keep
SELIC interest rates at historically low levels. Specifically,
inflation should reach 4.3% in 2018 and 4.7% in 2019, after having
closed 2017 at 2.9%, while SELIC rates should soon reach 6.75%
and remain at this level for a long time
3. Although in our baseline scenario the economy will continue to
recover and the fiscal problem will be addressed with a reform of
the social security and other measures at the beginning of the next
government to be elected in Oct-18, we can not rule out an
alternative scenario where political and fiscal risks
materialize, bringing the recovery to and end and perhaps
even generating a new economic crisis
Brazil Economic Outlook 1Q18
3
GLOBALGlobal growth confirmed and
short-terms risks moderated
Brazil Economic Outlook 1Q18
Global growth confirmed
01 Improved forecasts for the US,
China and the Eurozone
There is less short-term
uncertainty
02 More positive perspectives for
emerging countries
Greater global demand and
increase in commodity prices
03 More caution in the financial
markets
Expectations of lower liquidity
may reduce flows to emerging
markets
04 Contained core inflation
Although the downward pressure
factors are disappearing
05 Central banks continue their paths
towards normalization
The reasons for withdrawing stimuli
are materializing
06 Global risks
Lesser in the short term; no
changes in the medium and long
term
4
Brazil Economic Outlook 1Q18
Reasons for optimism in large areas, although with caution
Growth revised upwards
Improvement in the labor market
Approval of the tax reform
Continuistic changes in the Fed
UNITED STATES
Moderate deceleration
Some reforms already underway
Positive conclusions at
the XIX Congress of the CPC
Greater potential growth
CHINA
Greater growth than expected
More robust domestic demand
Lower political uncertainty
Plans for greater integration
EUROZONE
5
Brazil Economic Outlook 1Q18
Robust and sustained global growth
Source: BBVA Research6
World GDP growth(Forecasts based on BBVA-GAIN, % QoQ)
The global economy continues to grow,
supported by the recovery of the industrial
sector
Confidence indicators continue to improve,
and anticipate that the outlook will continue
to be positive
Private consumption continues to sustain
growth in advanced economies and gains
momentum in emerging economies
0.4
0.6
0.8
1.0
1.2
Dec-1
2
Jun-1
3
Dec-1
3
Jun-1
4
Dec-1
4
Jun-1
5
Dec-1
5
Jun-1
6
Dec-1
6
Jun-1
7
Dec-1
7
CI 20% CI 40% CI 60% Point Estimates Period average
6
Brazil Economic Outlook 1Q18
The outlook for emerging economies improves
7
The increase in oil prices reflects a greater
global demand, which would account for
60% of such increase
But this is also due to supply factors, linked
to geopolitical risks and the correction of
inventories
Positive and significant impact on emerging
economies that produce raw materials
However,we still expect prices to converge
to $ 60 per barrel in the medium term, due
to increased competition and structural
changes in the energy sector
Price of oil(Dollars per barrel,%)
Source: BBVA Research
Variation over previous period Dollars per barrel
4Q17 2018 2019
18%
21.8%
-2.8%
61.5
65.9
64.1
7
Brazil Economic Outlook 1Q18
88
-1.3
-1.0
-0.8
-0.5
-0.3
0.0
0.3
0.5
0.8
1.0
1.3
ma
r.-1
3
sep.-
13
ma
r.-1
4
sep.-
14
ma
r.-1
5
sep.-
15
ma
r.-1
6
sep.-
16
ma
r.-1
7
sep.-
17
China
Trump
Taper tamtrun
Brexit
Preferencefor EM
Preference for DM
Caution in financial markets, with moderation of flows to emerging markets
Source: BBVA Research, EPFR
Risk appetite indicator(Factor 1 (global), EPFR flow analysis)
Investors appetite for emerging (EM) vs developed (DM)(Inflows in EM vs. DM in % of assets under management)
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
Dec-1
3
Jun-1
4
Dec-1
4
Jun-1
5
Dec-1
5
Jun-1
6
Dec-1
6
Jun-1
7
Dec-1
7
Greater appetite for risk
Less appetite for risk
8
Brazil Economic Outlook 1Q18
Contained core inflation
Source: BBVA Research and the OCDE
Production gap and core inflation(% GDP potential, % YoY)
Reduction of the idle capacity of the
economy, but with room to grow without
strong inflationary pressures
Less reaction of prices to the increase in
activity, for several reasons:
Globalization
Increased flexibility of the labor market
Low inflationary expectations
Reduced productivity growth
The increase in the price of oil will push up
inflation in the short term, facilitating the
normalization of central banks in developed
economies -4
-3
-2
-1
0
1
2
3
4
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
US output gap US core inflation
EA output gap EA core inflation
9
Brazil Economic Outlook 1Q18
Fed
ECBBoJ
Withdrawal of non-conventional monetary policy measures
Tig
hte
nin
gE
asin
g
Pre-crisis Crisis Normalization
Hike in interest rates
Reinvestment of maturities
Interest rate rises
Partial reinvestmentReduction
of purchasing
of bonds
10
Brazil Economic Outlook 1Q18
FED ECB
Tightening cycle and reduction of
the balance in progress
Estimated rise of 75pbs in 2018 to
2.25% and reduction of the balance
by 500,000 million dollars
QE reduction, but extension until
September 2018
No rate hikes are expected until
2019
• Macro : possible surprises
in inflation
Elements of uncertainty:
• Politics: changes in government
ministries (Fed, ECB)
• Markets: Long-term rates and
slope of the curve
Monetary policy normalization: accelerated in the case of the Fed,
gradual in the case of the ECB
Focus: avoid sudden acceleration
of long-term rates Focus:
gain room for manoeuvre
11
Brazil Economic Outlook 1Q18
Down
Up
Unchanged
Generalized revision of the upward growth
Source: BBVA Research
UNITED STATES
2018
2.62019
2.5
SOUTH AMERICA
2019
2.6
EURO ZONE
CHINA2018
2.2
2019
6.0
WORLD
2018
3.82017
3.8
2019
1.8
2018
1.6
2018
6.3MEXICO2019
2.22018
2.02019
4.32018
4.5
TURKEY
12
Brazil Economic Outlook 1Q18
Global risks: Fewer in the short term
13* US: United States; EX: Eurozone; CHN: China. Source. BBVA Research
-P
rob
ab
ilit
y i
n t
he
sh
ort
te
rm+
- Severity+
CHN
US
EZ
• Containment of risks associated with high leverage in
the short term
• Potential negative effect of increased protectionism
• Political tensions still high, but more contained
• Negotiation of trading relations (NAFTA)
• Signs of over-valuation of certain assets
• Reduced risk of rapid normalization by the Fed, but
uncertainty persists
• Reduced political uncertainty, but significant question
marks remain in several countries:
• Brexit: fewer doubts about future trading
relations
• Germany: functioning of the “grand coalition”
• Italy (elections in March 2018): risk of a
government opposed to the European project
• Management of the normalization of monetary policy
Brazil Economic Outlook 1Q18
14
BRAZILRecovery gains momentum,
but risks do not recede
JGA / 14
Brazil Economic Outlook 1Q18
Political tensions must increase again as the presidential elections of
October approach
Political tensions have fallen again in recent
months. On one hand, uncertainty about the
continuity of president Temer in office was reduced
and, on the other hand, there are still several
months left for the presidential elections
Lula, who can still be prevented from being a
candidate due to a possible conviction for
corruption, as well as the right-wing Jair Bolsonaro
lead voting intentions, according to the polls
It is not clear yet whether Lula or Bolsonaro would
support orthodox economic policies and reforms
(in particular, the social security one), which feeds
political risks
In any case, the most likely is that they moderate
their speech in case of victory or that a more
centrist candidate emerges in the next few months
and ends up winning the elections
BBVA Research’s index of political tensions in Brazil*(7-days moving average)
Source: BBVA Research and GDELT. * Index of political tensions = share of news about politics * (1- average tone of news about politics)
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Jun-1
5
Aug-1
5
Oct-
15
De
c-1
5
Feb
-16
Apr-
16
Jun-1
6
Aug-1
6
Oct-
16
De
c-1
6
Feb
-17
Apr-
17
Jun-1
7
Aug-1
7
Oct-
17
De
c-1
7
formal start
of Rousseff’s impeachment
process
news about a recording
in which Temer supposedly
endorses bribery
1515
Brazil Economic Outlook 1Q18
The economic recovery has gained momentum throughout 2017
The recession has been left behind. GDP has been
growing at positive rates for some quarters
In particular, growth reached 1.4% YoY (0.1%
MoM) in 3Q17
Exports and private consumption have been
contributing positively to GDP since the beginning
of the year
In 3Q17 they grew 10.8% YoY (4.1% MoM) and
2.1% YoY (1.1% MoM), respectively
Investment in fixed capital, which lost 30% since
the second half of 2013, grew positively in the
second half of 2017 (in 3Q17 in quarterly terms
and in 4Q17 in annual terms)
GDP growth(% YoY)
16Source: BBVA Research and IBGE
-8
-6
-4
-2
0
2
4
6
Ma
r-1
3
Jun-1
3
Sep-1
3
De
c-1
3
Ma
r-1
4
Jun-1
4
Sep-1
4
De
c-1
4
Ma
r-1
5
Jun-1
5
Sep-1
5
De
c-1
5
Ma
r-1
6
Jun-1
6
Sep-1
6
De
c-1
6
Ma
r-1
7
Jun-1
7
Sep-1
7
16
Brazil Economic Outlook 1Q18
Robustness of exports and recovery of private consumption and
investment sustain the cyclical recovery of the economy
Exports are supported by the global environment, as
well as by favorable terms of trade and exchange
rate
Private consumption, which represents two thirds of
GDP, has been accelerating due to the moderation
of inflation and improvements in the labor market,
and despite the weakness of the credit market
Unemployment reached 12.0% in Nov-17 (13.70% in
Mar-17) helping the real wage bill to grow over 4% in
recent months
With respect to investment, it has been stimulated
by the recovery of consumption, expansive
monetary policy and the reduction of political
uncertainty
Both public consumption and expansion of imports
continue to contribute negatively to GDP
Exports, private consumption and investment(% YoY)
17Source: BBVA Research and IBGE
-20
-15
-10
-5
0
5
10
15
Ma
r-1
3
Jun-1
3
Sep
-13
Dec-1
3
Ma
r-1
4
Jun-1
4
Sep
-14
Dec-1
4
Ma
r-1
5
Jun-1
5
Sep
-15
Dec-1
5
Ma
r-1
6
Jun-1
6
Sep
-16
Dec-1
6
Ma
r-1
7
Jun-1
7
Sep
-17
Exports Private consumprion Investment in Fixed Capital
17
Brazil Economic Outlook 1Q18
Growth prospects for Brazil improve, mainly due to a more positive
global environment
18
The greater strength of the recovery of activity in Brazil since
the beginning of 2017 and, mainly, the better perspectives for
global growth (particularly in China) have caused an upward
adjustment in our forecast for the country
The approval of an ambitious social security reform during the
final year of the Temer government is unlikely. Unaddressed
fiscal problems and the political noise that the October elections
must generate should together prevent a more robust
economic recovery
2017 20192018
3.0%
(now)
1.5%(before)
2.1%(now)
2.7%(before)
0.6%(before)
1.0%(now)
18
Brazil Economic Outlook 1Q18
In 2017 private consumption has started to grown positively again and in
2018-19 investment must do so; net exports will contribute less to GDP
19
Consumption and investment forecasts have been
revised upwards, in line with the improved tone
exhibited by recent data and improvement in the
global environment
Exports must also grow more than previously expected,
stimulated by further growth in the global economy. The
expansion of domestic demand will support imports, reducing the
net contribution of external demand to GDP
GDP growth, by demand components*(%)
* (f) = forecasts. Source: BBVA Research and IBGE
-4,0
-2,0
0,0
2,0
4,0
6,0
8,0
GDP Investment Private consumption Public consumption Exports Imports
2017 (f) 2018 (f) 2019 (f)
19
Brazil Economic Outlook 1Q18
Inflation has already hit bottom
Inflation closed 2017 at 2.95%, slightly below the
target range and in line with our forecast
We maintain our forecast that inflation will close
2018 at 4.3% and 2019 at 4.7%
The acceleration of domestic demand, the
expected (moderate) depreciation of the exchange
rate and the view that food prices will exert ahead
more pressure than in 2017, when they fell 1.9%,
will all contribute for an acceleration of inflation
throughout 2018 and 2019
Inflation(IPCA; % YoY; forecast from Jan-18 onwards)
20Source: BBVA Research and IBGE.
0
2
4
6
8
10
12
Jan-1
6
Apr-
16
Jul-1
6
Oct-
16
Jan-1
7
Apr-
17
Jul-1
7
Oct-
17
Jan-1
8
Apr-
18
Jul-1
8
Oct-
18
Jan-1
9
Apr-
19
Jul-1
9
Oct-
19
Target range
20
Brazil Economic Outlook 1Q18
Monetary policy will remain exceptionally loose in 2018
The Monetary policy easing cycle, started on Sep-
16 when the SELIC interest rates was at 14.25%,
is about to come to an end
Specifically, we anticipate that the BCB will
announce a 25 bp cut of the SELIC rate, bringing it
to 6.75%, at its next monetary policy meeting in
February, and that from then onwards it will keep it
stable at this historically low level until the end of
2018
In 2019, as inflationary pressures increase and
interest rates in the developed economies are
hiked, the SELIC rate would be adjusted upwards
to 9.50%
Interest rates: SELIC(% end of period; forecasts from 2018 onwards)
21(f) = forecasts Source: BBVA Research and BCB.
7,25
10,00
11,75
14,2513,75
7,00 6,75
9,50
0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
16,0
20
12
20
13
20
14
20
15
20
16
20
17
20
18 (
f)
20
19 (
f)
21
Brazil Economic Outlook 1Q18
Fiscal situation: there is still no light at the end of the tunnel
The economic recovery will drive tax collection up,
benefitting public accounts. In particular, the recent
recovery in public revenue will allow the
government to meet the 2017 fiscal target (primary
deficit of -2.5% of GDP)
Anyway, even if activity growth surprises upwards,
a strong additional fiscal adjustment will be needed
so that - in the medium term - the spending ceiling
rule will be met and - in the long term - the
unsustainability of public debt will be avoided.
In this sense, a reform of the social security and
other complementary measures are needed
One of the biggest problems is that the current
government will hardly manage to pass an
ambitious social security reform and, while we
continue to wait for the next president to do so at
the beginning of his government, it is still not clear
whether he will be willing or able to do so
22Source: BBVA Research and BCB.
Public sector’s primary result and gross debt(% of GDP; forecasts from 2017 onwards)
-90
-70
-50
-30
-10
10
30
50
70
90
-5
-4
-3
-2
-1
0
1
2
3
4
5
2010 2012 2014 2016 2018
Gross public debt (right axis) Primary balance (left axis)
22
Brazil Economic Outlook 1Q18
The current account will deteriorate moderately, but the deficit will
remain at low levels
The trade balance has been exceptionally high in
2017. On one hand, exports have grown robustly
due to the global environment and a relatively
depreciated exchange rate. On the other hand,
imports remained relatively low, due to weak
domestic demand
Thus, the commercial balance of 2017, of around
3.3% of GDP, will contribute for driving down the
current account deficit to historically low levels
(close to 0.3% of GDP)
The strengthening of domestic demand and the
stability of the terms of trade should generate an
increase in the current account deficit to around
0.6% of GDP in 2018 and 1.9% of GDP in 2019
23
Current account(% GDP; forecasts from 2017 onwards)
(f) = forecasts Source: BBVA Research and BCB.
-4.5
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
(f)
20
18
(f)
20
19
(f)
23
Brazil Economic Outlook 1Q18
Financial markets continue to display a very positive tone, stimulated by
the global environment and, in a certain way, downplaying local risks
24
At the start of Jan-18, the Sao Paulo Stock Exchange reached
historical maximum levels (in nominal terms), while the risk
premium was around 220 bp, close to the values observed
before the crisis, when the country still exhibited an investment
grade
The exchange rate has appreciated 1% in real terms in 2017 (a
nominal depreciation of 2%). The normalization of monetary
policy in the US and the stability of the terms of trade will
contribute for the Brazilian real to depreciate from 3.30 in Dec-
17 to 3.35 in Dec-18 and 3.45 in Dec-19
Nominal exchange rate(BRL / USD)
Stock exchange and risk premium(% variation in 2017 and in the last three months*)
* Variations in the last three months: from October 10, 2017 to January 10, 2018
Source: Datastream and BBVA Research. Source: Datastream and BBVA Research.
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
Sao Paulo Stock Exchange Risk premium
2017 Last three months
1.5
2.0
2.5
3.0
3.5
4.0
4.5
en
e.-
11
sep.-
11
ma
y.-1
2
en
e.-
13
sep.-
13
ma
y.-1
4
en
e.-
15
sep.-
15
ma
y.-1
6
en
e.-
17
sep.-
17
ma
y.-1
8
en
e.-
19
sep.-
19
24
Brazil Economic Outlook 1Q18
Political and fiscal risks remain high, feeding each other
25
In our baseline scenario, the economy will continue to recover
and the fiscal problem will be addressed with a reform of
social security and other measures at the beginning of the
next government, to be elected in October
However, it can not be ruled out that political and fiscal risks
materialize, slowing down the recovery and even generating a new
economic crisis, especially if the global environment stops being so
positive
Political risks
(turbulence in the presidential race,
heterodox policies, populist
government, political polarization,
government without sufficient
support in the congress, etc.)
Fiscal risks
(no approval of the social security
reform, breach of the spending
ceiling rule, unsustainability of
public debt, inflation, etc.)
25
Brazil Economic Outlook 1Q18
Brazil: recovery gains momentum,
but risks do not recede
1. The growth of the Brazilian economy has surprised upwards
during 2017. That and the improvements in the global
environment, especially the acceleration of global growth,
reinforce the prospects for a (cyclical) recovery of the activity. We
have thus revised upwards our growth forecasts Brazil. We now
estimate growth to have reached 1.0% in 2017 and expect it to
increase to 2.1% in 2018 and 3.0% in 2019
2. Inflation has already bottomed out, but its acceleration from
now on will be gradual, allowing the Central Bank to keep
SELIC interest rates at historically low levels. Specifically,
inflation should reach 4.3% in 2018 and 4.7% in 2019, after having
closed 2017 at 2.9%, while SELIC rates should soon reach 6.75%
and remain at this level for a long time
3. Although in our baseline scenario the economy will continue to
recover and the fiscal problem will be addressed with a reform of
the social security and other measures at the beginning of the next
government to be elected in Oct-18, we can not rule out an
alternative scenario where political and fiscal risks
materialize, bringing the recovery to and end and perhaps
even generating a new economic crisis
Brazil Economic Outlook 1Q18
27
FORECASTS
Brazil Economic Outlook 1Q18
BBVA Research forecasts for Brazil
28f = forecasts
2016 2017(f) 2018(f) 2019(f)
GDP (%) -3.5 1.0 2.1 3.0
Private consumption(%) -4.3 1.1 2.8 2.4
Public consumption (%) -0.1 -0.7 -0.9 -0.1
Gross fixed investment (%) -10.3 -2.6 4.8 7.7
Exports (%) 1.9 6.8 7.3 6.2
Imports (%) -10.2 5.9 7.5 6.7
Unemployment rate (average) 11.3 12.7 11.9 10.9
Inflation (end of period. YoY %) 6.3 2.9 4.3 4.7
SELIC rate (end of period. YoY %) 13.75 7.00 6.75 9.50
Exchange rate (end of period) 3.35 3.30 3.35 3.45
Current account (% of GDP) -1.3 -0.3 -0.6 -1.9
Public sector’s total fiscal result (% of GDP) -9.0 -9.5 -8.5 -6.1
Gross public debt (% of GDP) 69.9 75.8 79.6 80.0
28
Brazil Economic Outlook 1Q18
This report has been produced by the Latin America unit
Chief Economist for Latin AmericaJuan Manuel Ruiz
BBVA-ResearchJorge Sicilia Serrano
Enestor Dos Santos
Cecilia Posadas
With the collaboration of:Global Economic Situations
Miguel Jiménez
Macroeconomic analysis
Rafael Doménech
Global Economic Situations
Miguel Jiménez
Global Financial Markets
Sonsoles Castillo
Long-Term Global Modelling and Analysis
Julián Cubero
Innovation and Processes
Oscar de las Peñas
Financial Systems and Regulation
Santiago Fernández de Lis
International Coordination
Olga Cerqueira
Digital Regulation
Álvaro Martín
Regulation
Financial Systems
Ana Rubio
Financial Inclusion
Spain and Portugal
Miguel Cardoso
United States
Nathaniel Karp
Mexico
Carlos Serrano
Middle East, Asia and
Geopolitical
Álvaro Ortiz
Turkey
Álvaro Ortiz
Asia
Le Xia
South America
Juan Manuel Ruiz
Argentina
Gloria Sorensen
Chile
Jorge Selaive
Colombia
Juana Téllez
Peru
Hugo Perea
Venezuela
Julio Pineda
