THEBrazilian economy recorded three consecutive quarters of trend declining GDP. GDP growth almost stopped in 2014, standing at a modest 0,1%, compared to 2,7% the previous year. Brazil's economy is feeling the effects of restrictive monetary and fiscal policies aimed at countering inflation, the fall in exchange rate and the deterioration of public finances. The most recent forecasts point to a decline in real GDP of 1,2% for this year, followed by a contained recovery (+1% in 2016). These forecasts are in line with those contained in the IMF's World Economic Outlook (WEO) for April, which estimates that Brazil's GDP will decrease by 1% in 2015, while for 2016 it forecasts growth of 1%.
In April 2015 the annual rate of inflation rose to 8,2%, the highest level since 2013, remaining for the fourth consecutive month above the upper limit of the target range (4%, +/-2,5%). Inflation is expected to remain in the high end of the range throughout the year ending it at 8,2%, before slowing significantly next year, ending 2016 at 5,5%. In this context, in the first few months of the year, the Central Bank continued the restrictive monetary policy cycle started in mid-2013. Furthermore, between January and May 2015 the Real depreciated by a further 14% against the US dollar. From April 2013 to the end of 2014, the Real lost half its value against the dollar, going from 2 to 3 Real : 1 USD, where the IMF highlighted an overvaluation of the effective real exchange rate at the end of 2014 (equal to 85) between 5% and 15%. During the first quarter of this year the real effective exchange rate depreciated by 10%, while in the medium-long term, the currency is expected to receive support from the imbalance adjustment policies recently launched by the Government.
In 2014, the public sector recorded a primary deficit of 0,6% of GDP, compared to a 1,9% surplus the previous year. For the current year, the government has set a primary budget surplus of 1,2% of GDP as an objective. Despite the weakness of domestic demand, the current account deficit rose to 4,2% of GDP in 2014 ($104 billion), from the previous 3,4%. During the same period, the financial account surplus rose to $110,7bn, supported by FDI (of which 60% due to intercompany loans) and foreign portfolio investment, driven by the rise in interest rates and the abolition of the tax on short-term capital flows. At the end of March 2015, Brazil had accumulated reserves in foreign currency for an amount equal to 354,7 billion USD, against an estimated foreign financing requirement of 221 billion (reserve cover ratio at 1,6).
All three major agencies continue to rate Brazil's sovereign debt as "investment grade" (BBB- for S&P, BBB for Fitch with negative outlook and Baa2 for Moody's with negative outlook).
The scenario changes and Intesa Sanpaolo takes us to the Andes, the Peruvian side. Last year the real GDP growth of 2,4%, was less than half of the +5,8% recorded in 2013, mainly affected by the weak external situation, particularly as regards the raw materials market. In the face of the weakening economy, Peruvian authorities have taken a series of measures to support demand in recent months, including tax cuts, investments in public works and interest rate cuts. The impact of these measures on domestic demand is expected to be felt more in the coming quarters. Analysts expect real GDP to rise by 3,9% this year. Growth is expected to further accelerate in 2016 (+5% according to the IMF) thanks to previous investments in mining. However, these forecasts appear excessively optimistic without a real recovery in the cycle of raw materials and domestic demand.
For most of 2014, the inflation trend rate remained above the upper limit of the target range (2±1%), closing the year at 3,2%. The Central Bank expects the trend to fall around the central value of the target range by the end of the year. The main credit institution left the policy rate unchanged, while it reduced the compulsory reserve ratio on deposits in local currency on several occasions (the last one last May), bringing it to the current 7,0%, from 11,5 .2,60% a year ago. Over the past two years, the nuevo sol has lost more than a fifth of its value against the dollar, rising from 1 PEN 2013 : USD in mid-3,15 to the current 5 PEN. Over the same period, the real effective exchange rate depreciated by about 103% to 99, although it remained above its long-term average (XNUMX).
In 2014, the state budget reported a deficit of 0,1% of GDP (compared to a 2% surplus recorded the previous year) for the first time since 2010. This year the deficit is expected to rise to 2% of GDP following the stimulus measures. Public debt, which has been steadily decreasing in recent years, is contained, equal to 20% of GDP in 2014. Peru's balance of payments shows a current account deficit (3,1% of GDP the average figure in the last five years), mainly determined by the remuneration of foreign capital invested in the country. In 2014 capital flows were not sufficient to cover the entire current deficit and the balance of payments closed with a deficit of 2,1 billion compared to the previous surplus of 2,9 billion. At the end of December 2014, foreign exchange reserves fell to 60,3 billion from 63,2 billion. The reserves amply covered the 2015 external financial requirement, estimated by EIU at 20,4 billion (reserve cover ratio of 3).
Here then is that, despite the negative trend of raw materials, a consistent, credible and flexible economic policy, one solid external and fiscal position (thanks to a low public and external debt in relation to GDP), the high coverage of the external requirement guaranteed by the foreign exchange reserves and by the availability in the Sovereign Fund, support the non-speculative investment rating (A3 for Moody's, BBB+ for S&P's and Fitch) assigned by rating agencies to Peruvian currency sovereign debt.
