Brazil: growth is expected from 2016

Il Brazil ended 2014 with blocked reforms, stagnant GDP, declining investments and slowing consumption. Growth will only return from next year. This is the essence of the focus on the country published by Intesa San Paolo, Studies and Research Department, edited by Giancarlo Frigoli.
The President Dilma Rousseff he obtained his second four-year mandate in 2014, narrowly beating (51,6%) his rival, Senator Neves. The new government took office in early January. The divisions within the President's party, the Partido dos Trabalhadores, and the fragmentation of the political framework seem hinder reforms structures that the Brazilian economy needs to return to growth and improve the country's competitiveness.
What makes these reforms more urgent than ever is the lowering of the prices of raw materials, which for Brazil represent about three-quarters of the country's exports. The preliminary estimates on the 2014 recorded a halt in GDP growth. Estimates speak of a modest +0,2%, compared to +2,3% in 2013. The current absence of fiscal and credit support measures has undoubtedly contributed to the slowdown. On the demand side, the slowdown in GDP is mainly due to investment declinei (-7,3% year/year from January to September 2014) and a slowdown in private consumption (+1,2% y/y in the first three quarters of 2014 from 2,6% in the same period of 2013). From that of the offer, there has been a decrease in both buildings (-4,9% y/y) than of manufacturing production (-3,2%), mainly due to the automotive sector. Agricultural production (+1% from +8,5% in 2013) and services (+0,9% from +2,2%) also experienced a sharp slowdown. Foreign trade, on the other hand, had a positive effect on GDP (+0,5 percentage points): imports decreased (-0,1%) due to the drop in domestic demand for intermediate goods and exports increased (+2,8% ).
According to preliminary data, Brazil will fall short of the budgetary targets expected at the beginning of 2014, recording a overall deficit which according to estimates will be equal to 5,5% of GDP. The country's primary balance closed, however, with a deficit of 0,2% of GDP. The failure to meet the budgetary targets is partly due to lower than expected growth, partly due to higher public spending due to the parliamentary elections. The Minister of Finance, Joaquin Levy, considered a conservative, has indicated as a target for 2015 tax revenues equal to 1,2% of GDP.
The rate of inflation, which frightens markets and families, closed 2014 at 6,4%well above the target range (from -2,5% to 4%). Analysts predict that price growth will remain constant also in 2015, to then drop to 5,7% in 2016. Throughout 2014, the Central Bank pursued a restrictive monetary policy. The SELIC rate is at 11,75%, the highest level since 2009. However, this restrictive impact of the Central Bank is counterbalanced by government refinancing to BNDES, the Brazilian Development Bank which, in turn, provides loans at interest rates ( 5%) far lower than the market ones.
During 2014, the real depreciated against the dollar by a further 13,4%. While in 2013 the depreciation of the exchange rate was seen as an opportunity to recover competitiveness, today the Authorities, worried about inflation, have begun to intervene in support of the currency with constant issuance of swap contracts in foreign currencies, which are equivalent to sales of forward currency. The nominal depreciation was balanced by high inflation and the real effective exchange rate closed 2014 at 84,7.
The current balance of payments deficit increased to $80 billion from $72,5 billion in the same period of 2013. trade balance closed in the red (4,2 billion) due to the drop in the prices of some minerals, such as iron and nickel, and exported agricultural products (soybeans). Again from January to November 2014, the financial account surplus rose to 96,7 billion from 69,1 billion the previous year. This improvement was primarily driven by growth in both short- and long-term foreign currency lending, which totals about $20 billion. At the end of November 2014, Brazil had foreign exchange reserves worth $366,4 billion. These far exceed the foreign financing requirement, estimated in 2015 by the EIU (Economist Intelligence Unit) at 190 billion dollars (reserve cover ratio at 1,9). However, at the end of 2014, Brazil had a net debt position (NFP) of $793 billion. One third of the total financial liabilities are attributable to portfolio investments and 14% to foreign currency loans. The largest imputation share is held by FDI (almost 50%). The worsening of the balance of payments and the net debt position lead to the strong dependence of the Brazilian economy on foreign capital, despite the fact that the reserves offer an adequate coverage of external financial needs and imports.
In the last year and a half the rating agencies expressed less and less positive judgments on Brazil. Moody's, while confirming the Baa2 rating, negatively changed the country's outlook, while S&P directly cut the rating from BBB to BBB-, the last step before moving to the "speculative" category. However, both underlined the low growth of the economy, the incoherent management of economic policy and the failure to achieve public finance objectives. The deterioration of the national macroeconomic situation and the evaluations of the rating agencies had only a temporary role in the increase in the CDS spread. In fact, already at the beginning of 2015 the CDS spread recorded a new decline, falling below 150 bp (basis points). In recent years, political deadlines and social tensions have blocked the structural reforms that the country needed.
Fiscal discipline, more decisiveness in contrasting inflation, reforms relating to the labor market and reduction of the role of the state in the economy, are deemed necessary by the agencies to relaunch the country's growth and credibility. Furthermore, the economy requires huge investments in the exploitation of natural resources, in infrastructures and in plants. The indicators suggest a probable further decline in GDP in the 4th quarter of 2014, while there are still no signs of recovery. According to the most recent Central Bank survey, there will be an expansion in real terms of 0,4% in 2015, while growth is expected to accelerate to 1,8% in 2016.