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Can we be optimistic about Brazil’s economy?

by Mariel Barclay

Updated: March 19, 2019

Just when Brazil is recovering from the deepest ever recession, uncertainty over the results of the coming election can hurt the predictability of its economy. Mariel Barclay, asks Bradesco’s Chief Economist Fernando Honorato about the perspectives for this coming year.

Q: Can we be optimistic about Brazil’s economy? Can the country achieve a sustainable recovery and inclusive growth? What is necessary to achieve this?

Brazil is headed towards a consumption-lead cyclical recovery due to three main reasons: (1) the deleveraging of families’ balance sheets is already at an advanced stage; (2) Companies are carrying low levels of inventories relative to ideal levels and they have also already adjusted jobs to the current level of production. Therefore, if demand picks up, production and jobs will have to rise, reinforcing the consumption story; (3) inflation will be low into 2018 due to restrained wage growth, high levels of idle capacity and potential to import due to balance of payments adjustments. All this will contribute to lower interest rates in 2018, helping to improve consumption and companies’ balance sheet. Growing jobs is the most effective way of reducing poverty and inequality, and Brazil has already created 1.3 million jobs this year. For growth to be sustained Brazil needs to address two issues: (1) fiscal sustainability, mainly through social security reform and (2) raising the level of investment, which depends a lot on the business environment. These two issues depend a lot on the continuation of the current economic reform agenda.

Q: What extent will political uncertainty impact growth next year?

The risk exists, but it is diminishing. That is precisely because the economy around the electoral period will be doing well in terms of jobs, growth, inflation and low interest rates. With that landscape, the candidates cannot deny the positive results of current economic policy and would not risk changing it – they are more likely to commit to the current economic reformist agenda. Consumption will not be affected by the election or political uncertainties. Perhaps investments will be affected. But all-in-all, consumption is the driver of next year’s growth, so we don’t expect it to be affected by the past risks.

Q: What do finance managers need to be prepared for in 2018? What are the main risks they will have to face in Brazil?

Volatility stemming from global issues and local political issues may increase going into 2018. The FED might tighten more than markets expect and inflation might rise in the global economy. So, preserving cash so as to keep companies solvent and being cautions with the investment agenda seem to be the most important recommendations. Rising demand will indicate to corporates the appropriate rate of expansion without overinvesting. Beware currency and local yield volatility on the back of these factors.