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Time to Buy Brazil? The Bullish Case

Written by Armando Castelar.

The answer to the title’s question is a resounding yes, according to Mauricio Molan, chief economist of Santander Brasil (see here). He expects the economy to resume growth in the second semester of 2016 and to expand vigorously in 2017, when GDP will rise 2%, after printing a negative 3.7% in 2016. He is not alone in making this call: other well-regarded economists have also grown more optimistic lately, foreseeing expansions in the range of 2% to 3% next year.

The bullish view rests on three main pillars. First, Dilma Rousseff’s impeachment will put an end to the political crisis and facilitate the approval of reforms, notably concerning the fiscal accounts, as signaled by the strong support Congress has given so far to the Temer government. The new government also counts on a better economic team, which will boost credibility. These two factors will combine to raise business and consumer confidence from the record lows at which they now stand. Surveys of confidence already show that it is no longer declining. The rise in confidence, in turn, will lift investment and consumption, which will raise tax revenues, facilitating the fiscal adjustment process and further boosting confidence.

Second, the Central Bank is likely to lower the policy interest rate, by five percentage points or more until the end of 2017, further boosting domestic demand and lowering interest payments on the public sector debt. Bullish economists believe inflation will come down, nearing the inflation target (4.5%), due to the record recession of 2014-16, the higher credibility of the new Central Bank governor, and the appreciation of the real, on and in itself a factor that will improve confidence. They see the currency appreciating due to a balanced current account and the high volume of FDI, in a context in which the Central Bank is unwilling to further pile up international reserves.

Third, net exports will continue to expand strongly. There is much optimism regarding a recovery in manufacturing, thanks to a decline in inventories, higher exports and the substitution of imports. Moreover, demand for export commodities has increased in recent months, with substantial price rises, benefiting agriculture and mining. Furthermore, there is the expectation that investment in the oil and infrastructure sectors will expand, with the new management teams in Petrobras and BNDES, as well as due to changes in legislation to make regulation in these sectors more market friendly.

However, not all economists are so optimistic about the outlook for the Brazilian economy in 2017. As I will show in my next post, the bearish case rests on arguments as sound as those put forward by bullish economists that lead to totally different forecasts.

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