Brazil’s GDP grew by 0.8% in the third quarter of 2018, compared to the previous quarter and by 1.3% compared to the same quarter of 2017. This is the seventh consecutive quarter of growth, but with rates still far below the expectations.
According to a study carried out by the IPEA (Institute of Applied Economic Research), without major reforms (pension and tax), Brazil can grow at an average rate of 0.5%, between 2020 and 2050 and with a path intercalated by different periods of recession. In the event that the reforms are implemented and a greater fiscal equilibrium is restored, the average annual growth could be above 2%.
It is therefore clear that the first major challenge of the new Bolsonaro government will be to study a reform of the social security system that structurally modify the current strong deficit and to make sure, through a delicate political articulation, that it is approved by Parliament without being distorted.
Bolsonaro proceeds quickly in the choice of ministers that will form the new government, and among them already there are 6 ex-soldiers. There is still a name, that of the Ministry of the Environment, which must be defined this week. For this task, the name of Xico Graziano, former head of cabinet in the government Fernando Henrique Cardoso and Secretary of the Environment and Agriculture of the State of Sao Paulo, was made. Always in the PSDB, he left the party before the election to support Bolsonaro. The choice of the Minister of the Environment is very delicate and not by chance left last: on the confrontation / clash between the interests of landowners and environmental interests, an important match will be played both on the domestic and on the international front.
Let’s see the update of some economic indicators. Starting from this edition I add the forecasts of the Banco Central Boletim Focus for 2019.
GDP (Value added at market prices)
|GDP – real growth (%)||2,7%||0,1%||-3,9%||-3,5%||1,01%||1,32%||2,53%|
The 2018 GDP will close around + 1.3%. Far from the 2.5% forecast at the beginning of the year, but which however consolidates the exit from the two terrible years of recession, 2015 and 2016.
The market continues to be moderately optimistic for 2019 and, if approved the pension and the tax reforms, the result could even exceed +3%. It is a goal within the reach of Brazil, given the propensity to return to invest expressed by foreign companies, after the election of Bolsonaro.
Inflation and real/dollar exchange
|IPCA (IBGE – %)||5,90%||6,40%||10,67%||6,29%||2,95%||3,89%||4,11%|
Significant decline in the inflation rate forecast for 2018, below the 4% threshold and therefore well below the percentage (4.5%) placed by Banco Central as the “center” of its goal for 2018.
Also for 2019, the forecast is a growth of around 4%, also coinciding with an increase of 2.5% of GDP. The low utilization of production capacity and still high unemployment (today at 11.3%) should contain inflationary tensions caused by growth.
|Exchange rate R$/US$ (end of the period)||2,34||2,66||3,90||3,25||3,25||3,75||3,80|
A slight growth in the forecast of the dollar for 2018, which goes from 3.70 to 3.75 reais.
The forecast of higher revenue flows caused by increasing foreign investments has not yet translated into a revaluation of the real, now quoted at R $ 3.86.
The euro, which had reached 4.25 reais a month ago, also returned to around 4.36.
|Nominal Interest rate (end of the períod)||10,00%||11,80%||14,87%||13,75%||7,00%||6,50%||7,75%|
|Real interest (deflactor: IPCA)||2,10%||4,20%||2,60%||6,91%||4,05%||2,61%||3,64%|
The discount rate (SELIC) forecast at the end of 2018 is still stable at 6.50%. Thanks to inflation under control, the outlook for the SELIC at the end of 2019 has decreased, estimated at 7.75% and no longer above the 8%. If this favorable situation should be confirmed (considering overcapacity and high unemployment), the virtuous circle “low inflation -> low interest rates -> greater investments -> greater growth without inflation” could be triggered.
The Brazilian stock market (Bovespa)
The stock exchange is reaching today a new historical high, for the first time above 90 thousand points. In the event of rapid approval of the pension reform, by February / March 2019, it is estimated that the index can easily exceed 100 thousand points. And with the commissioning of some significant privatization, the Bovespa can really “fly” in 2019. It is the great moment for the optimist wagers.