2014: A Year of Many Challenges
Executive Summary
The first problem faced by the government at the start of 2014 is the weak economic growth. The deceleration in payroll levels and slow expansion of consumer credit are limiting growth of household consumption, and the uncertainties about the domestic economy are discouraging gross fixed capital formation. There is no room for further fiscal stimulus, and there is a risk the Central Bank will raise the interest rate even more than previously indicated.
The inflation result in 2013 was totally artificial, based on containment of administered prices and the effects of tax relief on products with high weight in the IPCA. Discounting these effects, inflation last year exceeded the upper bound of the target interval, and the expectations for one and two years ahead are of an “implicit target” near 6%. So, the outlook is for another year of high inflation.
The current account deficit is growing in parallel with the tendency for reduced capital inflows, caused by the changing international economic situation. The weakening of the real, which is a burden for control of inflation, is also a solution for the mismatch between the current accounts and capital inflows, and for this reason can be smoothed out or even delayed, but not prevented.
The currency depreciation is also partly due to the worse fiscal picture. The official “target” for the primary surplus in 2013 was only attained at the cost of non-recurring revenues and accounting maneuvers. The announcement by the Finance Ministry that the target was met caused even more uncertainties, raising the perceived risks, in turn reflected in the higher quotations of Brazilian CDS. A byproduct of this increase in perceived risks is an additional contraction of demand for Brazilian assets, putting more pressure on the real to weaken.
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