How Perspectives Changed in 2017 in Relation to a Year Ago?
At the start of 2016, inflation was higher than 10%; fear of “fiscal dominance” had raised the quotation of Brazil’s 10-year CDS above 600 basis points and caused the real to depreciate to R$4.00/US$; and the most optimistic GDP projections were for contraction between 3% and 4%. Now as 2017 gets under way, inflation has dipped below 6.5% and is clearly converging to the target; the risk of fiscal dominance has evaporated and the Central Bank has accelerated the pace of lowering the SELIC rate to 75 basis points per meeting; and all the indicators are that although economic recovery will be slow, the recession is nearing its end.
The perspectives are favorable, but uncertainties exist, the most important being approval of the social security reform, which is a harder task than was winning approval of the constitutional amendment that imposed a limit on public spending. A second doubt comes from the fact that with only slow economic recovery, the government cannot count on significant real revenue growth to facilitate meeting the deficit target of R$ 139 billion this year. In face of this, it will have to choose among placing expenditures on contingency, which would make it harder to meet the spending limit in 2018; creating new recurring revenues, such as rolling back previous tax relief measures; or changing the deficit target, which would bring important reputational costs.
Our vision of the economy’s evolution in 2017 is positive, but this does not exclude a good deal of volatility in asset prices and back-and-forth bets on the economic tendencies. Despite the weakened political opposition to the government, factors like continuing revelations from the Lava Jato (Car Wash) investigations and the fiscal crisis of the state governments will likely generate volatility of asset prices, without mentioning trend changes due to alterations in the international economy.
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