Recession and Strong External Adjustment
In 2015 GDP will contract by 3.1% and another 2.7% in 2016. Negative quarterly growth rates should prevail until at least the middle of 2016, meaning the present recession will be one of the longest and deepest in the country’s history.
The primary fiscal deficit will be 1.4% of GDP this year, and we are projecting another deficit, of 0.7% of GDP, next year. The gross public debt will continue growing, reaching 75% of GDP at the end of 2016, and will likely rise further in the ensuing years. Against this fiscal backdrop, a new downgrade is very likely, and with the high risk premiums, the exchange rate should reach R$ 4.50/US$ at the end of 2016.
The recession and weaker real exchange rate are drastically reducing the current account deficit. The trade surplus will reach US$ 45 billion in 2016, with the current account deficit falling from US$ 65 billion this year to US$ 25 billion next year. But there will also be shrinkage of capital inflows (FDI and portfolio), causing the balance of payments to remain in equilibrium, with the government refraining from using reserves to intervene in the foreign exchange market.
The further weakening of the exchange rate and increase of some taxes (CIDE and ICMS) will lead to inflation of 7.5% in 2016. This will be a considerable decline from the 10% that will mark 2015, but will be the second straight year of inflation above the top of the target interval. Despite the bad inflation picture, the depth of the recession will cause the Central Bank to keep the interest rate at 14.25% a year, meaning a continuing situation of monetary accommodation alongside expansionary fiscal policy.
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