BRL likely to depreciate further

The higher than expected Brazil inflation, a collapse in productivity/investment, and a persisting current account deficit impacted BRL. The implied subsidy from the public sector to the private sector will continue to weigh negatively on fiscal accounts and investment. 

"The BRL may still depreciate by more than 25% before reaching the bottom of the cycle. Ahead of a full downgrade to sub-investment grade by Fitch and Moody's, the BRL may break higher than 4.50. On the external front, USD/CNY is forecasted weaker to keep pushing USD/BRL higher", says RBC capital markets.

The main concern into 2016 will be the unwinding of state owned financial institutions' balance sheets. The gap between the reference rate for these institutions and the main reference rate remains wide, at 7% and 14.25% respectively. 

"Petrobras is highly unlikely to contribute to the consolidated fiscal accounts. Moreover it may require additional increases in gasoline prices because international prices denominated in local currency spiked higher with a weaker BRL", added RBC.