Brazilian economy still on tenterhooks despite new govt in power

The Brazilian economy at present is in its second year of contraction after the GDP shrank 3.8 percent in 2015. There is no significant change expected for 2016. In the first quarter of this year, the economy contracted 5.4 percent on a year-on-year basis, signifying that the country is facing its worst economic performance since 1930s. Major declines in terms of trade and higher inflation together are to be blamed for the contraction.

Brazilian inflation began accelerating in 2014; however, it rose sharply in 2015 along with the BRL’s depreciation. On the year-on-year basis, Brazil’s CPI came in at about 10.7 percent in early 2016, quite higher than the central bank’s inflation target of 4.5 percent. Since then, inflation has began decelerating. It reached 9.39 percent y/y in April.

Over the rest of 2016, the Central Bank of Brazil projects the recent rise in the Brazilian real and higher unemployment to curb inflationary pressures. However, the BCB is unlikely to attain 4.5 percent inflation target in 2016 and 2017, said Commerzbank in a research report.

Meanwhile, lower commodities prices also negatively impacted the country. Terms of trade declined significantly. If China, which is the biggest commodity buyer in the world, continues to be weak, Brazil is expected to keep facing challenges from this side. The deficit in trade is likely to reach around 7 percent of GDP in 2016, noted Commerzbank. However, this is dependent on the government implementing austerity program.

Politicians in Brazil had voted in April to impeach President Rousseff, who was then replaced by Vice President Temer. The replacement is initially for up to 180 days until Rousseff defends the charges and then until 2018 if she is impeached. However, this does not assure stability as corruption investigations continue into a broader array of senior PMDB politicians, according to Commerzbank. Political risks are expected to remain at higher level.