Last year ended with unfavourable economic data. Activity indicators continue to post negative prints, surprising on the downside despite being at record lows already. The second year of low growth will remain a hurdle to the fiscal performance, especially as 2015 revealed government revenues were strongly affected by the decelerating activity, explaining the primary fiscal deficit of 2% of GDP we expect for 2015.

Moreover, political uncertainty was also the main reason for lower growth. The replacement of Finance Minister Joaquim Levy with Nelson Barbosa also raises uncertainties about a possible change in fiscal policy focused more on growth measures.

BoFA Merrill continues to expect a primary deficit of 0.6% of GDP for 2016, versus the official target at 0.5%, with risks of a bigger deficit if growth surprises on the downside. It still expects economic activity to start recovering in late 2016. BoFA also expects positive reading of trade balance data and BRL to continue weakening towards 4.5 by the end of 2016.

BoFA Merrill revises 2016 Selic call to 15.25% from 12.75% as Central bank sounded more hawkish. BCB report showing higher inflation forecasts with inflation remaining above the 4.5% target, even by 4Q17. In addition to the inflation forecast, trade balance continues to improve and surprised on the upside by posting a US$19.7bn surplus for 2015.