Brazil Business Report

IMPORTANT NOTICE:
The information in this PDF file is subject to Business Monitor Internationals full copyright and entitlements as defined and protected by international law. The contents of the file are for the sole use of the addressee. All content in this file is owned and operated by Business Monitor International, and the copying or distribution of this file, internally or externally, is strictly prohibited without the prior written permission and consent of Business Monitor International Ltd. If you wish to distribute the file, please email the Subscriptions Department at subs@businessmonitor.com, providing details of your subscription and the number of recipients you wish to forward or distribute this information to.
DISCLAIMER All information contained in this publication has been researched and compiled from from sources sources believed believed to to be accurate and inin view ofof the natural scope for human and/or and reliable reliable at atthe thetime timeof ofpublishing. publishing.However, However, view the natural scope for human and/ mechanical error, either at source or during production, Business Monitor International accepts no liability or mechanical error, either at source or during production, Business Monitor International Limited and its whatsoever for any (together loss or damage from errors, inaccuracies or omissions affecting any part of affiliate companies BMI) resulting accept no liability whatsoever for any loss or damage resulting from the publication. All information is provided without warranty, and Business International makes no errors, inaccuracies or omissions affecting any part of the publication. All Monitor information is provided without representation of warranty of representation any kind as to accuracy or completeness of any information hereto warranty, and BMI makes no ofthe warranty of any kind as to the accuracy or completeness contained. of any information hereto contained.
www.businessmonitor.com
Q2 2013
BRAZIL
BUSINESS FORECAST REPORT

INCLUDES 10-YEAR FORECAST TO 2022
Published by BUSINESS MONITOR INTERNATIONAL LTD
On The Road To A Modest Recovery
ISSN 1744-8875
Published by Business Monitor International Ltd. Copy Deadline: 18 January 2013
2
2012e
2,225.76 4,344.7 1,752.6 11,221 9,123 1.0 61.4 1.3 20.9 0.8 18.9 -2.5 198.4 5.0 5.4 33.5 7.25 1.95 2.48 -57.9 -2.6 284.3 303.0 -18.7 -0.8 -50.4 -2.3 379.0 20.3 385.0 20.1 -2.2 -49.8 -0.7 -0.7 -52.5 -2.2 390.0 19.3 -16.0 -17.7 300.0 317.0 284.0 299.3 329.1 325.0 4.1 0.2 -30.6 -1.2 392.0 18.1 -2.6 -2.5 -2.0 -60.0 -59.2 -50.5 2.59 2.61 2.67 2.65 -49.9 -1.8 364.0 355.0 9.0 0.3 -21.8 -0.8 395.0 16.3 2.07 2.17 2.22 2.21 7.50 8.00 7.50 6.50 31.2 36.3 34.8 34.0 31.5 5.50 2.17 2.61 -39.8 -1.3 404.0 387.0 17.0 0.6 -13.6 -0.4 400.0 15.0 5.5 5.0 5.0 4.8 4.6 5.4 5.5 5.5 5.6 5.7 5.7 4.5 29.0 5.50 2.12 2.55 -44.4 -1.3 443.7 420.0 23.7 0.7 -7.1 -0.2 407.0 13.8 200.1 201.7 203.3 204.8 206.3 207.7 7.7 7.2 7.0 6.5 5.8 5.2 19.6 20.2 20.8 21.2 21.5 21.7 21.9 5.0 209.1 5.6 4.6 27.0 5.50 2.05 2.46 -42.4 -1.1 488.7 459.0 29.7 0.8 -2.8 -0.1 415.0 12.7 2.1 2.5 1.0 1.5 1.6 2.8 2.0 20.6 20.4 19.8 19.4 18.9 18.6 18.2 3.2 2.5 3.1 3.5 4.0 4.3 4.5 4.6 17.9 2.2 22.0 5.0 210.4 5.7 4.5 25.0 5.50 1.95 2.34 -52.9 -1.2 543.7 504.0 39.7 0.9 7.2 0.2 425.0 11.7 61.1 60.4 59.9 59.5 59.4 59.4 59.5 59.6 3.5 3.7 4.0 4.2 4.3 4.3 4.2 4.4 9,385 9,791 10,360 11,273 12,375 13,688 15,348 17,460 19,941 4.5 59.8 4.8 17.6 3.0 22.1 5.0 211.7 5.8 4.5 23.0 5.50 1.85 2.22 -50.7 -1.0 603.7 549.0 54.7 1.1 22.2 0.4 445.0 11.1 11,449 11,750 12,432 13,527 14,850 16,426 18,417 20,952 23,929 1,832.4 1,974.9 2,106.2 2,309.0 2,553.0 2,843.5 3,209.4 3,674.1 4,221.6 4,741.3 5,154.6 5,623.5 6,123.5 6,663.4 7,251.0 7,895.0 8,597.5 9,372.0 10,215.4 4,729.4 26,653 22,211 4.5 59.9 4.8 17.4 3.2 22.2 5.0 212.9 5.8 4.4 22.0 5.50 1.80 2.16 -56.8 -1.0 658.7 599.0 59.7 1.1 27.2 0.5 455.0 10.3 2,290.47 2,369.94 2,527.41 2,770.80 3,063.63 3,412.21 3,851.24 4,408.95 5,065.92 5,675.23
BRAZIL MACROECONOMIC INDICATORS

2013f 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f
Nominal GDP, US$bn [2]
BRAZIL Q2 2013
Nominal GDP, BRLbn [2]
Nominal GDP, EURbn [3]
GDP per capita, US$ [3]
GDP per capita, EUR [3]
Real GDP growth, % y-o-y [3]
Private final consumption, % of GDP [3]
Private final consumption, real growth % y-o-y [3]
Government final consumption, % of GDP [3]
Government final consumption, real growth % y-o-y [3]
Fixed capital formation, % of GDP [3]
Fixed capital formation, real growth % y-o-y [3]
Population, mn [4]
Unemployment, % of labour force, eop [5]
Consumer prices, % y-o-y, ave [3]
Lending rate, %, ave [6]
Central Bank policy rate, % eop [7]
Exchange rate BRL/US$, ave [8]
Exchange rate BRL/EUR, ave [8]
Budget balance, US$bn [1,6]
Budget balance, % of GDP [1,6]
Goods and services exports, US$bn [6]
Goods and services imports, US$bn [6]
Balance of trade in goods and services, US$bn [6]
Balance of trade in goods and services, % of GDP [6]
Current account, US$bn [7]
Current account, % of GDP [6]
Foreign reserves ex gold, US$bn [7]
Import cover, months g&s [6]
Business Monitor International Ltd
Notes: e BMI estimates. f BMI forecasts. 1 General Government Budget (Accumulated Current Prices). Sources: 2 IBGE, IMF; 3 IBGE/BMI calculation; 4 World Bank/UN/BMI; 5 IBGE; 6 BCB/BMI calculation; 7 BCB; 8 BMI calculation.
Contents
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5 Major Forecast Changes.................................................................................................................................................................5 Key Risks To Outlook.....................................................................................................................................................................5
Chapter 1: Political Outlook..................................................................................................................... 7

SWOT Analysis........................................................................................................................................................... 7 BMI Political Risk Ratings......................................................................................................................................... 7 Domestic Politics ...................................................................................................................................................... 8
Rising Violence Highlights Operational And Security Risks......................................................................................................8
The recent increase in crime and violence in So Paulo highlights the continued spread of the Primeiro Comando da Capital gang in recent years, as well as the relative fragility of the security situation in some of the country's urban areas. Moreover, with anti-crime programmes likely to ramp up in both So Paulo and Rio de Janeiro over the coming quarters, we see potential for operational and security risks to head higher as well. TABLE: POLITICAL OVERVIEW ............................................................................................................................................................................. 8
Long-Term Political Outlook................................................................................................................................... 10

Significant Policy Challenges Ahead..........................................................................................................................................10
President Dilma Rousseff's administration faces myriad tough policy choices over the next few years, and many of these may not be addressed until after the 2014 general elections. The country's impressive economic performance under President Luiz Incio Lula da Silva has significantly raised the bar for any future administration, and Rousseff now faces a delicate combination of policy objectives, from continuing to improve living standards and addressing widening domestic economic imbalances to meeting security and infrastructural challenges ahead of the FIFA World Cup in 2014 and the Rio de Janeiro Olympic Games in 2016.
Chapter 2: Economic Outlook................................................................................................................ 13

SWOT Analysis......................................................................................................................................................... 13 BMI Economic Risk Ratings.................................................................................................................................... 13 Economic Activity.................................................................................................................................................... 14
Upswing In 2013, But No Return To Boom Years.......................................................................................................................14
Following Brazil's unexpectedly-weak Q312 growth data, which showed that both fixed investment and the banking sector continue to drag down economic activity, we have revised down our average real GDP growth forecast for 2012 to 1.0% (from 1.5% previously). That said, we anticipate a significant pickup in economic activity in 2013, as we expect a backlog of infrastructure projects and a modest uptick in private consumption will boost growth to 3.5% in 2013. TABLE: ECONOMIC ACTIVITY.............................................................................................................................................................................. 14
Monetary Policy........................................................................................................................................................ 16
Economic Recovery And Price Pressures Underpin Modest Rate Hike..................................................................................16
While we believe that a slow economic recovery and significant pressure on households is likely to keep Brazilian interest rates on hold for the majority of 2013, we maintain our view for a 25-basis-points hike by end-year, bringing the Selic rate to 7.50%. This comes as inflation expectations have headed higher in recent months and we believe significant currency depreciation and other supply-side price pressures will keep headline inflation elevated as well. TABLE: MONETARY POLICY................................................................................................................................................................................ 17
Exchange Rate Policy ............................................................................................................................................. 19

BRL: Inflation Concerns To Limit Currency Weakness.............................................................................................................19
Since our last currency forecast update, the Brazilian real has continued to trade broadly sideways. While a sell -off in late 2012, which brought the unit to a low of BRL2.1384/US$ in early December, initially made us think that the Banco Central do Brasil (BCB) might allow a weaker currency, the unit's subsequent rally confirmed that the real is likely to range trade over the coming months. As such, we expect the unit to continue trading within a tight band of BRL2.0000/US$ and BRL2.1000/US$ over the coming months, forecasting an average exchange rate of BRL2.0700/US$ this year, slightly stronger than our previous forecast of BRL2.1300/US$. TABLE: CURRENCY FORECAST.......................................................................................................................................................................... 20
Balance of Payments............................................................................................................................................... 21
Stronger Trade Outlook Underpins Current Account Improvement........................................................................................21
Following a substantial trade slowdown in 2012, we expect a modest recovery in exports, due to favourable base effects and a cyclical upswing in Chinese growth, will bolster the current account in 2013. Mean while, although we expect the financial account surplus to Business Monitor International Ltd www.businessmonitor.com
BRAZIL Q2 2013
remain off its recent highs, we believe it will continue to comfortably offset the current account deficit. TABLE: CURRENT ACCOUNT............................................................................................................................................................................... 21
Fiscal Policy.............................................................................................................................................................. 23
Expenditures To Keep Fiscal Deficit Substantial In 2013..........................................................................................................23
While we see some upside for revenue growth in 2013 following a significant slowdown in 2012, we believe expenditures will head higher as well, meaning that we anticipate no improvement in Brazil's nominal fiscal deficit this year. Moreover, with the government indicating that it is looking to loosen Brazil's fiscal framework, we believe the administration will miss its primary balance target in 2013. TABLE: FISCAL POLICY........................................................................................................................................................................................ 23
Regional Economic Activity ................................................................................................................................... 25

What If We Are Wrong On Chinese Growth? Assessing The Regional Implications.............................................................25
Signs of a recovery in China's economy present substantial upside risks to our current 'hard landing' scenario. Higher-than-anticipated economic growth in China over the coming years would have profound implications for Latin America's economic trajectory, and we highlight Chile and Peru, and Brazil to a lesser extent, as most affected in the event of stronger growth in Asia's biggest economy. 25 TABLE: CHINA'S CONSUMPTION OF SELECTED COMMODITIES, % OF GLOBAL CONSUMPTION............................................................ 25
Chapter 3: 10-Year Forecast................................................................................................................... 31

The Brazilian Economy To 2022............................................................................................................................. 31
Imbalances To Unwind, Three Potential Scenarios...................................................................................................................31
Vast natural resources and strong domestic demand will keep investor interest rooted in Brazil over the coming decade. However, there is a pressing need for the authorities to address some of the country's deeply- rooted structural issues, stemming from too much consumption and not enough production, which is likely to lead to slower growth and a weaker currency at some point over the next 10 years. TABLE: LONG-TERM MACROECONOMIC FORECASTS.................................................................................................................................... 31
Chapter 4: Business Environment......................................................................................................... 35

SWOT Analysis......................................................................................................................................................... 35 BMI Business Environment Risk Ratings.............................................................................................................. 35 Business Environment Outlook.............................................................................................................................. 36 Institutions................................................................................................................................................................ 36
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS............................................................................................................................... 36
Infrastructure............................................................................................................................................................ 37
TABLE: BMI LEGAL FRAMEWORK RATING........................................................................................................................................................ 37 TABLE: LABOUR FORCE QUALITY...................................................................................................................................................................... 38
Market Orientation.................................................................................................................................................... 39
TABLE: LATIN AMERICA ANNUAL FDI INFLOWS........................................................................................................................................... 39
Operational Risk....................................................................................................................................................... 40
TABLE: TRADE AND INVESTMENT RATINGS..................................................................................................................................................... 40
Chapter 5: Key Sectors........................................................................................................................... 43

Autos ........................................................................................................................................................................ 43
TABLE: BRAZIL AUTOS SALES BY SEGMENT HISTORICAL DATA AND FORECASTS, 2010 2017........................................................ 45 TABLE: FOOD CONSUMPTION INDICATORS HISTORICAL DATA & FORECASTS, 2010-2017................................................................... 50
Other Key Sectors.................................................................................................................................................... 53

TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS.................................................................................................................................. 53 TABLE: PHARMA SECTOR KEY INDICATORS.................................................................................................................................................... 53 TABLE: TELECOMS SECTOR KEY INDICATORS................................................................................................................................................ 53 TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS...................................................................................................................... 54 TABLE: FREIGHT SECTOR KEY INDICATORS.................................................................................................................................................... 54
Chapter 6: BMI Global Assumptions..................................................................................................... 55

Global Outlook.......................................................................................................................................................... 55
Growth May Be Turning The Corner ...........................................................................................................................................55
TABLE: GLOBAL ASSUMPTIONS......................................................................................................................................................................... 55 TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS................................................................................................................. 56 TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS (%).......................................................................... 56 TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS................................................................................................................ 57
Executive Summary
Core Views
Following a massive slowdown in 2012, we expect the Brazilian economy to rebound in 2013. This view is underpinned by our projection that fixed investment will pick up over the coming quarters as the government pushes through projects in advance of the expiration of the PAC II growth acceleration programme and FIFA World Cup in 2014. That said, we continue to expect that a period of household deleveraging will constrain private consumption growth in coming years, in line with our forecast for average real GDP growth of 3.5% between 2012 and 2017.
We anticipate that a modest recovery in exports on the back of the current cyclical upswing in Chinese growth, favourable base effects and strong agricultural harvests will bolster Brazil's external accounts this year. As such, we forecast the current account deficit will come in at 2.2% of GDP in 2013, a modest improvement from an estimated 2.3% of GDP deficit in 2012. In addition, while we continue to believe financial inflows will remain off their previous highs, we expect the financial account surpluses will still comfortably cover the current account shortfalls for the foreseeable future.
We believe an uptick in expenditures will offset a modest increase in Given our view for economic activity to remain below-trend in the next few years, we believe the monetary authorities will prefer to keep the policy rate accommodative, implying that low interest rates are here to stay. However, with inflation expectations having increased in recent months and supply-side pressures likely to remain elevated over the coming months, we forecast 25 basis points of hikes by end-2013, bringing the Selic target rate to 7.50%. revenues in 2013, meaning that the nominal fiscal deficit will remain substantial at 2.6% of GDP this year. Moreover, in line with recent statements by members of President Dilma Rousseff's administration, we now believe the government will miss its 2013 primary fiscal balance target of 3.1% of GDP, as it looks to have done in 2012.
Key Risks To Outlook

Downside Risks To Growth Forecast: Should fixed investment disappoint in 2013 on the back of project delays, as it did in 2012, economic activity could remain weaker than we currently expect in the coming quarters. Such a scenario would pose major downside risks to our 2013 real GDP growth forecast of 3.5%.
We maintain our view that fiscal consolidation will remain off the cards for Brazil until after 2014 at the earliest. This is underpinned by our expectation of substantial spending related to the second phase of the country's growth acceleration programme and the 2014 general election, fiscal stimulus aimed at bolstering near-term growth, and indications the President Dilma Rousseff's government is looking to relax Brazil's fiscal regulations.
Downside Risks To Interest Rate Forecast: Given our expectation for economic activity to pick up over the coming quarters, while supplyside price pressures remain elevated, we forecast 25 basis points of
Major Forecast Changes

We have downgraded our 2012 real GDP growth estimate to 1.0% and our 2013 forecast to 3.5% as we believe Brazil's economic recovery is progressing more slowing than we initially anticipated. That said, we continue to anticipate a substantial uptick in economic activity this year, as a rebound in fixed investment boosts growth.
hikes by end-2013, bringing the Selic rate to 7.50%. However, the central bank's rhetoric continues to indicate that rates will remain on hold at the current 7.25% level. Should growth pick up more modestly than we currently anticipate over the coming months, we could see the monetary authorities hold the policy rate at 7.25% or even cut this year.
Chapter 1:
Brief Methodology Political Outlook
SWOT Analysis
Strengths
President Dilma Rousseff has largely followed in the footsteps of her predecessor Luiz Incio Lula da Silva, maintaining market-friendly policies and ensuring broad policy continuity. Such developments underscore the country's democratic credentials ahead of the 2014 general election as well. Although corruption scandals plague the political landscape, Rousseff's crackdown on corrupt officials has boosted confidence in the executive's commitment to tackling the issue.
BMI Political Risk Ratings

Brazil's political risk profile remains highly stable and continues to place Latin America's largest economy among the higher ranks of social stability and broad policy continuity in the region, buoying the country in our proprietary political risk ratings. We highlight, however, that the region as a whole does not instil the same degree of confidence in our political risk assessment, suggesting that rising political risk and social tensions in Argentina, Venezuela, Bolivia and some Central American countries, will present some degree of 'spill-over' risk going forward. S-T Political Rank Trend
+ = = = + = = = + = = = -
Weaknesses
Rousseff's 'house cleaning' of allegedly corrupt officials in recent years means she must focus on maintaining a workable coalition to push ahead with important reforms prior to the 2014 general election.
Opportunities
The recently passed 'barrier' electoral law, which restricts federal campaign financing for smaller parties, may help improve Brazil's highly fragmented party environment by fostering coalition building. Brazil's growing political influence in the region may pave the way for the country to assume the role of regional leader, pioneering closer integration among Latin American countries.
Chile 76.7 1 Uruguay 74.8 2 Colombia 72.5 3 Costa Rica 72.5 3 Panama 71.9 5 Brazil 70.8 6 Peru 67.5 7 Mexico 65.6 8 El Salvador 57.9 9 Nicaragua 55.2 10 Ecuador 55.0 11 Bolivia 50.6 12 Argentina 50.2 13 Venezuela 48.1 14 Guatemala 47.5 15 Paraguay 45.6 16 Honduras 43.8 17 Regional ave 61.3/Global ave 65.5/Emerging Markets ave 63.1
Threats
The smaller members of the ruling legislative coalition could stir up trouble for Rousseff if they feel she has assigned too many cabinet posts to other parties or disagree with her policy trajectory. This would be particularly problematic for the president heading into the 2014 general election.
L-T Political
Rank
Trend
= = = = = = = = = = = = = = = = =
Chile 84.2 1 Costa Rica 71.8 2 Uruguay 71.4 3 Panama 67.9 4 Mexico 67.1 5 Brazil 66.5 6 Colombia 62.8 7 Argentina 61.9 8 Peru 61.5 9 Paraguay 60.4 10 El Salvador 58.9 11 Honduras 53.3 12 Ecuador 50.6 13 Venezuela 48.8 14 Guatemala 45.8 15 Nicaragua 44.7 16 Bolivia 44.2 17 Regional ave 61.3/Global ave 63.2/Emerging Markets ave 59.6
BRAZIL Q2 2013
Domestic Politics
Rising Violence Highlights Operational And Security Risks
BMI VIEW
The recent increase in crime and violence in So Paulo highlights the continued spread of the Primeiro Comando da Capital gang in recent years, as well as the relative fragility of the security situation in some of the country's urban areas. Moreover, with anti-crime programmes likely to ramp up in both So Paulo and Rio de Janeiro over the coming quarters, we see potential for operational and security risks to head higher as well.
reportedly on the back of a confrontation between police and the Primeiro Comando da Capital (PCC) gang in May. This increase in violence highlights the fragility of security in some of Brazil's urban areas, as well as increased potential for violence to spread outside of the state. Furthermore, with anti-crime initiatives likely to ramp up in So Paulo and Rio de Janeiro in the lead up to the 2014 FIFA World Cup and 2016 Olympic Games in Rio de Janeiro, we see potential for operational and security risks in the country to head higher as police increasingly come into conflict with gangs. Local media report that 102 police officers were killed in the city of So Paulo in 2012, more than double the number killed in 2011. The surge in violence recalls a period of deadly confrontation between the PCC and police in 2006, during which the gang allegedly organized a series of attacks that killed about
Crime has surged in the state of So Paulo in recent months,

TABLE: POLITICAL OVERVIEW
System of Government
Head of State Head of Government Last Election Composition of Current Government
Parliamentary democracy, universal suffrage: 513-seat Chamber of Deputies (four-year term). Executive power rests with president.
President (Dilma Rousseff), one four-year term President Dilma Rousseff Parliamentary October 1 2010 Presidential October 31 2010 Coalition comprising Partido dos Trabalhadores, Partido Comunista do Brasil, Partido Republicano Brasileiro, Partido Socialista Brasileiro, Partido do Movimento Democrtico Brasileiro, Partido Liberal, Partido Progressista and Partido da Mobilizao Nacional Vice President Michel Temer (Partido do Movimento Democrtico Brasileiro), Chief of Staff Gleisi Hoffmann (Partido dos Trabalhadores), Defence Minister Celso Amorim (Partido do Movimento Democrtico Brasileiro), Finance Minister Guido Mantega (Partido dos Trabalhadores) Partido dos Trabalhadores (88 seats): Left-wing social-democratic party founded in 1980 by a group of intellectuals and workers at the Colgio Sion in So Paulo. The party was led by former president Luiz Incio Lula da Silva since its formation until 1994. The party is currently led by Rui Falco. Partido do Movimento Democrtico Brasileiro (78): A centrist party, succeeding its predecessor the Brazilian Democratic Movement in 1981. The party is largely made up of liberals and former guerrillas of the MR-8 group. The party is currently led by Michel Temer. Partido da Social Democracia Brasileira (54): One of the largest and most prominent Brazilian parties, it is the party of former president Fernando Henrique Cardoso. The social-democratic party is associated with the Third Way movement in Brazilian politics. The party was founded in 1988 and is currently led by Srgio Guerra. Democratas (Partido da Frente Liberal) (43): Considered to be the main centre-right party in Brazil, it is the party of the former military regime which ruled Brazil between 1964 and 1985. The party was founded in 1985 as the Liberal Front after splitting from the Democratic Social Party. The party's leader is Jos Agripino Maia. Partido Progressista (41): This centre-right party was founded in 1995 as the Brazilian Progressive Party and is regarded as conservative. The party changed its name to Progressive Party in 2003. It is currently led by Francisco Dornelles. Other parties represented in parliament include: Partido da Repblica, Partido Socialista Brasileiro, Partido Democrtico Trabalhista, Partido Trabalhista Brasileiro, Partido Popular Socialista, Partido Verde, Partido Comunista do Brasil, and Partido Social Cristo.
Key Figures
Main Political Parties (number of seats in parliament)
Next Election Key Relations/ Treaties
Parliamentary 2014 Presidential 2014 Brazil is member of Mercosur, which includes Argentina, Paraguay and Uruguay. Associate members of the economic bloc include Chile, Ecuador, Peru, Bolivia and Colombia. Brazil has increasingly strong ties with the EU. 70.8 66.5
BMI Short-Term Political Risk Rating BMI Structural Political Risk Rating Source: BMI
POLITICAL OUTLOOK
200 people in retaliation against a government programme designed to isolate leaders of the PCC in prison. The most recent conflict between the two groups has resulted in the deaths of numerous police officers, particularly those in the force's lower ranks. Despite government efforts to cut down on crime and gang activity in some of country's most notorious slums, the most recent surge in violence highlights the fragility of security in urban areas.
Latin America Short-Term Political Risk Ratings
Policy-making process 80 60 40 Policy continuity 20 Social stability
beyond So Paulo and its increasingly important role in the drug trade implies that the risk of violence between the police and the gang spreading outside of So Paulo is greater than in previous years. While this is not our core view, we will be watching the situation closely for any potential trigger events, which could see violence spread. Indeed, such a situation would likely see us downgrade the security component of our short-term political risk rating for Brazil. In addition to the surge in violence in So Paulo in recent months, we highlight potential for the highly visible police pacification programme ongoing in Rio de Janeiro's favelas to result in significant confrontations between police and gangs over the coming quarters. Indeed, the current programme utilizes raids and increased law enforcement presence by special police forces to rid the favelas of narcotics traffickers and local militias in an attempt to reduce violence. As these initiatives continue we anticipate that rising violence between the police and gangs, such as the Comando Vermelho, could pose increased risks to firms' operating in the city.
Latin America Short-Term Political Risk Ratings
74
Strong Rating At Risk?
Brazil Colombia Peru Mexico

Source: BMI
Security/external threats
Potential For Deterioration
72
Anecdotal evidence also suggests that the PCC's grip on the Brazilian prison system continues to grow the group was formed as a union to defend prisoners' rights in 1993 and local press report that the PCC is an important force in the majority of So Paulo's prisons, using them as bases from which to run the gang's operations. In addition, while So Paulo and neighbouring states remain the PCC's main power base, the gang reportedly has a presence in 21 of the country's 27 states, and gang membership continues to rise.
Colombia Brazil Peru Mexico
70
68
66
64
62
The PCC has also expanded its narco-trafficking operations in recent years. According to the UN, federal cocaine seizures have more than tripled in Brazil since 2004 to reach 27 tons in 2010, and perceived cocaine usage has continued to grow since then. Bolivian anti-narcotics authorities have stated that the PCC is present in Bolivia as well and obtains much of its cocaine from the country. Bolivia's Interior Minister, Carlos Romero, highlighted in October 2012 that 54% of Brazilian cocaine comes from Bolivia, underscoring links between the drug trade in both countries. There is also evidence that Brazil's narco-traffickers, including the PCC, have infiltrated neighbouring Paraguay in recent years, as the country is a regional narcotics transshipment point and a marijuana producer. The PCC's growing presence
Source: BMI
Assessing The Implications Of Gang Violence

The surge in violence in So Paulo, as well as the relative tenuousness of the security situation in some urban areas has important implications for political and business environment risk in Brazil. Indeed, with conflicts between the police and gangs likely to increase over the coming quarters, we see potential for firms to be impacted on the operational and security fronts. While we believe most investment is likely to go ahead in spite of these risks, we note that signs of violence spreading
BRAZIL Q2 2013
into more affluent areas could make foreign investors wary. Moreover, should we see signs that the influence of the PCC or Comando Vermelho is rapidly increasing outside of Brazil's urban areas in the fashion of the Mexican drug cartels, this could weigh heavily the country's investment outlook over the medium to long term.
Long-Term Political Outlook

Significant Policy Challenges Ahead
BMI VIEW
President Dilma Rousseff's administration faces myriad tough policy choices over the next few years, and many of these may not be addressed until after the 2014 general elections. The country's impressive economic performance under President Luiz Incio Lula da Silva has significantly raised the bar for any future administration, and Rousseff now faces a delicate combination of policy objectives, from continuing to improve living standards and addressing widening domestic economic imbalances to meeting security and infrastructural challenges ahead of the FIFA World Cup in 2014 and the Rio de Janeiro Olympic Games in 2016.
ingly geared towards a social development agenda, ensuring that a growing number of Brazilians have access to affordable housing and retail goods via cheaper credit. While we expect this trend to slow somewhat over the coming years, consolidation of a rising middle class and its ambition to close the 'income gap' with Western economies will remain of paramount political importance. This will place a considerable straightjacket on future policy efforts to unwind public spending programmes initiated under Lula, such as 'Bolsa Familia' and the Growth Acceleration Programme, restricting the room available to plug the government's fiscal holes and potentially making the eventual reduction of the government's role in the economy that much more painful when it does come. Rising Fiscal Uncertainty: Enormous public spending commitments and a highly inefficient tax collection system will further challenge the capacity of Brazilian authorities to rein in the fiscal shortfall over the coming years. Therefore, a pick-up in economic activity does not automatically guarantee a narrowing of the budget deficit, suggesting that more will need to be done on the spending side. Indeed, our long-term political risk rating for Brazil is weighed down primarily by a poor rating in the 'scope of state' category, largely due to the large size of public spending as a percentage of GDP. Reforming Brazil's highly complex and often conflicting tax code will be another enormous challenge for any future government, and we believe that a tangible improvement in tax collection will remain unattainable until the latter end of our forecast period, and possibly beyond. High Labour Market Rigidity: Brazil has some of the highest hiring costs in the world, forcing employers to commit large sums to pension funds and pay enormous penalties for firing workers. This places an additional burden on the public sector to ensure high employment numbers, as an inflexible labour market will have private-sector employers thinking twice before re-hiring after a recession. Moreover, we caution that a large grey economy will exacerbate the country's tax collection inefficiency, in turn prolonging the government's fiscal woes over the coming years. High Entry Barriers: Although Brazil has plenty to offer to foreign investors, we highlight that the country remains a challenging market in which to invest. High entry barriers are manifested through conflicting regulatory frameworks across different states, high taxes, significant local content and hiring requirements, and local companies aided by state subsidies. Moreover, some of Brazil's largest and most successful businesses remain firmly in state hands, further raising entry barriers for
The 2000s for Brazil are likely to be associated with the country's ascent as a global economic force as a result of its rich natural resources, a burgeoning consumer sector and broader macroeconomic stability. The emergence of Brazil as a regional economic heavyweight enabled the government of former president Luiz Incio Lula da Silva to pull millions of households out of poverty and helped to steer the economy out of recession in 2009. Yet while the turbulent days of hyperinflation, endemic financial market volatility and poor investor confidence appear for now to be a thing of the past, future administrations in Brazil will carry the burden of higher voter expectations and frequent comparisons with the seemingly untouchable image of Lula. We therefore expect immense pressure on President Dilma Rousseff and any future president to live up to expectations over the coming decade. In our view, the growing need for reforms to tackle many unaddressed policy issues in Brazil could lead to a significant polarisation of the electorate.
Key Challenges To Governance And Stability

Closing The Income Gap: Since the emergence of a vibrant consumer segment, the political landscape has become increas-
10
POLITICAL OUTLOOK
foreign companies looking to set up shop in the country. Given the proximity of highly competitive regional economies with strong growth outlooks, Brazilian policymakers may ultimately risk alienating non-portfolio investors, undermining the longterm growth potential for Brazilian businesses. Regulating Offshore Reserves: The discovery of vast offshore subsalt oil deposits in the Santos basin has turned Brazil into a potential petroleum exporting giant. Policymakers will be under enormous pressure to draw up a suitable regulatory framework for the offshore reserves. Regulating these vast reserves formed an important basis of the ruling Partido dos Trabalhadores (PT) election campaign in 2010. However, with the government using the record share issuance by state oil giant Petrobras to increase its control over the company, we caution that the country risks losing out on international investment. Foreign oil companies will likely operate under a production sharing agreement under this proposal, meaning that overcoming the technological challenges of bringing the oil and by-products efficiently to market will remain a major policy challenge. In addition, significant local capital requirements and hiring restrictions mean that Brazil's oil industry may continue to be plagued by capacity constraints for years to come. Tackling Deforestation: Brazil possesses the largest stretch of the Amazon rainforest. The Brazilian government will increasingly come under international and domestic political pressure to ensure the preservation of the Amazon and to restrict uncontrolled deforestation. The policy implications of overseeing logging activity and illegal deforestation will be an enormous challenge for any future administration, as the sheer size of Brazil's rainforest presents significant practical challenges for any legal response. Additionally, the highly lucrative timber industry takes on considerable political dimensions in the affected regions, as local governors, who often bring a strong local electorate to the negotiating table, tend to benefit from the proceeds of the logging, cattle and soy cycle responsible for much of the unregistered deforestation activity in the country. Cracking Down On Gang Violence: High levels of gang activity will come under the spotlight over the coming decade, as Brazil hosts high-profile sports events such as the FIFA World Cup in 2014 and the 2016 Olympic Games in Rio de Janeiro. Rio in particular is home to favelas dominated by notorious gangs and often the location of drug-related violence and killings. Despite previous efforts, the federal government has virtually no control over the affected areas. Moreover, with the influence
of So Paulo's Primeiro Comando da Capital (PCC) gang on the rise, we anticipate increased anti-crime initiatives there as well. As such, we believe gang violence will become an increasingly prominent challenge for the Brazilian authorities to overcome ahead of both the FIFA World Cup and the Olympic Games. Much attention will focus on the ability of security forces to establish federal control over these areas to guarantee security for visitors and athletes. Drug Trafficking Risk To Stability: While Brazil traditionally experiences little or no insurgent and paramilitary activity on its territory compared with neighbouring Colombia and Peru, the regional drug trade continues to weigh heavily on the political risk profile of Latin America. The illicit drug trade has helped finance guerrilla groups such as the Fuerzas Armadas Revolucionarias de Colombia (FARC) and the Sendero Luminoso (Shining Path) in Peru, severely exhausting federal government efforts to crack down on these illegal organisations. In Mexico's case, drug cartels look set to be a major challenge for the incoming administration of president-elect Enrique Pea Nieto. In addition, with Brazilian narcotics traffickers increasingly expanding their operations into Bolivia and Paraguay, we believe the destabilising potential of the regional drug trade suggests that neighbouring countries may require the assistance of the Brazilian government to avert deeper political crises. While not our core scenario, the heightened political risk profile of the region certainly suggests that a concerted regional effort may be a key policy objective in the 2010s.
Consolidation Over, What Now?

Since taking office in January 2011, Rousseff has asserted her authority by clamping down on corruption, which resulted in significant changes in the composition of the cabinet, much of which was a legacy of her illustrious predecessor. The next few years will be crucial in determining not only the electoral fortunes of her party in 2014, but also the political and economic trajectory of Brazil beyond the next electoral cycle. No Let-Up In Spending Commitments: In keeping with our long-held view, we expect policy continuity to be the key theme of Brazilian politics over the medium term. We do not envision a sharp unwinding of existing public spending commitments anytime soon, despite pronouncements by the Rousseff administration of the need for fiscal consolidation, since slower global and domestic growth, as well as the need to secure capital investment ahead of the FIFA World Cup and Olympic Games will see continued reliance on institutions such as the Banco Nacional do Desenvolvimento.
11
BRAZIL Q2 2013
Bottlenecks Hinder Growth: Despite its immense potential, Brazil's growth trajectory remains constrained by structural weaknesses, most notably in the form of a highly regulated labour market, an overly complex and burdensome tax system and dearth of access to long-term credit. Our worst-case scenario is that these bottlenecks coupled with country's underdeveloped infrastructure sour the taste in foreign investors' mouths over the coming years. We believe that under such a scenario Brazil would begin to slip from investors' radar screens and risk losing out to more competitive investment destinations in the region.
12
Chapter 2:
Economic Outlook
SWOT Analysis
Strengths
The government's commitment to primary fiscal surpluses has instilled confidence in the economy in recent years and bolstered the country's sovereign credentials.
BMI Economic Risk Ratings

Though Brazil's extensive commodity wealth and a large consumer base are likely to keep investor interest rooted in the country over the coming years, there is a pressing need for the authorities to address major structural imbalances in the economy. These stem in large part from a very strong consumer and a weak manufacturing sector, which have fostered an increased reliance on foreign capital in recent years. While our core scenario calls for these imbalances to unwind through a weakening of the currency over the coming years, we do not rule out the possibility of a more rapid unwind or a delayed rebalancing followed by a sharp adjustment thereafter. S-T Economy Rank Trend
+ = + = = = = = = + = =
Weaknesses
Large-scale social spending programmes have seen the government's fiscal balance deteriorate at an alarming rate. Increased use of populist rhetoric in the face of weaker global growth could destabilise the public coffers for a prolonged period. High levels of labour market rigidity and an enormous public sector threaten to jeopardise Brazil's economic growth, as employers will be less keen to hire new workers.
Opportunities
Brazil's massive mineral and oil wealth combined with solid sovereign dynamics will ensure continued foreign investment into the country. The successful bid to host the 2016 Olympic Games in Rio de Janeiro, only two years after the FIFA World Cup in Brazil, should also keep investor interest in Brazil firmly anchored. A recently passed public sector pension bill, which limits monthly payouts to retirees, may help limit the country's substantial public sector spending commitments over the long term.
Chile 79.2 1 Mexico 76.2 2 Peru 75.8 3 Uruguay 73.1 4 Brazil 68.1 5 Panama 66.9 6 Colombia 64.6 7 Bolivia 63.5 8 Ecuador 58.3 9 Guatemala 58.1 10 Costa Rica 55.4 11 Paraguay 51.9 12 El Salvador 51.7 13 Honduras 50.0 14 Argentina 47.5 15 Nicaragua 44.0 16 Venezuela 32.9 17 Regional ave 58.1/Global ave 55.3/Emerging Markets ave 53.5
Threats
The country's major economic imbalances, namely too much consumption and not enough production, are untenable in the long term. Moreover, we believe that their unwinding poses major risks to Brazil's growth story in the medium term, which are not adequately appreciated by investors at present. The inability of successive governments to implement successful economic reforms, such as an overhaul of the tax system, which places a heavy burden on business and industry, and reform of the inflexible labour market are key threats to Brazil's economy. Should President Dilma Rousseff's government fail to make progress on these fronts over the coming years, it would impede long-term competitiveness of the Brazilian economy and potentially cap foreign direct investment.
Brazil 73.6 1 Chile 71.7 2 Peru 71.0 3 Uruguay 70.5 4 Mexico 67.6 5 Colombia 67.3 6 Argentina 66.6 7 Panama 65.5 8 Costa Rica 61.6 9 Bolivia 60.4 10 Guatemala 55.6 11 Ecuador 52.5 12 Paraguay 50.2 13 El Salvador 48.5 14 Venezuela 44.0 15 Honduras 41.9 16 Nicaragua 38.6 17 Regional ave 56.8/Global ave 53.8/Emerging Markets ave 51.3
L-T Economy
Rank
Trend
+
= = = = = = + + = = =
13
BRAZIL Q2 2013
Economic Activity
Upswing In 2013, But No Return To Boom Years
BMI VIEW
Following Brazil's unexpectedly-weak Q312 growth data, which showed that both fixed investment and the banking sector continue to drag down economic activity, we have revised down our average real GDP growth forecast for 2012 to 1.0% (from 1.5% previously). That said, we anticipate a significant pickup in economic activity in 2013, as we expect a backlog of infrastructure projects and a modest uptick in private consumption will boost growth to 3.5% in 2013.
reduce lending rates, have long been themes in our analysis, though they weighed on economic activity more significantly than we were expecting in Q312. While growth looks to come in at the weakest level since the 2009 recession in 2012, we continue to anticipate a significant pickup in economic activity in 2013. Indeed, we forecast real GDP growth of 3.5%, a slight downward revision from our previous 3.7% forecast, as we expect a construction backlog to bolster growth, and continued stimulus measures to modestly boost activity in the consumer and manufacturing sectors. Not Yet Moving In The Right Direction
Brazil Interest Rates & Credit Growth
54 49 44 39 75 70 65 60 55 50 45 40 35
Brazil Real GDP Growth By Expenditure, % chg y-o-y

50 40 30 20 10 0 -10 10 8 6 4 2 0 -2
Starting To Turn The Corner
34 29 24 19 14
Nov-05
Nov-10
Jan-05
Jun-05
Jan-10
Jun-10
Jul-07
May-08
Feb-07
Mar-09
Sep-06
Dec-07
Aug-09
Individual Credit Growth (% chg y-o-y) LHS Average Preset Consumer Interest Rates (%) RHS
Source: BMI, BCB
Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312
-20
-4
Private Consumption (LHS) Public Consumption (LHS) Gross Fixed Capital Formation (LHS) Real GDP Growth (RHS)
Source: BMI, IBGE
Expenditure Breakdown
Private Consumption Weaker Consumer The New Normal: Our core view for relatively weak private consumption remains in play. Indeed, high household debt levels and weaker purchasing power, on the back of the real's 10.9% depreciation in the year to date is likely to constrain private consumption growth considerably over the coming quarters. As such, we forecast private consumption to contribute 0.8 percentage points (pp) to headline real GDP growth in 2012, implying real growth of 1.3%. We expect private consumption to pick up modestly 2013,
Macro Strategy
We have downgraded our 2012 real GDP growth forecast for Brazil to 1.0% (from 1.5% previously), as recently released Q312 growth data indicates that the economic recovery is progressing more slowly than we expected. Both fixed investment underperformance and slimmer profit margins for the banking sector, due to government pressure on commercial banks to
TABLE: ECONOMIC ACTIVITY
2007
Nominal GDP, BRLbn [1] Real GDP growth, % y-o-y [2] GDP per capita, US$ [2] Population, mn [3] Industrial production index, % y-o-y, ave [4] Unemployment, % of labour force, eop [4] 2,661.3 6.1 7,201 189.8 5.9 7.4
2008
3,032.2 5.2 8,622 191.5 3.0 6.8
2009
3,239.4 -0.3 8,384 193.2 -6.8 6.8
2010
3,770.1 7.5 10,987 194.9 10.8 5.3
2011
4,143.0 2.7 12,576 196.7 0.4 4.7
2012e
4,344.7 1.0 11,175 198.4 -2.7 5.5
2013f
4,741.3 3.5 11,023 200.1 2.5 5.4
2014f
5,140.2 3.7 11,202 201.7 5.1 5.5
2015f
5,607.8 4.0 11,375 203.3 4.6 5.5
Sep-11
Feb-12
Apr-06
Oct-08
Apr-11
6,106.5 4.2 12,422 204.8 4.1 5.6
Notes: e BMI estimates. f BMI forecasts. Sources: 1 IBGE, IMF; 2 IBGE/BMI calculation; 3 World Bank/UN/BMI; 4 IBGE.
14
Jul-12
30
2016f
ECONOMIC OUTLOOK
growing by 3.2% in real terms, and contributing a more significant 2.1pp to headline growth, as fiscal and monetary stimulus increasingly feed through to the domestic market. However, we highlight that weaker credit growth will help keep private consumption growth off its recent highs. As we highlighted above, a significant uptick in household debt levels has brought the household debt servicing ratio (expected household debt servicing payments/disposable income) to 22.0 in September, marking several months near record high levels, and implying that a period of deleveraging is necessary over the coming quarters. We have seen consumer default rates rise in tandem in recent months, remaining elevated at 7.9% of the total portfolio in October, indicating that consumers remain stretched to make loan payments despite a tight labour market. We expect both of these factors, combined with private sector banks' continued reticence to aggressively expand their loan portfolios, will limit credit growth over the coming quarters, weighing on private consumption. Pressure On Households Remains High
Brazil Household Debt & Non-Performing Loans
23 22 21 20 19 18 17 16 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5
resulted in many projects being held up, or even re-tendered, for reasons ranging from bidding irregularities to inadequate environmental impact assessments. Ineffective institutions have hindered government funding of infrastructure projects, which comprises the majority of the government's growth acceleration programme (PAC II), while a poor business environment is deterring the private sector.
Brazil PAC II (2011-2014) Investment Programme, BRLbn
Cidade Melhor (Better City), 57.1 Comunidade Cidada (Citizen Community), 23
A Lot In The Pipeline
Energy, 461.6
Minha Casa, Minha Vida (My House, My Life), 278.2
Transport, 104.5
Source: Brasil.gov
Agua e luz Para Todos (Water and Light for all), 30.6
Nov-05
Nov-10
Jan-05
Jun-05
Jan-10
Jun-10
Jul-07
May-08
Feb-07
Mar-09
Sep-06
Dec-07
Aug-09
Seasonally-Adjusted Household Debt Servicing Ratio LHS Individual Non-Performing Loans (% total portfolio) RHS
Source: BMI, BCB
Fixed Investment Backlog To Drive Strong Growth: Following a poor performance in Q312, we have significantly revised down our 2012 fixed investment forecast. We now forecast gross fixed capital formation to subtract 0.5pp from headline growth in 2012, implying a 2.5% contraction in real terms, down from 0.3% real growth previously. Our Infrastructure team has long highlighted that Brazil is plagued by a number of issues, which have put a ceiling on growth. Indeed, construction costs remain substantial due to prohibitive local content requirements, while high tariffs and complex tax, human resources, legal and capital structures are weighing on profitability and access to heavy industry. Moreover, a weak regulatory environment has
Sep-11
Feb-12
Apr-06
Oct-08
Apr-11
Jul-12
15
5.0
However, with the 2014 World Cup coinciding with a general election and the final year of the PAC II, our Infrastructure team expects a boost to construction industry growth in 2013 and 2014 similar to that seen in 2010 (without the base effects from 2009's recession). Accelerating activity will be driven by an expected improvement in funding disbursement and the awarding of contracts, as a raft of new concession tenders and projects has started to hit the market in H212. Moreover, with infrastructure crucial to supporting the expansion of the oil & gas, agribusiness and mining sectors, we believe the Brazilian government will likely push through projects crucial to catalysing this growth potential. Given these factors, we forecast gross fixed capital formation to contribute a more significant 1.5pp to real GDP growth in 2013, implying real growth of 7.7%. Government Consumption Heading Higher On PreElection Spending: We maintain our forecast for government consumption to contribute a relatively moderate 0.2pp to headline growth in 2012, implying real growth of 0.8%. Indeed, despite numerous fiscal stimulus measures implemented in the yearto-date, we have not seen a significant pickup in expenditure growth. Rather, given that most of these measures have come in the form of tax breaks, we have seen revenue growth fall instead, a trend we expect to continue through year-end.
15
BRAZIL Q2 2013
However, we maintain our view for a pickup in government consumption in 2013, forecasting real growth of 2.1%, contributing a more sizeable 0.4pp to real GDP growth. Indeed, with a general election coming up in October 2014, and the PAC II programme scheduled to expire that year as well, we believe public spending will pick up significantly over the coming quarters.
Brazil Total Export And Import Growth, % chg y-o-y
80 60 40 20 0 -20 -40
A Massive Slowdown
'Lower-Trend Growth Ahead'). While a massive growth acceleration programme and significant commodity wealth will continue to support one of the region's largest infrastructure project pipelines, our view for China's economy to rebalance has important implications for Brazil. As Chinese investment comes off the boil, we anticipate that the slowdown in economic activity will feed through to lower average prices for base metals and iron ore, squeezing firms' margins and forcing them to re-evaluate their capital expenditure programmes in major commodity producing countries. As such, we expect that investment inflows related to the commodity sector are likely to moderate, feeding through into slower headline growth in Brazil.
Risks To Outlook
Should Brazil's construction backlog clear more slowly than we currently expect, resulting in only a moderate improvement in fixed investment growth over the coming quarters, growth is likely to be relatively moderate in H113. Such a scenario, combined with little pick up in private consumption due to persistently high indebtedness and rising labour market uncertainty, would pose major downside risks to our 2013 real GDP growth forecast of 3.5%.
Source: BMI, BCB
Net Exports External Account Weakness To Continue: Given significant continued weakness in trade data in recent months, we have downgraded our exports and imports outlooks for Brazil to reflect real growth of just 1.0% (from 4.0% previously) in 2012, and we forecast net exports to subtract 0.8pp from headline real GDP growth. Due to downgrades to our export and import data for 2013, in line with our view that weaker Chinese demand for commodities will continue to impact Brazil's external accounts, we now forecast net exports to subtract 0.5pp from headline growth, slightly more than our previous forecast of -0.4pp.
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
Exports Imports
-60
Monetary Policy
Economic Recovery And Price Pressures Underpin Modest Rate Hike
BMI VIEW
While we believe that a slow economic recovery and significant pressure on households is likely to keep Brazilian interest rates on hold for the majority of 2013, we maintain our view for a 25-basis-points hike by end-year, bringing the Selic rate to 7.50%. This comes as inflation expectations have headed higher in recent months and we believe sig-
Lower-Trend Growth To Continue Beyond 2013

Over the medium term, we believe slowing private consumption and the end of the China-led commodity boom will contribute to average Brazilian real GDP growth of 3.5% between 2012 and 2017. Indeed, we believe that Brazil's consumer story is in for a period of more moderate growth in the next few years due to reduced consumer purchasing power, on the back of continued currency weakness, and high household indebtedness. In addition, we foresee a supportive, but bifurcated, investment picture going forward (see our online service, October 11 2012,
nificant currency depreciation and other supply-side price pressures will keep headline inflation elevated as well.
We maintain our view that interest rates in Brazil will remain near record lows in 2013, as the monetary authorities seek to lessen the burden on a highly leveraged household sector, bolster private consumption growth and economic activity. That said, with inflation expectations edging higher and our forecast for a significant uptick in real GDP growth to 3.5% in 2013, we maintain our view that the Banco Central do Brasil (BCB) will hike the benchmark Selic target rate by 25 basis points (bps) to 7.50% by end-2013 (see our online service, July 20 2012,
16
ECONOMIC OUTLOOK
'Interest Rates To Head Lower'). Nevertheless, given that the Brazilian economy's recovery remains nascent and the country's policymakers are likely to continue placing pressure on both lending rates and the currency over the coming quarters, we acknowledge that there are significant risks to this view.
power, continued real weakness, will also mean that imported inflationary pressures will remain a salient concern over the coming quarters, particularly given that Brazil's consumer price basket is heavily weighted towards food and fuel (see 'Supply Shocks And Stimulus Biggest Inflation Risks', August 24 2012).
Brazil Real Effective Exchange Rate Index
120 110 100 90 80 70 60 50 40
Aggressive Rate Cuts Achieved Several Goals

We have long argued that the BCB's 525 basis points (bps) of cuts to the Selic rate between August 2011 and November 2012 sought to achieve several different goals, including stimulating growth in the slowing economy, weakening the overvalued real and bringing down the country's restrictively high interest rates. At present, the monetary authorities look to have been relatively successful, achieving at least two out of the three objectives and fundamentally altering interest rate expectations over the coming years. Indeed, the real depreciated by 8.8% in 2012 on the back of lower interest rates and government intervention, and continues to trade below the BRL2.0000/US$ level despite rallying in recent days. This has fed through to a slightly weaker real effective exchange rate as well, a long-held concern for the BCB given the sharp slowdown in industrial production since 2011. As such, while we believe the real will remain weak over the next several years, averaging BRL2.1600/US$ between 2013 and 2015, we have recently tempered our forecasts for depreciation to reflect what we see as important BCB concerns over FX weakness. In addition to eroding consumer purchasing
TABLE: MONETARY POLICY
2009
Consumer prices, % y-o-y, eop [2] Consumer prices, % y-o-y, ave [3] M1, BRLbn [4] M1, % y-o-y [5] M2, BRLbn [4] M2, % chg y-o-y [5] Central Bank policy rate, % eop [4] Lending rate, %, eop [4] Lending rate, %, ave [5] Real lending rate, %, eop [1,5] Real lending rate, %, ave [1,5] 3-month money market rate, % [5] Real 3-month money market rate, %, eop [1,5] 3-month money market rate, %, ave [5] Real 3-month money market rate, %, ave [1,5] 4.3 4.9 248.1 10.5 1,169.3 8.9 8.75 34.3 37.3 30.0 32.4 8.7 4.4 9.8 4.9
1994 1995 1996 1997
FX Provides Some Relief
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: BIoomberg, BIS
In addition, interest rate expectations for a multi-year period have changed dramatically in recent quarters, as the January 2014 DI futures contract is currently trading at 7.2%, down from 10.4% at the beginning of 2012. Moreover, the January 2021 contract is trading at 9.3%, significantly lower than 11.0% at the start of last year, implying a shift in rate expectations at the longer end of the interest rate futures curve as well.
2010
5.9 5.0 280.1 12.9 1,360.7 16.4 10.75 35.0 34.9 29.1 29.8 11.6 5.7 10.3 5.2
2011
6.5 6.6 285.4 1.9 1,617.5 18.9 11.00 37.0 38.9 30.5 32.4 10.4 3.9 11.7 5.2
2012e
5.3 5.4 348.2 22.0 1,876.3 16.0 7.25 30.0 33.5 24.7 28.2 -5.3 -5.4
2013f
5.3 5.5 379.5 9.0 2,176.5 16.0 7.50 32.5 31.2 27.2 25.8 -5.3 -5.5
2014f
4.5 5.0 428.8 13.0 2,394.1 10.0 8.00 34.5 36.3 30.0 31.3 -4.5 -5.0
2015f
4.7 5.0 476.0 11.0 2,585.7 8.0 7.50 35.0 34.8 30.3 29.8 -4.7 -5.0
2016f
5.1 4.8 518.8 9.0 2,792.5 8.0 6.50 33.0 34.0 27.9 29.2 -5.1 -4.8
2012
2017f
4.4 4.6 560.3 8.0 3,015.9 8.0 5.50 30.0 31.5 25.6 26.9 -4.4 -4.6
Notes: e BMI estimates. f BMI forecasts. 1 Real rate strips out the effects of inflation. Sources: 2 IBGE; 3 IBGE/BMI calculation; 4 BCB; 5 BCB/BMI calculation.
17
BRAZIL Q2 2013
Brazil January 2014 DI Futures Contract, %

8.2 8.0 7.8 7.6 7.4 7.2 7.0 6.8 6.6
Rates To Remain Low
Source: Bloomberg
Furthermore, given our view for private consumption growth to remain relatively moderate in 2013, as neither household debt levels nor non-performing loans have seen a major improvement in recent months, we anticipate that rates will remain near historical lows this year and do not rule out further government pressure on commercial banks to reduce their lending rates. Indeed, although average preset consumer lending rates have fallen from 50.3% to 38.0% between January and November 2012, credit growth has remained relatively moderate, coming in at 10.0% y-o-y in September. As such, we do not rule out further cuts to commercial banks' reserve requirements either, as was the case in September and December 2012, in order to further stimulate loan growth and bolster private consumption.
Brazil Real GDP Growth, % chg y-o-y
50 40 30 20 10 0 -10 -20 10 8 6 4 2 0 -2 -4
While the BCB was likely able to avoid a more aggressive slowdown in 2012 by slashing the benchmark interest rate, growth has yet to rebound strongly. As Q312 data showed, this was partly due to its own policies, as the service sector suffered on the back of a poor performance from financial services (see 'Services And Investment Disappoint Highlighting Downside Risks To Growth', December 3 2012). Nevertheless, while we expect private consumption growth to remain relatively moderate on the back of the above factors, we anticipate a significant uptick in fixed investment growth in 2013 as projects are increasingly pushed through in advance of the expiration of the government's PAC II growth acceleration programme and FIFA World Cup in 2014 (see 'Upswing In 2013, But No Return To Boom Years', December 18 2012). That said, we maintain our view that real GDP growth will remain below pre-crisis levels over the coming years, averaging 3.7% between 2013 and 2017, on the back of a continued deleveraging process and a supportive, but bifurcated investment picture (see 'Lower-Trend Growth Ahead', October 11 2012).
Brazil Economic Activity, Selic Rate and Consumer Price Inflation
19 17 15 13 11 9 7 11 9 7 5 3 1 -1 -3
Nov-12
Jun-12
Jul-12
Oct-12
Aug-12
Sep-12
Dec-12
Data Points To Stronger Growth And Inflation
Worst Is In The Past
Source: BMI, BCB
A Delicate Balance Between Stimulating Growth And Stoking Inflation

While we believe that significant pressure on households, as well as a still nascent economic recovery will keep rates on hold for the majority of 2013, we maintain our view for a 25bps hike to the Selic rate by year-end. This comes as we expect supply-side price pressures to remain significant through H113, and continue to anticipate a substantial boost in economic activity in 2013 largely on the back of stronger fixed investment.
Source: BMI, IBGE
18
Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312
Private Consumption (LHS) Public Consumption (LHS) Gross Fixed Capital Formation (LHS) Real GDP Growth (RHS)
Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12
Selic Rate (%) LHS Consumer Price Inflation (% chg y-o-y) RHS Economic Activity (% chg y-o-y) RHS
-5
ECONOMIC OUTLOOK
Indeed, given the run-up in global grains prices in 2012, our Commodities team believes that food price inflation is likely to remain elevated through H113, keeping headline inflation in Brazil on the rise. In addition, high likelihood of a domestic fuel price hike this year means that supply-side pressures are unlikely to ease substantially in the near future (see 'Moody's Downgrades Petrobras, But Prospects For Fuel Price Changes Provide Optimism', December 20 2012). These factors, combined with our view for stronger economic activity and a pick-up in government spending before the 2014 general election, underpins our view for inflation to average 5.5% this year, slightly above our estimated average of 5.4% for 2012. This view is broadly in line with the weekly central bank economists' survey, which has seen end-2013 inflation expectations increase from 5.4% on November 30 to 5.5% on January 4. As such, we maintain our view that the trend will be for higher rates over the coming years.
Core View
We maintain our view for further currency weakness in Brazil over the coming years on the back of a more moderate domestic growth story, easing investment inflows due to slowing growth in China and our expectation that the central bank will remain supportive of a weak real. That said, we have revised our multi-year exchange rate outlook to reflect a slightly stronger currency, with the unit averaging BRL2.1567/US$ between 2013 and 2015, as compared to BRL2.2783/US$ previously. This revision follows what we see as increasing concerns by the central bank over the inflationary impact of significant FX weakness, as well as potential for other supply-side pressures to drive inflation higher in 2013 tempering the bank's growth bias.
Brazil Exchange Rate, BRL/US$ (Daily) & 200-Day Moving Average
2.2
BRL To Remain Range Bound For Now
Risks To Outlook
Given that Brazil's economy remains in the early stages of a recovery, we acknowledge that there are significant risks to our view for a modest interest rate hike this year. Should fixed investment remain a drag on growth in early 2013 on the back of continued project delays and investor concerns over high costs and red tape, we believe the BCB could cut rates in order to bolster growth. That said, we do not rule out the possibility of additional easing leading to a hiking cycle, should inflation head back towards the upper limit of the central bank's target band, potentially posing an upside risk to our end-2013 interest rate outlook.
2.1 2.0 1.9 1.8 1.7 1.6 1.5 1.4
Jun-10
Jun-11
Feb-11
Feb-12
Jun-12
Oct-10
Apr-11
Oct-11
Apr-12
Dec-10
Dec-11
Oct-12
Aug-10
Aug-11
Source: BMI, Bloomberg
Exchange Rate Policy

BRL: Inflation Concerns To Limit Currency Weakness
BMI VIEW
Since our last currency forecast update, the Brazilian real has continued to trade broadly sideways. While a sell -off in late 2012, which brought the unit to a low of BRL2.1384/US$ in early December, initially made us think that the Banco Central do Brasil (BCB) might allow a weaker currency, the unit's subsequent rally confirmed that the real is likely to range trade over the coming months. As such, we expect the unit to continue trading within a tight band of BRL2.0000/US$ and BRL2.1000/US$ over the coming months, forecasting an average exchange rate of BRL2.0700/US$ this year, slightly stronger than our previous forecast of BRL2.1300/US$.
While we are expecting a significant pickup in economic activity in Brazil in 2013, forecasting real GDP growth to accelerate from an estimated 1.0% in 2012 to 3.5% in 2013, we maintain our long-held view that a period of lower-trend growth is on the cards over the coming years (see our online service, October 11 2012, 'Lower Trend Growth Ahead'). While we believe the 2013 growth spurt will be driven in large part by a pickup in fixed investment related to the expiration of the government's PAC II growth acceleration programme and FIFA World Cup in 2014, we believe the investment picture will remain bifurcated. This is underpinned by our view that some mining and infrastructure investment will remain vulnerable to weaker external demand. In addition, we expect Brazil's consumer story to experience a period of more modest growth in the next few years due to a period of consumer deleveraging following a run-up in household debt levels in 2011 and 2012 (see 'Upswing In 2013, But
Aug-12
Dec-12
19
BRAZIL Q2 2013
No Return To Boom Years', December 18 2012). With Brazilian growth unlikely to return to its recent highs for the foreseeable future, interest rates to remain near record lows (we forecast one 25 basis points hike by end-2013, bringing the benchmark Selic interest rate to 7.50%), we see little upside for the real over the coming quarters (see 'Economic Recovery And Price Pressures Underpin Modest Rate Hike', January 9). Downtrend To Remain In Place
production has not posted sustained gains since 2010. That said, with the weekly central bank economists' survey showing end2013 inflation expectations increased from 5.4% on November 30 to 5.5% on January 4, and potential for a domestic fuel price increase and food price inflation to keep headline inflation elevated in 2013, we believe the BCB is likely to limit significant currency weakness over the coming quarters, underpinning our view for only moderate depreciation. Investors Continue To Price In Depreciation
Brazil Exchange Rate, BRL/US$ (Monthly)

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5
Brazil BRL/US$ 1-Year Offshore Non-Deliverable Forward Contract & 200-Day Moving Average
2.4 2.3 2.2 2.1 2.0 1.9 1.8 1.7 1.6
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Nov-10
Nov-11
Nov-12
Jan-11
Jan-12
May-11
May-12
Mar-11
Sep-10
Sep-11
Mar-12
Source: Bloomberg
In addition, our view for China to undergo a period of domestic rebalancing over the coming years long a theme in our Asia Country Risk analysis has important implications for the Brazilian real. Indeed, we expect the Chinese economy to increasingly move away from a heavily investment-led growth model to one in which private consumption plays a greater role, implying that Chinese demand for commodities is likely to weaken over the coming years (see 'Emerging Markets: Beyond China's Hard Landing', September 27). As such, we believe that investment inflows are likely to ease over the coming quarters, as firms increasingly re-evaluate their capital expenditure plans on the back of lower average metals prices. Moreover, we continue to believe that the BCB will remain supportive of a weaker real over the coming quarters in order to continue aiding the ailing manufacturing industry, as industrial
TABLE: CURRENCY FORECAST
Spot
BRL/US$, ave BRL/EUR, ave BCB Selic Rate, % eop Source: BMI, January 9 2013 2.0391 2.6666 7.25
Risks To Outlook
We maintain that the central bank's exchange rate policy will be a major driver of the real over the coming quarters, meaning that policy changes pose the largest risk to our multi-year exchange rate outlook. Indeed, should inflation spike on the back of higher food price pressures than we currently expect and a significant domestic fuel price increase, we could see the BCB allow the unit to appreciate to above the BRL2.0000/US$ level, posing major risks to our average and end-2013 exchange rate forecasts of BRL2.0700/US$ and BRL2.1500/US$ respectively.
Short-Term
2.0500 -
2013
2.0700 2.5254 7.50
Sep-12
Jan-13
Jul-11
Jul-12
2014
2.1750 2.6100 8.00
20
ECONOMIC OUTLOOK
Balance of Payments
Stronger Trade Outlook Underpins Current Account Improvement
BMI VIEW
Following a substantial trade slowdown in 2012, we expect a modest recovery in exports, due to favourable base effects and a cyclical upswing in Chinese growth, will bolster the current account in 2013. Mean while, although we expect the financial account surplus to remain off its recent highs, we believe it will continue to comfortably offset the current account deficit.
account surplus will continue to comfortably offset the current account deficit.
Trade Balance To Head Higher As Exports Recover

Brazilian exports fell off sharply in 2012 as domestic growth slowed and exports to China headed into negative territory, and we expect only moderate upside in 2013. Indeed, we have revised our 2012 estimate to reflect a 4.7% contraction in exports last year (from a 2.0% contraction previously) and forecast a relatively modest 4.5% expansion in 2013. Brazilian exports are weighted heavily towards manufactured goods and primary products (84.2% of exports during the first 11 months of 2012), and our view for the cyclical upswing in Chinese economic activity to continue through H113 means that rising demand for steel and iron ore will be supportive of export growth (exports to China were 17.1% of total exports between January and November 2012). Moreover, our Agribusiness team is expecting strong sugar, coffee and soybean production to come online over the coming months, bolstering exports as well. That said, while exports to Argentina are a fairly small proportion of total exports 7.5% between January and November 2012 we believe they are unlikely to see a significant pickup, underpinned
We maintain our long-held view that Brazil's external account deficit will remain substantial in the next few years on the back of more moderate export growth, due to still weak global growth and a structural shift in China's economy. As such, we forecast the current account deficit to come in at 2.2% of GDP in 2013, a slight improvement from an estimated 2.3% of GDP in 2012 (see our online service, September 26 2012, 'Weakening Trade Account Dampens Current Account Outlook'). While we expect structurally weaker growth in China will temper investment inflows into Brazil over the coming quarters, as cost constraints impact firms' capital expenditure plans, we believe the financial
TABLE: CURRENT ACCOUNT
2009
Goods imports, US$bn [2] Goods imports, % of GDP [3] Goods exports, US$bn [2] Goods exports, % of GDP [3] Goods exports, % of imports [3] Balance of trade in goods, US$bn [2] Balance of trade in goods, % of GDP [3] Services imports, US$bn [2] Services imports, % of GDP [3] Services exports, US$bn [2] Services exports, % of GDP [3] Goods and services exports, US$bn [3] Goods and services exports, % of GDP [3] Balance of trade in goods and services, US$bn [3] Balance of trade in goods and services, % of GDP [3] Net income, US$bn [2] Income account balance, % of GDP [3] Net transfers, US$bn [2] Net transfers, % of GDP [3] Current account, US$bn [2] Current account, % of GDP [3] Openness to international trade, % [1,3] 127.7 7.9 153.0 9.4 119.8 25.3 1.6 47.0 2.9 27.7 1.7 180.7 11.2 6.0 0.4 -33.7 -2.1 3.3 0.2 -24.3 -1.5 17.3
2010
181.8 8.5 201.9 9.4 111.1 20.1 0.9 62.6 2.9 31.8 1.5 233.7 10.9 -10.6 -0.5 -39.5 -1.8 2.8 0.1 -47.5 -2.2 17.9
2011
226.2 9.1 256.0 10.4 113.2 29.8 1.2 76.3 3.1 38.4 1.6 294.5 11.9 -8.1 -0.3 -47.3 -1.9 2.8 0.1 -52.6 -2.1 19.5
2012e
223.5 10.0 244.0 11.0 109.2 20.5 0.9 79.5 3.6 40.3 1.8 284.3 12.8 -18.7 -0.8 -36.0 -1.6 4.3 0.2 -50.4 -2.3 21.0
2013f
230.0 10.0 255.0 11.1 110.9 25.0 1.1 70.0 3.1 29.0 1.3 284.0 12.4 -16.0 -0.7 -37.0 -1.6 3.2 0.1 -49.8 -2.2 21.2
2014f
242.0 10.2 270.0 11.4 111.6 28.0 1.2 75.0 3.2 29.3 1.2 299.3 12.6 -17.7 -0.7 -38.0 -1.6 3.2 0.1 -52.5 -2.2 21.6
2015f
260.0 10.3 300.0 11.9 115.4 40.0 1.6 65.0 2.6 29.1 1.2 329.1 13.0 4.1 0.2 -38.0 -1.5 3.2 0.1 -30.6 -1.2 22.2
2016f
290.0 10.5 335.0 12.1 115.5 45.0 1.6 65.0 2.3 29.0 1.0 364.0 13.1 9.0 0.3 -34.1 -1.2 3.3 0.1 -21.8 -0.8 22.6
2017f
320.0 10.4 375.0 12.2 117.2 55.0 1.8 67.0 2.2 29.0 0.9 404.0 13.2 17.0 0.6 -33.9 -1.1 3.3 0.1 -13.6 -0.4 22.7
Notes: e BMI estimates. f BMI forecasts. 1 Imports plus exports, % of GDP. Sources: 2 BCB; 3 BCB/BMI calculation.
21
BRAZIL Q2 2013
by our view for a devaluation of the Argentine peso in 2013, as well as sharp deceleration in real GDP growth to 0.9% this year. Heading Into Positive Territory
Brazil Goods Exports, % chg y-o-y
120 100 80 60 40 20 0 -20 -40
Investment Inflows To Ease

On the investment side, we maintain our long-held view that Brazil's financial account surplus will remain off its recent highs in the next few years, although it will be more than sufficient to fund the current account deficit. This view is underpinned by our expectation that a structural shift in the Chinese economy will precipitate more modest demand and prices for industrial metals in particular, prompting major mining firms to re-evaluate their capital expenditure plans in light of this new environment. In addition, with Brazil's growth story having slowed substantially over the last 12 months, and unlikely to return to pre-2011 growth rates in the near future, we expect portfolio investment to remain more moderate as well, in line with the recent trend. That said, given Brazil's substantial infrastructure project pipeline, as well as its massive commodity wealth, we believe the country will remain one of the foremost investment destinations in Latin America over the next five to 10 years. Imports Linked To Industrial Production
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
May-07
May-08
May-09
May-10
May-11
Total
Source: BMI, BCB
Primary products
Manufactured goods
May-12
Sep-12
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
-60
Following an estimated 1.2% contraction in 2012, we forecast only a moderate recovery in import growth this year to 2.9% (a slight downgrade from our previous forecast of 4.8%). Intermediate goods and raw materials, as well as capital goods, comprised 66.5% of total imports during the first 11 months of 2012, and import growth correlates closely with the industrial production index. While we expect industrial production to rebound in 2013, aided by increased competitiveness on the back of continued real weakness and the continuation of several stimulus programmes targeted at the manufacturing sector, we forecast an average expansion of just 1.5%, following an estimated 2.7% contraction in 2012. As such, while we believe favourable base effects and a modest pickup in the manufacturing sector will prompt imports to return to growth this year, we expect them to remain off their recent highs. In addition to a moderate improvement in the trade balance, our expectation that the income account deficit will be constrained by less significant profit repatriation by foreign firms, also underpins our view for an improvement in the current account this year. Indeed, we have seen the income account deficit moderate in recent months and expect this trend to continue as firms' profit margins remain under pressure due to weak domestic and global growth.
Brazil Goods Imports & Industrial Production Index, % chg y-o-y

100 80 60 40 20 0 -20 -40 25 20 15 10 5 0 -5 -10 -15
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
May-07
May-08
May-09
May-10
May-11
Jan-12
May-12
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Intermediate Products And Raw Materials LHS Capital Goods LHS Industrial Production RHS
Source: BMI, BCB
Risks To Outlook
We recently explored the potential impacts of a more sustained uptick in Chinese economic activity on Brazil and the region's other major metals exporters through 2013 (see 'What If We're Wrong On Chinese Growth? Assessing The Regional Implications', December 27 2012). Such a scenario would bolster export growth on the back of a sustained pickup in demand and prices for steel and iron ore, posing potential upside risks to our 2013 and 2014 export and current account forecasts. In addition, stronger economic activity in China would likely result in stronger investment inflows than we currently expect as firms are likely to continue boosting their capital expenditure plans.
22
Sep-12
-60
-20
ECONOMIC OUTLOOK
Fiscal Policy
Expenditures To Keep Fiscal Deficit Substantial In 2013
BMI VIEW
While we see some upside for revenue growth in 2013 following a significant slowdown in 2012, we believe expenditures will head higher as well, meaning that we anticipate no improvement in Brazil's nominal fiscal deficit this year. Moreover, with the government indicating that it is looking to loosen Brazil's fiscal framework, we believe the administration will miss its primary balance target in 2013.
Financial Account Surplus To Remain Off Its Recent Highs

Brazil FDI & Portfolio Investment, US$mn
FDI Portfolio Investment 30,000 25,000 20,000 15,000 10,000 5,000
PAC II growth acceleration programme and the 2014 general election will see total expenditures head higher in 2013. As such, we forecast the nominal fiscal deficit to come in at 2.6% of GDP this year, marking no improvement from our 2012 estimate (see our online service, September 25 2012, 'Continued Stimulus Means Fiscal Consolidation Will Remain Elusive'). Similarly, as the government continues to prioritise economic growth over fiscal consolidation, we expect it to miss its primary fiscal balance target of 3.1% of GDP in 2013, with the primary balance coming in at 2.8% of GDP. Indeed, in line with recent government statements, we believe it is highly likely that the administration technically missed the target in 2012, and will instead exclude certain investments and tap the country's sovereign wealth fund to meet it.
Brazil Tax Revenue & Economic Activity, % chg y-o-y
40 30 20 10 0 12 10 8 6 4 2 0 -2 -4
More Upside Ahead
0 -5,000 -10,000 -10 -20
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12
Source: BMI, BCB Source: BMI, BCB
We maintain our view that significant fiscal consolidation is off the cards in Brazil until after the 2014 general election at the earliest. While we expect a gradual winding down of the tax cuts enacted in late 2011 and 2012 as economic activity picks up, meaning some upside for revenue growth over the coming quarters, we believe that spending related to the government's
TABLE: FISCAL POLICY
2009
Fiscal revenue, BRLbn [1,5] Revenue, % of GDP [1,6] Fiscal expenditure, BRLbn [2,5] Expenditure, % of GDP [2,6] Budget balance, BRLbn [3,5] Budget balance, % of GDP [3,6] Primary balance BRLbn [3,5] Primary balance % of GDP [4,6] 737.1 22.8 699.9 21.6 -106.2 -3.3 64.8 2.0
Revenues To Head Higher

While revenue growth remained weak for the majority of 2012, due in part to a major slowdown in tax inflows, we expect some upside in 2013 as economic activity recovers. Moreover, we
2010
917.3 24.3 840.8 22.3 -93.7 -2.5 101.7 2.7
2011
987.2 23.8 897.2 21.7 -108.0 -2.6 128.7 3.1
2012e
1,056.3 24.3 995.9 22.9 -113.0 -2.6 99.9 2.3
Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12
Tax Revenue (LHS) Seasonally-Adjusted Economic Activity Index (RHS)
-6
2013f
1,151.4 24.3 1,130.3 23.8 -124.2 -2.6 132.8 2.8
2014f
1,278.0 24.8 1,288.6 25.0 -128.9 -2.5 154.6 3.0
2015f
1,431.4 25.5 1,430.3 25.4 -112.5 -2.0 174.3 3.1
2016f
1,603.1 26.2 1,580.5 25.8 -110.2 -1.8 202.1 3.3
2017f
1,795.5 26.9 1,722.7 25.9 -86.6 -1.3 233.2 3.5
Notes: e BMI estimates. f BMI forecasts. 1 Central Government Revenues; 2 Central Government Expenditure; 3 General Government Budget (Accumulated Current Prices); 4 Fiscal balance stripping out interest payments on government debt. Sources: 5 BCB; 6 BCB/BMI calculation.
23
BRAZIL Q2 2013
forecast total central government revenue to expand by 9.0% in 2013, after estimated growth of 7.0% in 2012. This comes as we have already begun to see a modest recovery in tax revenue in recent months, posting 4.7% y-o-y growth in November, well above its 2012 low of -6.9% y-o-y. Uptrend To Continue
Selected Components Of Central Government Expenditures, BRLbn

120 100 80 60 40 20 0
tion of the government's PAC II growth acceleration programme in 2014, as well as the general election that year will see both current and capital expenditures tick up. Indeed, our Infrastructure team anticipates that after significant project delays in 2012, the government will increasingly push through public investment projects over the coming quarters. In addition to the programme's expiration in 2014, the general election provides a further impetus for President Dilma Rousseff's government to ramp up promised spending on infrastructure and social housing, underpinning our view for higher expenditure growth.
Changing The Fiscal Paradigm ?

The Brazilian government's decision to forgo its primary fiscal balance target of 3.1% of GDP in 2012, indications that the government may miss it again in 2013 (our core view), as well as proposed changes to the country's fiscal responsibility law underscore our view that the current administration is moving towards a looser fiscal framework. Indeed, given the economy's success in managing its public finances in recent years, we believe that an increasing focus on the nominal fiscal deficit, rather than the primary surplus, is apt. While we acknowledge that relaxing the country's hallmark fiscal responsibility law could be a slippery slope, the ability to reduce Brazil's substantial tax burden one of the proposed changes will be essential to increasing investment and improving the country's business environment over the medium to long term. Indeed, Brazil scores 154 out of 185 economies in the 'paying taxes' portion of the World Bank's Doing Business 2013 report, due to both a 69.3% total tax rate and a burdensome 2,600 hours to file taxes. Given that we expect both more moderate real GDP growth over the coming years, as well as an increasingly important role for fixed investment in Brazil's economy, a more investor-friendly tax regime is essential in the next few years.
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jul-08
Jul-09
Jul-10
Jul-11
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Jul-12
Capital and Current Expenditures Social securities benefits Payroll and Social Charges
Source: BMI, BCB
Our view for revenues to expand at a modestly stronger pace in 2013 is underpinned by our expectation of a gradual winding down of the tax cuts implemented in recent quarters, as well as a pickup in economic activity. Indeed, the former is exemplified by the government's recent announcement that it will gradually increase the industrial products tax (IPI) over the coming months, phasing out a tax cut targeted at the Autos sector (see ' Government To Stagger Tax Cut Reduction ', December 20 2012). While we believe the elimination of tax breaks will be gradual, given the government's growth bias, we believe slightly higher tax rates are likely to bolster revenues this year. Moreover, we expect revenue growth to get a boost from stronger economic activity as well, in line with our forecast for real GDP growth to accelerate to 3.5% in 2013, a significant increase from estimated 1.0% growth in 2012 (see 'Upswing In 2013, But No Return To Boom Years', December 27 2012).
Oct-12
Risks To Outlook
The risks to our 2013 fiscal outlook lie to the downside. Should real GDP growth disappoint over the coming quarters on the back of a more moderate expansion in fixed investment that we currently anticipate, we could see both more moderate revenues and higher expenditures. Weaker than expected economic activity could see the government fail to phase out certain tax breaks, seeing what modest additional revenue growth we foresee this year disappear. Moreover, we expect that expenditures are likely to pick up even if economic activity does not as the government attempts to stimulate growth and moves forward with some public investment projects ahead of the PAC II deadline and general election in 2014. Such a scenario would pose major downside risks to our primary and nominal fiscal forecasts this year.
PAC II And Election To Boost Expenditures

On the expenditures side, we continue to see scope for government spending to head higher over the coming quarters, forecasting total central government expenditures to expand by 13.5% in 2013, up from an estimated 11.0% in 2012. This view is supported by our expectation that both the expira-
24
ECONOMIC OUTLOOK
Regional Economic Activity

What If We Are Wrong On Chinese Growth? Assessing The Regional Implications
BMI VIEW
Signs of a recovery in China's economy present substantial upside risks to our current 'hard landing' scenario. Higher-than-anticipated economic growth in China over the coming years would have profound implications for Latin America's economic trajectory, and we highlight Chile and Peru, and Brazil to a lesser extent, as most affected in the event of stronger growth in Asia's biggest economy.
Back in October, our Asia team identified the possibility of a cyclical upturn in Chinese economic growth, as part of a drawdown in inventory levels (see 'Growth: Upside Risks Amid Structural Downturn', November 12 2012). This view has since materialised, presenting noteworthy upside risks to our China growth forecast, which we recently revised up to 7.5% from 7.1% for 2013. While we currently maintain that the latest batch of positive data is temporary and cyclical within in a structural downtrend, we explore the possibility of China's economy performing closer to current consensus expectations over the next two years, and how this will affect our outlook for Latin America. 'Hard Landing' Scenario Is Still Out Of Consensus
China Real GDP Growth Forecasts, %
Bloomberg Consensus BMI 11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 2010 2011 2012f 2013f 2014f 6.0
Regular readers of BMI's Latin America Country Risk service will be acutely aware of our below-consensus economic growth outlook for much of the region, despite forecasting stronger average real GDP growth in 2013. In particular, we have maintained a subdued growth outlook for countries with a high dependence on commodity exports, as they are particularly exposed to declining external demand. As part of our key macroeconomic themes for 2013 for Latin America, we have singled out industrial metals exporters, such as Chile and Peru, as most vulnerable to a deceleration in economic growth in China (see our online service, 'Our Key Themes For 2013', December 12 2012), which has become a dominant consumer of global base metal production in recent years. With BMI remaining substantially below consensus expectations on Chinese growth, in light of an ongoing structural rebalancing process in the coming years, metals exporters in Latin America will be directly affected by the drop in housing activity and fixed investment in China. Having said that, we highlight growing upside risks to this view, with recent economic data showing signs of 'green shoots' in the Chinese economy.
In our baseline scenario, we see Latin America's weighted average real GDP growing by 3.4% in 2013, up from 3.0%, which we expect for 2012. Based on the existing weightings used in our calculations for regional GDP, a stronger growth scenario in China, which aligns more closely with consensus expecta-
TABLE: CHINA'S CONSUMPTION OF SELECTED COMMODITIES, % OF GLOBAL CONSUMPTION

Aluminium 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 16.1 18.6 19.9 22.2 25.2 32.7 33.3 40.7 39.1 41.2 Copper 18.2 20.1 20.2 21.9 21.2 26.8 28.4 39 38.2 40.6 Lead 14.3 17.1 19.7 25.5 27.7 30.7 38.6 44.5 43.7 46.5 Nickel 7.1 10.6 11.5 15 17.1 24.2 25.5 43.1 34.4 43.1 Tin 19.4 23.9 27.9 33.5 31.6 37.5 41 45.7 41.6 47.2 Zinc 17.9 21.2 26.2 28.6 29 31.8 36 43.5 42.9 43.5 Corn 20.1 19.8 19 19.4 20 19.4 19.5 20.2 21.2 21.9 Rice 33.4 32.1 32.1 31.1 30.4 29.9 30.5 30.8 30.4 30.6 Wheat 17.5 18 16.8 16.5 16.5 17.3 16.6 16.5 16.9 17.5 Oil 6.7 7.2 8.1 8.3 8.8 9.1 9.3 9.7 10.6 11.1 Coal 27.4 30.6 35.2 37 37.8 38.6 40.5 43.6 46.2 50
Source: BMI, USDA, WBMS
25
BRAZIL Q2 2013
tions of 8.1% real GDP growth versus our forecast of 7.5% in 2013, we estimate that Latin America's GDP would expand by 3.7% in real terms, 0.3 percentage points (pp) above our current estimates for the region. Moreover, i n 2014, we would see scope for Latin America's economy to expand by 4.1% in real terms, as opposed to our current baseline expectation for 3.7% real GDP growth, in the event that a hard landing is avoided and China's economy grows more in line with consensus expectations of 8.0% against our current projection for 6.7% real GDP growth. Scope For A V-Shaped Recovery?
Latin America Real GDP Growth Forecast, % y-o-y

BMI baseline scenario Stronger Chinese growth scenario 6.5 6.0
Ahead ', October 11 2012). Although we are forecasting a significant uptick in economic activity in 2013, with real GDP growth accelerating from 1.0% in 2012 to 3.5% in 2013, on the back of continued stimulus measures and a significant construction backlog, we believe that Brazil is in for a period of more moderate growth over the coming years (see 'Upswing In 2013, But No Return To Boom Years', December 18 2012). This is underpinned by our view that a period of consumer deleveraging is on the cards, and while investment will be broadly supportive, it will be bifurcated, as some mining investment remains vulnerable to weaker Chinese metals demand. Export Sector Still Looking To China
Brazil Exports To China
30 300 250 200 150 100 50 0 -50
5.5 5.0 4.5 4.0 3.5 3.0 2.5
25 20 15 10 5 0 -5
2010
2011
2012f
2013f
2014f
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
May-07
May-08
May-09
May-10
May-11
Jan-12
Source: BMI
Brazilian Exports To China (% total) LHS Brazilian Exports To China (% chg y-o-y) RHS
Source: IMF, Bloomberg, BMI
In the event that we turn out to be overly pessimistic on China's economic outlook (ie, no immediate rebalancing of the economy), the stronger growth outlook for the region is primarily based on the impact this would have on growth in Brazil, Chile and Peru, which we believe to be most directly affected by China's economic performance over the coming two years. However, we also include indirect factors on regional growth, such as stronger investor confidence, improved liquidity conditions and an increase in private sector investment in the region, which would help to push Latin America's real GDP growth higher.
Brazil : A More Supportive External Environment Would Delay Domestic Rebalancing

While Brazil is less heavily exposed to China's growth story than the region's major metals exporters, due to a lesser reliance on exports (exports were 11.9% of GDP in 2011, compared with 18.0% in Peru) and a more diverse commodity mix, we believe China's economic rebalancing will have important implications for the Brazilian economy, including more moderate investment inflows and a weakening currency (see ' Lower-Trend Growth
Conversely, we believe that a sustained bounce in Chinese economic activity in 2013 and 2014 would feed through to a pickup in export growth exports to China averaged 17.8% of total exports between January and July 2012 on the back of rising demand and more favourable prices for steel and iron ore. As such, we believe net exports would be a more positive contributor to growth over the coming years. However, the impact would be less notable, given that Brazil's growth outlook for the next two years is in large part based on fixed investment and existing stimulus efforts. This is reflected in the smaller divergence between BMI's and Bloomberg consensus forecasts for real GDP growth in Brazil despite our substantially lower growth outlook on China, our Brazil growth forecast is only slightly below consensus. Having said that, we would expect investment inflows to pick up in the event of stronger Chinese economic growth, which would likely stave off further monetary easing measures by the central bank. The central bank has recently grown more conBusiness Monitor International Ltd
26
May-12
-10
-100
ECONOMIC OUTLOOK
cerned about the impact of a weaker real on the economy and its inflation fighting credentials. With the prospect of stronger global commodity prices in the event of a stronger Chinese growth scenario, a normalization of monetary policy could occur sooner than under our current core view. Although we see the central bank raising the Selic target rate to 7.50% from the record-low of 7.25% by end-2013, the central bank may seek to bolster the real's carry appeal and stave off capital outflows which have seen the currency become one of the worst-performing FX majors in the region in 2012. China Hard Landing Has Minor Impact On Forecast Outlook
Brazil Real GDP Growth Forecasts, %
Bloomberg Consensus BMI 8 7 6 5 4 3 2 1 0
date in November. Indeed, Chilean exports to China constitute roughly 25% of all Chilean exports, so we believe that an uptick would likely boost export volumes, supporting net exports and pushing real GDP higher. While 25% is a significant portion of exports to send to one country, the year-to-date contraction is not attributable solely to China. Indeed, for much of 2012 Europe was a greater drag on year-on-year export growth than China. As such, we believe that, as long as Europe remains weak, a moderate strengthening in China would not be sufficient to bring Chile back to the strong commodity growth of recent years.
Chile Goods Exports By Destination, US$mn
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 30 25 20 15 10 5 0
Feeding The Dragon
2010
2011
2012f
2013f
2014f
Source: BCC, BMI
Nevertheless, while an upturn in China would provide a more supportive external environment for Brazil to recover from the sharp slowdown seen in 2011 and 2012, boosting headline growth, we do not believe that more robust Chinese growth would fundamentally alter Brazil's economic rebalancing, but would simply delay it.
Chile: Potentially A Very Different Economic Trajectory

We expect that a sustained recovery in Chinese economic activity would bolster the Chilean economy significantly. Stronger Chinese demand, we believe, would have both firstand second-order effects on the economy, which would likely include stronger real GDP growth, a smaller current account deficit, and a stronger peso. The primary effect of a stronger-than-expected Chinese economy in 2013 would be a return to relatively strong growth in Chilean exports, which have contracted by 4.2% y-o-y in the year-toBusiness Monitor International Ltd
The composition of Chile's exports leads us to believe that the gains of a stronger Chinese economy would be fairly concentrated among the country's sizeable mining industry. Chilean exports to China are roughly 80% copper, and we would expect higher profits in the mining industry. Higher profits could lead to higher capital expenditure via reinvestment or encourage long-overdue investment in the country's supporting industries, such as power generation and transmission, investments that would likely have positive spill-over effects for the rest of the economy. In addition to the real economic benefit of a stronger net export picture, we see other areas that would be affected by a surge in Chinese economic activity leading to a rise in Chilean goods exports. Chief among these is the current account, where we believe greater export volumes would narrow our forecast for a 2.2% of GDP current account deficit in 2013. That said, we have long maintained that Chile is in a fundawww.businessmonitor.com
Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Exports To China (FOB), US$mn Exports ex China (FOB), US$mn Exports To China As Percent Of Total (RHS), 3mma %
27
BRAZIL Q2 2013
mentally stable position with regard to its current account, so while noteworthy, a slightly smaller current account deficit for a year is unlikely to have a substantial real economic impact.
Chile Contribution To Goods Export Growth By Destination, pp
80 60 40 20 0
Not All About China
cal opposition of manufacturing and agricultural exporters something we saw during the summer of 2012 a stronger peso would facilitate greater private consumption growth and stronger purchasing power, enabling a rebalancing away from reliance on export-driven growth over the long term. China Is A Major Factor In Chile's Growth Outlook
Chile Real GDP Growth Forecasts, %
Bloomberg Consensus BMI 6.5
6.0
5.5 -20 -40 -60 5.0
Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12
4.5
Europe
Source: BCC, BMI
China
All Other
Asia ex China
Americas
4.0
2010
2011
2012f
2013f
2014f
3.5
Another area of likely impact is the exchange rate, which in our core view will depreciate slightly in 2013 on the back of weaker global copper prices. We believe a likely result of an upsurge in Chinese growth would be higher metals prices in general, such that Chile's terms of trade would improve substantially. Copper Demand Key To External Sector
Chile Exports To China, US$mn
2,250 2,000 1,750 1,500 1,250 1,000 750 500 250
Higher commodity prices on the back of stronger-than-expected Chinese growth would likely increase inflationary pressures in the Chilean economy. As such, and in light of our expectation that such a scenario would see stronger real GDP growth, we believe Highly Exposed To A Hard Landing
Peru Exports To China
30 25 20 15 10 5 0 -5 150 130 110 90 70 50 30 10 -10 -30
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Copper Exports To China (FOB), US$mn Non-copper Exports To China (FOB), US$mn
Source: BCC, BMI
Source: IMF, Bloomberg, BMI
Higher average prices for copper, which constitutes over half of all Chilean exports, would likely see a period of peso strength, particularly if high prices lead to an increase of FDI in the sector. While we believe such a development would raise the politi-
the Banco Central de Chile (BCC) would not cut its monetary policy rate from 5.00% to 4.50% in 2013, as is our core view, but would likely hold or even hike rates. Higher interest rates would reinforce the peso appreciation we describe above, as an attractive carry trade would bring more speculative dollars into the country.
28
Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212
Exports To China (% total) LHS Exports To China (% chg y-o-y) RHS
-10
-50
ECONOMIC OUTLOOK
Peru: Far-Reaching Implications Of Rising Exports

Similar to Chile, we believe that stronger Chinese growth is most likely to feed through to the Peruvian economy by way of a strong uptick in exports, due to rising Chinese demand for Peru's mining exports, higher base metals prices, and more robust investment inflows than we currently expect. Indeed, Peruvian exports to China averaged 19.7% of total exports in H112, and growth in exports has trended downward in recent quarters. Moreover, mining exports comprised more than half of total exports during the first three quarters of 2012, with copper alone making up 22.6%.
Peru Cooper Exports By Destination, %
Others 19% China 37% Spain 5% Brazil 5% Italy 6% South Korea 6% Germany 8%
Source: Ministry of Mines, BMI
inflows into Peru remain stronger than we currently expect over the coming quarters, bolstering the financial account surplus and placing continued appreciatory pressures on the currency. China The Largest Consumer
Peru Lead Exports By Destination, %
Japan 2% Morrocco Others 2% 1%
Germany 2% Belgium 7%
High Trade Concentration
Canada 18%
China 45%
South Korea 24%
Source: Ministry of Mines, BMI
A stronger external account picture, a more significant rise in investment inflows in 2013 and 2014 and more robust real GDP growth in Peru would have important implications for our monetary policy and exchange rate outlooks as well.
Japan 14%
Major Implications From Upside China Growth Risks

Peru Real GDP Growth Forecasts, %
Bloomberg Consensus BMI 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0
As such, a sustained, multi-quarter bounce in the Chinese economy, briefly staving off economic rebalancing pressures would likely translate into a significant uptick in Peru's external accounts. We would therefore expect net exports to be a less substantial drag on real GDP growth in 2013 and 2014, likely bringing headline growth closer to 2012 levels, which we forecast to come in at 6.1%, rather than our current forecast of 5.2% growth in 2013. Stronger economic activity in China, and higher base metals prices would also impact Peru through the investment channel. Indeed, our Mining team has long highlighted that weaker prices for copper, as well as other base metals, are likely to result in major mining firms cutting back on their capital expenditure plans (see 'Capital Expenditure To Slow', October 29 2012). This is a particular threat in Peru, given rising costs and significant business environment risks stemming from continued protests. A sustained uptick in Chinese growth could see investment
2010
2011
2012f
2013f
2014f
Indeed, given our view for growth to moderate in 2013, as well as declining inflation and a significant appreciation of the Peruvian nuevo sol in recent quarters, we forecast the Banco Central de la Republica del Peru (BCRP) to cut the policy rate by 25bps
29
BRAZIL Q2 2013
to 4.00% by end-2013. However, we have long highlighted that a stronger domestic growth outlook, and a more favourable external environment, could lead the government to keep rates on hold over the coming quarters, choosing to utilise banks' reserve requirements to adjust credit conditions, rather than the policy rate, as has been the case in recent months. Moreover, we anticipate modest sol weakness over the coming quarters, and forecast the unit will fall to PEN2.6600/US$ in 2013, down from PEN2.6360/US$ in 2012, due to monetary easing and continued central bank intervention to weaken the currency (see 'PEN: Weakness In 2013, But Appreciation Over The Medium Term', December 5 2012). However, more robust investment inflows than we currently expect could place sizeable appreciatory pressures on the unit, posing major upside risks to our multi-year exchange rate outlook.
30
Chapter 3:
10-Year Forecast
The Brazilian Economy To 2022

Imbalances To Unwind, Three Potential Scenarios
BMI VIEW
Vast natural resources and strong domestic demand will keep investor interest rooted in Brazil over the coming decade. However, there is a pressing need for the authorities to address some of the country's deeply- rooted structural issues, stemming from too much consumption and not enough production, which is likely to lead to slower growth and a weaker currency at some point over the next 10 years.
A substantial and sustained currency sell-off hits the consumer and the banking sector hard.
Unwinding Imbalances Change The Shape Of Growth 50% Probability

We have long highlighted that Brazil's economic imbalances are largely the cause of cheap, free-flowing credit and rampant currency strength driven by robust capital inflows. Strong purchasing power and increasing access to financing have bolstered the Brazilian consumer and driven demand for relatively inexpensive imports in recent years. On the other hand, the country's manufacturing sector has been weakened by rising labour costs, import substitution policies and a lack of export competitiveness. These dynamics have seen the current account flip into deficit in recent years, fostering a reliance on foreign investment in order to cover the external account shortfall. Given the diminishing returns of continued fiscal and monetary stimulus, as well as the still rising cost of domestic production, we believe these imbalances are untenable in the long term. Our core scenario calls for these imbalances to unwind over the coming years through a weakening of the currency. The real's break through long-term trendline support in May caused us to call for more substantial depreciation in coming years, with the unit reaching BRL2.2500/US$ by end-2015 from BRL2.0500/ US$ in end-2012. The slowdown in private consumption will also be painful, impacted by both a reduction in purchasing power as the currency weakens, as well as households' deleveraging as credit growth slows. Moreover, the improvement on the manufacturing side is likely to be more drawn out, as substantial private investment and a reduction in the govern-
Over the coming decade, a lot of attention will be focused on Brazil as an engine of regional economic growth, and increasingly as a key political actor on the international stage. Economic policy credibility, solid institutions, rising incomes and a vast array of commodities will underpin the country's growing importance as a destination for global investors. However, several of the economic imbalances that we have long been highlighting a very strong consumer and an ailing manufacturing sector need to be addressed. The longer these imbalances remain unaddressed, the more painful the adjustment will be when it comes. We therefore outline three potential scenarios for these imbalances to play out over the next decade: Currency depreciation through 2015 helps unwind the imbalances. The authorities utilize their massive toolkit to stave off any substantial changes until after the 2014 presidential election.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
2015f
Nominal GDP, US$bn [1] Real GDP growth, % y-o-y [2] Population, mn [3] GDP per capita, US$ [2] Consumer prices, % y-o-y, ave [2] Current account, % of GDP [4] Exchange rate BRL/US$, ave [5] 2,527.41 4.0 203.3 12,432 5.0 -1.2 2.22
2016f
2,770.80 4.2 204.8 13,527 4.8 -0.8 2.21
2017f
3,063.63 4.3 206.3 14,850 4.6 -0.4 2.17
2018f
3,412.21 4.3 207.7 16,426 4.5 -0.2 2.12
2019f
3,851.24 4.2 209.1 18,417 4.6 -0.1 2.05
2020f
4,408.95 4.4 210.4 20,952 4.5 0.2 1.95
2021f
5,065.92 4.5 211.7 23,929 4.5 0.4 1.85
2022f
5,675.23 4.5 212.9 26,653 4.4 0.5 1.80
Notes: f BMI forecasts. Sources: 1 IBGE, IMF; 2 IBGE/BMI calculation; 3 World Bank/UN/BMI; 4 BCB/BMI calculation; 5 BMI calculation.
31
BRAZIL Q2 2013
ment's import substitution policies are also necessary to make the industry more dynamic. This shift away from a consumption-based growth model towards greater fixed investment is what Brazil needs to put the economy on a more sustainable long-term trajectory. Investment will be driven by the 2014 FIFA World Cup, the Olympic Games in Rio de Janeiro in 2016, the PAC II growth acceleration programme, as well as the country's substantial infrastructure deficit. These will provide enormous incentives for widespread infrastructure upgrades across the country in which private firms (Brazilian and foreign) will be keen to participate. Furthermore, the exploration and development of the country's massive offshore oil reserves will remain a major driver of investment, in line with our Oil & Gas team's forecast for net oil exports to increase to 1,086.7100b/d in 2022, from a deficit of 55.9100b/d in 2012. However, for private companies to invest we need to see a significant reduction in the cost of doing business, otherwise the government will be left holding the bill. While this will mark a major change to Brazil's growth story, we do not foresee a significant drop in headline growth, in line with our average real GDP growth forecast of 3.9% between 2012 and 2022. While this forecast encompasses a moderate slowdown over the next few years, as the weaker currency and slower credit growth impact the economy, we anticipate a pick up between 2017 and 2022, when we expect growth to average 4.4%. Meanwhile rising capital inflows and a more competitive Brazilian economy will help return the real to its appreciatory trend, ending 2021 at BRL1.7500/US$.
private consumption fall substantially, bringing down headline growth as well. Furthermore, several additional years of strong credit and money supply growth would make the consumer deleveraging process even more painful. In addition, given the unchecked rise of these imbalances, the potential for a sharp currency sell-off on the back of investors' re-evaluation of their attitudes towards the economy remains high.
Substantial Sell-off Batters Consumer and Banking Sector 15% Probability

In our opinion, the worst case scenario, and no doubt the most painful for Brazil over the short term would entail a substantial and sustained sell-off in the real, likely sending it to the BRL2.5000/ US$ level, on the back of a major change in investor sentiment towards the economy. This would represent a significant break out of the unit's long-term appreciatory trend, with massive implications for the country's growth story. Such a significant reduction of Brazilians' purchasing power would translate into a slump for private consumption, dragging down headline growth with it. In addition, tepid consumption would hit the service sector hard, translating into rising unemployment, a major drag on growth as it currently employs the more than twice the number of workers than the manufacturing sector. A significant currency sell-off would also increase the likelihood of a banking sector crisis and a supply side liquidity crunch. We have long expressed concern about the sector's risky financing practices, including small banks selling their loan books to larger firms, and a growing reliance on external debt issuance due to a favourable exchange rate. A sustained sell-off in the real would create potential for a currency mismatch on banks' balance sheets, while their debt servicing costs would increase substantially. However, they would also be hit on the assets side, as rising unemployment would precipitate a sharp deterioration in credit quality, meaning that some lenders would be unable to cover these rising costs. While we believe the government would be able to cover the cost of a bank bailout, it would pull the nominal fiscal deficit further into the red, leaving the government with an even larger debt overhang. Such a scenario would clearly precipitate a rapid change in investors' perceptions of the economy, implying that the country's substantial net international investment liabilities position could become a major risk to external account stability. Though foreign direct investment has ticked up in recent months, a large proportion of these liabilities are still in the form of shorter-term investments, which could head rapidly for the exit in the event
Quick Fixes Prolong Imbalances, Sharp Adjustment After 2014 35% Probability
Given the Brazilian authorities' massive toolkit and demonstrated willingness to use it, we do not rule out the current economic imbalances to continue over the coming years. This risk to our core scenario is particularly acute given the 2014 general election, implying that the appeal of using massive fiscal and monetary stimulus to support growth remains high. Should the government choose to continue substantial tax cuts for industry and the consumer implemented in 2011, while walking a fine line between aggressive monetary stimulus and eroding the central bank's inflation fighting credentials, we believe the authorities would be successful in boosting growth over the coming years. However, this would result in a sharp adjustment after 2014. The removal of massive government stimulus would see
32
10-YEAR FORECAST
of a substantial re-evaluation of Brazil's growth prospects. The subsequent dearth of capital would not only exacerbate the downturn, but could cap growth for many years to come.
BMI's long-term macroeconomic forecasts are based on a variety of quantitative and qualitative factors. Our 10-year forecasts assume in most cases that growth eventually converges to a long-term trend, with economic potential being determined by factors such as capital investment, demographics and productivity growth. Because quantitative frameworks often fail to capture key dynamics behind long-term growth determinants, our forecasts also reflect analysts' in-depth knowledge of subjective factors such as institutional strength and political stability. We assess trends in the composition of the economy on a GDP by expenditure basis in order to determine the degree to which private and government consumption, fixed investment and the export sector will drive growth in the future. Taken together, these factors feed into our projections for exchange rates, external account balances and interest rates.
33
Chapter 4:
Business Environment
SWOT Analysis
Strengths
A stable political regime has anchored investor interest in Brazil in the last decade, and we expect this trend to remain in place throughout the forecast period. A large population and a growing middle class present mean that Brazil's consumer sector provides significant long-term opportunities for firms. The Brazilian economy is one of the largest in the world and benefits from a rich abundance of agricultural and mineral resources.
BMI Business Environment Risk Ratings

Several physical, institutional and regulatory challenges continue to weigh on Brazil's business environment profile. At the same time, however, long-term opportunities will likely continue to keep foreign investment anchored, particularly in light of a series of sovereign credit ratings upgrades, the awarding of the 2014 FIFA World Cup and 2016 Olympic Games to Rio de Janeiro, and the country's massive commodity wealth. For the time being, however, a rigid labour market, high barriers to entry and endemic corruption threaten to stall robust progress for the country's investment profile. Business Environment Rank Trend
+ + + + + + + = + + + + + +
Weaknesses
Despite economic liberalisation, significant trade barriers, labour market rigidity and a complex customs system increase business risk
Opportunities
Commitments to upgrade physical infrastructure should continue to be boosted by the successful bid to host the 2016 Olympic Games in Rio de Janeiro and the 2014 FIFA World Cup, as well as the PAC II growth acceleration programme. Recent onshore and offshore oil discoveries could help Brazil become a global oil giant. This will help the country attract a wide range of investors and businesses over the long term.
Threats
Tax reform and new labour legislation are needed to simplify the very complex, onerous tax system and highly inflexible labour market. Government intervention in the domestic banking sector and lax regulation distort Brazil's financial system. Combined with massive fiscally fuelled credit, there is potential for significant misallocation of resources. This could undermine the overall business environment and lead to a more prolonged economic slump.
Chile 64.0 1 Uruguay 59.8 2 Mexico 53.8 3 Brazil 53.7 4 Peru 53.5 5 Colombia 52.6 6 Costa Rica 52.1 7 Panama 51.6 8 Argentina 48.3 9 Paraguay 43.2 10 El Salvador 42.0 11 Guatemala 40.9 12 Nicaragua 40.3 13 Ecuador 38.4 14 Bolivia 37.5 15 Honduras 36.3 16 Venezuela 32.6 17 Regional ave 45.7/Global ave 48.6/Emerging Markets ave 45.2
35
BRAZIL Q2 2013
Business Environment Outlook

Introduction
With an abundance of agricultural and mineral resources and a government that is actively courting foreign investment, Brazil poses an attractive investment environment. Furthermore, President Dilma Rousseff's ambitious infrastructure investment plans should unlock opportunities across all major sectors, not least with the successful bid to host the 2016 Olympic Games in Rio de Janeiro two years after the FIFA World Cup will take place in Brazil. Over-regulation, corruption and gang crime, however, represent the key threats to the business environment, in our view.
since 1988. Judicial power is divided between the state and federal branches. Each state is divided into judicial districts (comarcas). These comarcas have trial courts acting as the court of first instance. Some districts also have extra courts to rule on family and bankruptcy issues. Crimes against the person are heard by a jury; otherwise, most cases are heard by a judge only. Judgments from these courts can be appealed against in the courts of second instance.
Property Rights
Property rights protection is reasonably sound. In the 2012 International Property Rights Index report, Brazil is placed 62nd out of 130 countries surveyed, rising from 81st in 2009. It ranks 18th out of 22 countries in the region. That said, property rights are still a relatively abstract concept in the slums (favelas) of major cities and rural areas at the periphery.
Institutions
Legal Framework
The Brazilian legal system is becoming increasingly sophisticated in order to complement an expanding and diverse economy. The upshot of this has been a more dynamic and more competitive legal market. While the system is now well structured by Latin American standards, inefficiencies still slow the judicial process, and this has contributed to a major backlog in cases. The legal system is mainly based on Portuguese law and is underpinned by the terms of the Federal Constitution, effective
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS
Infrastructure Rating
Argentina Brazil Chile Colombia Costa Rica Dominican Republic El Salvador Guatemala Guyana Honduras Jamaica Mexico Nicaragua Panama Peru Trinidad & Tobago Uruguay Venezuela 55.8 60.9 53.4 51.6 55.1 38.6 42.4 39.2 36.9 32.0 42.1 52.1 34.6 48.6 49.4 44.9 63.5 40.9
Intellectual Property Rights

Brazil is a member of the World Intellectual Property Organisation (WIPO) and has signed several relevant WTO accords. Enforcement remains patchy, a state of affairs that has drawn criticism from the country's main trading partners. However, the overall intellectual property rights situation has improved considerably. Several court cases concerning trademark infringements have been successfully brought by international companies. A 1996 industrial property law generally brought patent and trademark legislation up to international standards. In addition, a
Institutions Rating
44.8 53.3 68.1 56.4 51.1 45.8 43.1 37.2 46.8 32.6 49.7 51.9 38.0 54.2 50.2 47.3 66.2 24.6
Market Orientation Rating

44.4 47.0 70.4 49.8 50.0 49.6 40.5 46.4 46.7 44.5 37.5 50.1 48.5 51.9 60.8 61.0 49.7 32.5
Business Environment
48.3 53.7 64.0 52.6 52.1 44.6 42.0 40.9 43.5 36.3 43.1 51.4 40.3 51.6 53.5 51.0 59.8 32.6
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator
36
BUSINESS ENVIRONMENT
1998 law brought copyright protection legislation up to international standards, although piracy of copyrighted materials (such as music and videos) and trademarks remains a problem. Brazil has ratified the WIPO Treaties on Copyright and Performances and Phonograms. Brazilian patents, copyrights and trademark laws are generally considered to meet international standards.
Corruption
With a score of 43 (and a ranking of 69th out of 174 countries), Brazil's 2012 performance in Transparency International's Corruption Perceptions Index saw the country's rank decline slightly from the previous year. We believe this highlights deterioration in corruption perceptions since the start of the decade, at which point the country fared markedly better. The authorities are, at least, ostensibly trying to eradicate endemic corruption: the country has signed the OECD Anti-Bribery Convention. While federal government authorities generally investigate allegations of corruption, there are inconsistencies in the level of enforcement among individual states.
facturing and service sectors. Development in infrastructure is being driven by public-private partnerships (PPP), whereas the Brazilian construction industry is being spurred by strong government investment. Private-sector interest in the construction segment has been increasing, which is evident in the growing number of public offerings on the stock exchange. Indeed, we expect this trend to gain new momentum as economic activity remains strong and the country gears up for the 2014 FIFA World Cup and the 2016 Olympic Games in Rio de Janeiro. The leading construction companies are well entrenched in the country and are significant players outside Brazil. The federal government's Growth Acceleration Programme (Programa de Acelerao do Crescimento, PAC) was unveiled in January 2007, with the aim to facilitate faster turnaround of construction projects in the pipeline. The programme has already funded projects in the oil and gas, transportation and sanitation sectors, and aimed to spur BRL500bn (US$235bn) of infrastructure development during 2007-2010. Infrastructure upgrades included the expansion and modernisation of the country's main international airport, Guarulhos, at a cost of US$832mn. The government has also announced the allocation of funds for various states for urbanisation, slum rehabilitation and sanitation, among other developments. The second PAC programme, estimated at BRL1tn (US$544.5bn), is aimed at continuing social programmes and increasing public sector investment in infrastructure between 2010 and 2014.
Infrastructure
Physical Infrastructure
Brazil possesses well-developed agricultural, mining, manuTABLE: BMI LEGAL FRAMEWORK RATING
Investor Protection Score
Argentina Brazil Chile Colombia Costa Rica Dominican Republic El Salvador Guatemala Guyana Haiti Honduras Jamaica Mexico Nicaragua Panama Peru Trinidad & Tobago Uruguay Venezuela 26.0 42.5 61.9 67.1 31.5 42.4 28.0 24.1 41.2 5.8 26.4 38.9 51.9 23.1 61.1 53.6 48.1 60.6 4.2
Rule of Law Score

46.3 69.8 90.2 64.3 79.4 37.2 24.7 42.0 48.5 9.6 41.3 53.6 55.5 33.8 60.9 41.1 63.1 85.0 17.1
Contract Enforceability Score

64.0 55.4 53.7 8.7 38.7 42.8 49.2 27.6 50.9 35.9 20.4 23.1 54.8 64.0 20.1 49.2 17.8 52.3 38.1
Corruption Score
56.8 52.4 72.2 36.9 89.5 44.7 68.6 46.1 50.5 42.7 22.9 70.5 30.8 43.2 47.4 44.8 64.8 84.9 20.8
37
BRAZIL Q2 2013
Nevertheless, the nation's transport infrastructure suffers from inadequate funding and lack of focus, leading to slow progress in the development of roadways and port terminals. Private investment generated through PPPs has been beneficial only at the regional level. The laws regarding foreign companies are not liberal, and stipulate that they either have a Brazilian partner or be established in Brazil in order to provide construction services. The government is also considering revising its existing toll tariffs system, but we expect protracted negotiations on this front. The current set of concessions has been in place since 1996, when the country's macroeconomic fundamentals were riskier and high tariffs were required to recover roads in a deplorable condition.
The high numbers employed in the services and industrial sectors reflect the changing shape of Brazilian society, as the country's urbanisation continues apace. The proportion of working women is also growing, approaching half of the labour force. According to some estimates, more than a third of all workers still operate in the informal market and so do not pay taxes or receive employment benefits. Average real wages, which had been falling over a number of years, started to nudge upwards again from 2005. However, huge disparities exist between the amount of earnings and types of employment, as well as regional variations. Brazil's labour code, based on the Consolidated Labour Laws, is comprehensive, with fairly extensive labour benefits. Workers receive an annual bonus, based on overall earnings, at least 30 days of vacation annually and are entitled to recompense when dismissed without cause. The 1988 constitution establishes a 44-hour working week and overtime pay of 50% of base pay. Labour courts exist to hear routine employment cases, involving wage disputes, unfair dismissal, and working conditions, etc. Despite federal efforts to speed up the system, the backlog of such cases stretches back several years in some instances. These courts are effectively empowered to arbitrate on employer-union negotiations by imposing an agreement if talks break down and one side seeks a legal resolution. Greater flexibility in labour relations recently has resulted in less recourse to the courts for dispute resolution in this manner. Unions are often strong, with membership running at more than 10% of the workforce
Labour Force
Brazil has a labour force of approximately 90mn people out of a total population of some 198mn, although inaccurate census information makes these figures extremely approximate. Around 65% work in the service sector, 20% in agriculture and 15% in industry. Unemployment averaged 6.0% in 2011, with this figure falling to a recent low of 4.7% in December 2011. Wages are generally relatively low, though a 14% increase to the minimum wage in January 2012 has brought it to BRL622.0, implying a substantial increase in wage-related benefits as well. Furthermore, up to a third of employers' labour costs can be accounted for by various taxes and other charges.
TABLE: LABOUR FORCE QUALITY

Literacy Rate,%
Labour Market Rigidity Score

21.0 46.0 18.0 10.0 39.0 21.0 24.0 28.0 19.0 10.0 57.0 4.0 41.0 27.0 66.0 39.0 7.0 18.0 69.0
Female Labour Participation, %

52.4 60.1 41.8 40.7 45.1 50.5 45.9 48.1 44.7 57.5 40.1 56.1 43.2 47.1 48.4 58.2 55.1 53.8 51.7
Source: BMI/World Bank/ILO. Labour Market Rigidity score from Ease of Doing Business report, 1 = highest score
38
directly and representing many more through their role in collective bargaining. Unions are obliged to represent all workers in their sector or region, whether they are members or not. There are estimated to be more than 15,000 unions operating across Brazil. Employers' federations are also powerful players in workplace negotiations. More sophisticated labour-management negotiations have led many firms to overhaul their practices and hire more skilled negotiators, in many cases resulting in improved relations.
state guarantee. Companies taking up the contracts must invest at least BRL20mn for five to 35 years. One aim is to speed up infrastructure development, including roads, railways and water systems. The bill also introduces improved levels of transparency. Foreign water companies have expressed concerns that their sector still needs stronger regulation and a more developed institutional framework before it becomes sufficiently attractive to bring in large FDI flows. Brazil has eight free trade zones (FTZs) in total, of which the most important for foreign investors is the Manaus FTZ, which covers nearly 4,000 square miles in the middle of the Amazon basin. Here, goods originating outside the country enter without attracting customs levies or any import taxes. Goods may also be exempt from certain other taxes.
Market Orientation
Foreign Investment Policy
In terms of market openness, Brazil is a front runner in Latin America and a major recipient of foreign capital. Total FDI inflows of US$66.6bn in 2011 were almost double the amount Brazil attracted in 2007 and, in nominal terms at least, higher than flows attracted at the beginning of this decade when the government's privatisation campaign was in full swing. The foreign investment framework has been an evolving process over the past few decades. For instance, foreigners have been able to invest in the stock market since 1991. A series of rules and constitutional amendments introduced in 1995-2000 gave foreign investors the same opportunities as domestic investors in most sectors. That said, the catalyst for recent FDI activity has undoubtedly been a loosening of regulation under the Lula administration. Foreign suitors, satisfied with the improved level of economic and political stability, have been taking advantage of the country's extensive privatisation programme. A landmark reform took place in December 2004 when Brazil's senate approved the Public-Private Investment Bill, allowing private firms to invest jointly with the government in projects backed by a
Foreign Trade Regime

Brazil joined the WTO in 1995. It was a founding member of the Mercosur free trade area in 1991 with Argentina, Paraguay and Uruguay (Bolivia and Chile have observer status). Mercosur and the neighbouring Andean Community (Peru, Bolivia, Ecuador and Colombia) signed a pact in October 2004 under which the two trading blocs agreed to phase out import tariffs over 15 years. Mercosur is in the process of negotiating a trade agreement with the EU and also with the US and others through the proposed Free Trade Area of the Americas. Separately and through Mercosur, Brazil has been strengthening bilateral ties with other countries, notably India, for which Brazil is its biggest Latin American trading partner. Brazil and India have set a target of bilateral trade of US$10bn in the short term.
TABLE: LATIN AMERICA ANNUAL FDI INFLOWS

2009
US$bn Argentina Brazil Chile Colombia Mexico Peru Trinidad & Tobago Venezuela Source: UNCTAD, BMI 4.0 25.9 12.9 7.1 16.1 6.4 0.7 -2.5 Per Capita 100.3 134.3 760.1 156.3 143.9 223.6 530.6 -88.9
2010
US$bn 7.1 48.5 15.4 6.9 20.7 8.5 0.5 1.2 Per Capita 174.6 248.8 898.3 149.0 182.6 290.8 409.6 41.7
2011
US$bn 7.2 66.7 17.3 13.2 19.6 8.2 0.6 5.3 Per Capita 177.7 339.0 1001.7 282.0 170.3 280.0 426.3 180.1
39
BRAZIL Q2 2013
Tax Regime
The tax regime is highly complex, making the overall burden difficult to predict. Rates are among the highest in Latin America. Reform of the regime has been high on the government's agenda, though substantial progress has yet to be made. Corporate Tax: Effectively 34%. Companies pay corporate income tax, income surtax and a social contribution. Corporate income tax is 15%. The income surtax is 10% on profits above BRL240,000 per year. The social contribution is charged at 9%. Resident companies pay tax on global income. Non-resident firms pay tax on Brazilian-sourced income only. In August 2007, legislation (Complementary Law 127/2007) was introduced aimed at simplifying the tax regime for small businesses. Individual Tax: Rises progressively to 27.5%. Residents are taxed on global income. Non-residents are taxed on Braziliansourced income only. Indirect Tax: Brazil has separate VAT regimes run by the federal and state governments, which are not harmonised; however, an 18% rate is used in some of the most developed states. Recent reforms have included invoice taxes to VAT. An attempt to harmonise VAT failed in 2003. Further efforts are now being made to do so.
Capital Gains: gains of companies are taxed as income in most cases. Individuals are taxed on gains at 15%. Capital gains made by non-residents on investments registered with the central bank are generally subject to a 15% withholding tax.
Operational Risk
Security Risk
The most serious threat to domestic security in Brazil comes from organised crime, in our view. This risk is particularly widespread in drug trafficking, which is largely controlled internally by the criminal gangs of Rio de Janeiro and So Paulo. The strongest of these groups are the Primeiro Comando da Capital (PCC) in So Paulo and the Comando Vermelho (CV) in Rio de Janeiro, which have started to explore joining forces in order to expand their regional power at a national level. Their influence has grown to such an extent that in many parts of Rio de Janeiro they are seen as a parallel power to the state. Although the Colombian border attracts the most attention, drug trafficking is a problem along all sections of Brazil's frontier, especially given increasing production in Peru and Bolivia. New drug-smuggling routes are opening up across the Peruvian and Bolivian borders into the states of Acre, Rondnia and Mato Grosso. These borders are heavily forested, difficult to patrol and
TABLE: TRADE AND INVESTMENT RATINGS

Openness To Investment Score
Openness To Trade Score

20.2 9.4 68.5 9.3 63.6 44.4 66.0 45.3 87.8 44.6 61.8 32.9 38.7 73.4 81.4 49.1 70.5 38.0 20.0
40
have yet to gain increased attention from the Brazilian armed forces and federal police. Indeed, local news sources report than an unprecedented 24 tonnes of cocaine were confiscated in 2009, compared with 15 tonnes in 2005. Moreover, recent media reports have suggested that between 60% and 80% of Bolivian cocaine is destined for Brazil, underscoring the country's growing consumer base. Brazil is the second-largest producer and exporter of small arms and ammunition in the Americas after the US, with both civilian and military production. Brazil also has one of the highest rates of death by firearms in the world, with around 90% of these being murders. The main increases in murders have occurred in the urban capitals, such as Rio de Janeiro and So Paulo. The majority of illegal weapons seized by the security forces are locally manufactured handguns and ammunition. Although Brazil has no active domestic insurgent groups, there are growing concerns about the presence of illegal armed and organised crime groups in the Tri-Border Area on the border with Argentina and Paraguay. In particular, there are anxieties that Islamist terrorists are using organised crime to fund activities in South America and abroad.
41
Chapter 5:
Key Sectors
Autos
Executive Summary
Passenger car sales in Brazil decreased 5.2% y-o-y in September, to 214,351 units. Over the first nine months of 2012, sales in this segment have increased 7.2% y-o-y, to 2,100,365 units. BMI has long maintained that passenger car sales in Brazil will increase 3.9% over the course of the year. We maintain this view for now, as we believe sales in this segment will moderate over the remainder of the year, and drop in line with our forecast. Earlier in 2012, car sales were boosted significantly through stimulus measures aimed at boosting investment and consumption, including cheaper credit for vehicle loans and tax breaks for domestically produced vehicles. Although the stimulus measures are in place until the end of October, we believe their effects were felt the most in the June-August period, and that their impact will be more subdued in the latter stages. We believe that greater access to credit for vehicle loans will provide some modest increase in sales over the remainder of the year, but not substantially so. Over the long term, we maintain a bullish outlook for the passenger car segment in Brazil, and expect to see strong and sustained growth over the remainder of our 2017 forecast period. Vehicle production in Brazil increased 8.2% y-o-y in September, 282,540 units. Over the first nine months of the year, production declined 5.7% y-o-y, to 2,462,873 units. In July, we revised down our vehicle production forecast, to a 5% decrease in 2012, predicated on our belief that the Brazilian economy, with its industrial and vehicle production, will pick up in the second half of the year. This view is continuing to play out, and we maintain our forecast for now. BMI believes that despite weak Q212 growth, we will see a modest pick-up in economic growth in coming quarters, in line with our 2012 real GDP growth forecast of 1.0%. The July industrial production reading recorded the most moderate contraction since March, at 2.9% y-o-y. We believe, however, this will resurge somewhat in H212. This has informed our belief that vehicle production will have picked up in this time.
BMI also sees little to suggest substantial further appreciation for the Brazilian real in the short term. Rather, we believe central bank intervention, both through monetary easing, as well as directly purchasing US dollars, will mute any upside potential for the currency. An appreciation of the currency would provide further downside risk to our forecast, as this would make exports less competitive. Over the longer term, we maintain our bullish outlook for the autos production sector, predicated on government policy bearing fruits, our view of resurging domestic sales, and the potential for Brazil to become a regional production hub. On the back of this bullish outlook, over the short and long term, we expect to see significant investment from international automotive manufacturers in the Brazil autos sector.
Market Overview
Suppliers: It is BMI's long held view that government policy in Brazil to boost domestic automotive production would bear fruits, and that the segment will see considerable ongoing investment over the medium term. Indeed, automotive manufacturers continue to invest in production facilities in the country, and this is begetting growth across the supply chain. Indeed, on the back of government policy mandating local content requirements for autos parts, domestic suppliers are benefiting massively from these increases in investment. We expect this trend to continue as the production market, and the domestic supply chain, continues to develop. According to 2008 estimates, the industry boasts of a strong network of 470 automotive companies, which together operate some 650 plants across the country. Details of some of the leading international names are listed below. The list is not exhaustive. Segment Developments: In October, South Korean automaker Hyundai Motor's components subsidiary Hyundai Mobis plans to establish large-scale distribution centres in the Brazil in 2013, amongst other emerging market economies. The move is in line with the carmaker's global expansion of vehicle production facilities and the development of its aftermarket parts business. The carmaker is set to increase its global distribution bases to 35 by end 2012.
43
BRAZIL Q2 2013
In September, Automotive technology and systems manufacturer Denso announced that it will begin production of engine control units (ECUs) in Brazil. The company will initially supply Toyotaplants in Brazil. Toyota recently opened its third auto production plant in Brazil, currently employing some 4,000 workers, and recently announced plans to build an engine production plant in the country.In addition to Toyota, Denso aims to supply ECUs made in Brazil to other Japanese automakers, including Nissan which plans to bring a new plant online in 2014. In the first quarter of FY2012, Denso's sales in the Latin American region reached JPY14bn (US$176.3mn), an 11.4% y-o-y decrease. In the Q112 period, vehicle sales in both Brazil and Argentina key regional markets for the company decreased, but picked up over the Q212 period in Brazil, and BMI expects this growth to continue for the remainder of the year. We remain somewhat more bearish about vehicle production and sales in Argentina, however, forecasting an 18% drop in this segment in 2012. Denso hopes to nearly double its sales in the Latin America region to US$1.4bn by 2015, taking advantage of automakers' plans to increase their parts procurement in Brazil. In August, German auto parts manufacturer Continental launched a new technical centre in Brazil. The move is line with the company's strategy to focus on powertrain testing and cater to the growing demand for development capacities, owing to stricter global standards for fuel consumption and emissions. The new centre has been built with an investment of about BRL28mn (US$13.8mn) and has 50 staff members mainly from the local area. In August, Denso Do Brasil (DNBR), a subsidiary of global automotive firm Denso Corp., opened a new plant and technical development centre in Santa Barbara, Sao Paulo, Brazil. The company has invested US$101.4mn in the plant, employing 800 employees. The technical centre will develop motor parts for the South American market. DNBR's president, Hiroshige Shinbo, says the technical centre will increase production capacity and reduce development time for new technology. In August, US component manufacturer Wabtec Corporation acquired a 100% stake in Brazilian subsidiary Winco Equipamentos Ferroviarios. The move is in line with Wabtec's strategy to expand its business footprint in Brazil. Wabtec's sales outside the US grew from US$370mn in 2006 to US$916mn in 2011, with a compounded annual growth rate of 20%. The company expects double-digit growth in 2012. In August, Air and ocean freight specialist DHL Global Forward-
ing opened a new Automotive Competence Centre in SoPaulo, Brazil. The company expects the Centre to handle some 2,000 shipments per month from original equipment manufacturers (OEMs) and first-tier suppliers importing auto components into the country. In July, US-based Yaskawa America Inc's (YAI) divisions, Motoman Robtica do Brasil and Yaskawa Elctrico do Brasil, jointly stated their plans to expand in Brazil. Both divisions will move together to a larger manufacturing area in Diadema, but will stay as separate divisions. Both divisions are scheduled to be fully functional by mid-July 2012 and will relocate around 150 employees. The new location will enable the divisions to bolster efficiencies and production capacity as well as offer efficient customer service.
Industry Forecast
Sales: Passenger car sales in Brazil decreased 5.2% y-o-y in September, to 214,351 units. Over the first nine months of 2012, sales in this segment have increased 7.2% y-o-y, to 2,100,365 units. BMI has long maintained that passenger car sales in Brazil will increase 3.8% over the course of the year. We maintain this view for now, as we believe sales in this segment will moderate over the remainder of the year, and drop in line with our forecast. We believe that greater access to credit for vehicle loans will provide some modest increase in sales over the remainder of the year, but not a substantial increase. Earlier in 2012, the Brazilian government implemented stimulus measures aimed at boosting investment and consumption, including cheaper credit for vehicle loans and tax breaks for domestically produced vehicles. These were extended for two month sin late August, along with other measures to stoke the economy. Car sales increased massively on the back of these moves. At the time, we maintained that car sales would dip once these incentives finished, and our fears were borne out when passenger car sales declined in September. Although the measures are in place until the end of October we believe their effects were felt the most in the June-August period, and that their impact will be more subdued in the latter stages. As a result, we maintain our 2012 sales forecast, with sales abating somewhat over the remainder of the year. BMI maintains its view that significant fiscal and monetary stimulus will precipitate a pick-up in private consumption over the coming quarters, although we believe that private banks' concerns over elevated non-performing loans, high household debt levels, reduced purchasing power, and weak consumer
44
KEY SECTORS
confidence mean that such a development will be more modest than we previously expected. BMI believes that this modest increase in private consumption in the second half of the year will boost passenger car sales. This has partly informed our bullish forecast throughout the year. The rate of delinquent car loans in Brazil dropped to 6.0% in June, from 6.1% in May the first decline since December 2010. The rate of total loan delinquency is slightly lower, coming in at 5.8% in June. BMI believes that lower interest rates in the second half of the year will lower this rate further; this may facilitate a boost in vehicle loans as banks becomes more willing to issue credit. Vehicle loans to customers in the non-prime, sub-prime, and deepsub-prime risk tiers accounted for 25.4% of all vehicle loans in Brazil in Q212, a 14% increase on Q211. As banks increased loan access to a wider section of the population, the average customer credit scores for both new and used vehicle loans decreased in the period. BMI believes that this widening of access to credit has helped, in part at least, to boost passenger car sales in Q212. Despite the increase in loan volumes to riskier consumers, however, the loan-to-value (LTV) ratios (the amount of money paid over the life of a loan versus the purchase price of the vehicle) were lower than they were a year ago. For new vehicles, the average LTV ratio was 109.55% in Q212, compared with 115.65% in Q211. BMI believes that, although banks have widened their access to credit to sections of the population that were hitherto unable to access official credit for vehicle purchases, the lower LTV ratio suggests that this is not a considerable increase in the riskiness of their portfolios, and therefore remains a sustainable increase in operations. Over the first nine months of 2012, Fiat's sales increased 11.6% y-o-y, to 493,976 units. The company is the largest auto company
in the country by sales volume, with a market share of 23.5%. In this period, Volkswagen's (VW) sales increased 9.6% y-o-y, to 482,085 units. The German marque has a market share of 22.9%. General Motor Company's (GM) sales increased 1.9% y-o-y in this period, to 396,543 units, giving the company a market share of 18.8%. Ford's sales over this period increased 8% y-o-y, to 197,342 units, resulting in a market share of 9.4%. Despite weak Q212 growth, BMI believes there will be a modest pick-up in economic growth over the coming quarters, in line with our 2012 real GDP growth forecast of 1.8%. Indeed, the July industrial production reading recorded the smallest contraction since March, at 2.9% y-o-y. We believe this will resurge somewhat in H212. Light commercial vehicle sales declined 0.5% y-o-y in 9M12, to 565,786 units. We have become increasingly bearish on sales in this segment, forecasting a 2% increase in 2012, down from 4.2% previously. We maintain this forecast for now, as we believe the year-to-date reduction will be moderated by an upswing in the economy and rise in industrial production in H212. Heavy truck sales fell 22% y-o-y in 9M12, to 101,318 units. We recently revised down our 2012 sales forecast for this segment to a more bearish 18% decline over the year, from an 8.7% decrease previously. However, we also believe that falling truck sales will be moderated by the upswing in the economy and rise in industrial production in H212. Production: Vehicle production in Brazil increased 8.2% yo-y in September, 282,540 units. Over the first nine months of the year, production declined 5.7% y-o-y, to 2,462,873 units. In July, we revised down our vehicle production forecast, to a 5% decrease in 2012, predicated on our belief that the Brazilian economy, and with it industrial and vehicle production, will pick up in the second half of the year. This view is continuing
TABLE: BRAZIL AUTOS SALES BY SEGMENT HISTORICAL DATA AND FORECASTS, 2010 2017
2010
Vehicles, units % chg y-o-y Passenger cars, units % chg y-o-y Commercial vehicles, units % chg y-o-y Motorbikes, units % chg y-o-y 3,524,970 12.21 2.644.704 6.87 880,266 32.05 1,818,181 15.13
2011
3,644,151 3.38 2,647,032 0.09 997,119 13.27 2,044,422 12.44
2012e
3,764,256 3.3 2,748,943 3.85 1,015,313 1.82 2,233,693 9.26
2013f
3,892,227 3.4 2,827,917 2.87 1,064,310 4.83 2,393,004 7.13
2014f
4,131,583 6.15 2,981,594 5.43 1,149,988 8.05 2,588,072 8.15
2015f
4,394,399 6.36 3,150,841 5.68 1,243,558 8.14 2,789,282 7.77
2016f
4,686,898 6.66 3,351,999 6.38 1,334,899 7.35 3,031,056 8.67
2017f
5,167,621 10.26 3,647,106 8.8 1,520,516 13.9 2,728,936 8.1
e/f = estimate/forecast. Source: National Association of Motor Vehicle Manufacturers, Registro Nacional de Veculos Automotores, Federao Nacional da Distribuio de Veculos Automotores, BMI
45
BRAZIL Q2 2013
to play out, and we maintain our forecast for now. BMI believes that despite weak Q212 growth, we will see a modest pick-up in economic growth in coming quarters, in line with our 2012 real GDP growth forecast of 1.8%. The July industrial production reading recorded the most moderate contraction since March, at 2.9% y-o-y. We believe, however, this will resurge somewhat in H212. This has informed our belief that vehicle production will pick up in the remainder of the year. Further, BMI sees little to suggest substantial further appreciation for the Brazilian real in the short term. Rather, we believe central bank intervention, both through monetary easing, as well as directly purchasing US dollars, will mute any upside potential for the currency. An appreciation of the currency would provide further downside risk to our forecast, as this would make exports less competitive. Over the longer term, we maintain our bullish outlook for the autos production sector, predicated on government policy bearing fruits, our view of resurging domestic sales, and the potential for Brazil to become a regional production hub. In May 2012, as part of a BRL60.4bn (US$31.6bn) stimulus package designed to boost foreign and domestic investment, innovation, and GDP growth, the Brazilian government announced a number of tax incentives and other perks for the autos industry. BMI has long maintained that, although investments are necessary to boost Brazil's productive capacity, such changes will not happen immediately, and the domestic production sector will take time to mature. Imposing tight restrictions on importers will cutoff supply in the short to medium term, before the domestic manufacturing sector is ready. The current downward trend in vehicle production is commensurate with this view. BMI believes that once the sector does begin to develop we will see strong growth in domestic manufacturing. Indeed, a number of auto manufacturers continue to invest in the country, predicated on their longer-term faith in the sector.
is in for a period of lower-trend growth. We highlight slowing private consumption and the end of China's investment boom as major contributors to Brazil's medium-term growth trajectory. Following substantial growth in the last decade, we believe Brazil's consumer story is in for a period of more moderate expansion over the medium term due to re duced consumer purchasing power o n the back of currency weakness and high household indebtedness following significant credit growth in recent years. Household debt levels have ballooned in recent years, a factor we expect to co nstrain consumer borrowing despite government pressure on commercial banks to bring down their lending rates. As such, we have revised our medium-term growth forecasts to reflect a more moderate consumer story in coming years. W e forecast private consumption to contribute an aver age of 2.0 percentage points to real GDP growth between 2012 and 2017, implying average real private consumption growth of 3.1% between 2012 and 2017. Headline Industry Data (local currency) 2013 per capita food consumption = +9.8% year-on-year (y-o-y); forecast compound annual growth rate (CAGR) to 2017 = +9.3%. 2013 alcoholic drink sales = +10.8% y-o-y; forecast CAGR to 2017 = +10.7%. 2013 soft drink sales = +9.0% y-o-y; forecast CAGR to 2017= +9.3%. 2013 mass grocery retail sales = +8.0% y-o-y; forecast CAGR to 2017 = +8.7%.
Food & Drink

Executive Summary
A number of pressing challenges are facing Brazil's economy over the next few years, informing our view that the country
Key Company Trends AmBev Volume Growth Muted : In August 2012, AmBev, the Brazilian subsidiary of beer giant Anheuser-Busch InBev, posted muted growth for its fiscal first half. For the six months to the end of June, total volumes were up by 3.4%, with beer volumes up by 2.7% and soft drink sales up by 4.9% (on an organic basis). Net sales advanced by 10.1% on an organic basis. However, growth of just 2.7% for beer sales points to the firm's recent push for revenues over volumes as well as the ongoing challenges within the Brazilian beer market due to slowing economic growth a situation set to be compounded by upcoming duty hikes. Brasil Foods Facing Cost Challenges :Body 1In August 2012,
46
KEY SECTORS
Brasil Foods, Brazil's largest food producer, registered a massive drop in profitability after seeing commodity and financial costs eat into its earnings. For the six months to the end of June, the firm reported a 7% increase in net sales, which reached BRL13.2bn. However, earnings before interest, taxes, depreciation and amortisation fell by 32% to BRL1,097mn, while net profits slumped by 82% to BRL160mn. Key Risks To Outlook: The risks to our growth forecasts for Brazil remain substantial. We previously outlined two potential scenarios for the country's economic imbalances to unwind over the coming years, both of which remain on the table. First, given policymakers' massive toolkit and demonstrated willingness to use it, we do not rule out that the current policy mix could achieve higher returns to growth through the 2014 general election than we currently forecast, particularly if the authorities change their view on a weak real. However, this would result in a sharper adjustment thereafter, as the reduction of massive fiscal stimulus would likely prompt a substantial drop in private consumption, and two more years of strong credit and money supply growth would make the ensuing deleveraging period even more painful. Meanwhile, given the real's break through long-term trend-line support, and analysts' and investors' increasingly bearish views on the economy, we believe our worst-case scenario has become increasingly likely in recent months. A significant and sustained change in investor sentiment could precipitate an aggressive currency sell-off, sending the unit towards BRL2.5000/US$ much faster than we currently anticipate. This would severely dampen private consumption and likely drag headline growth down as well. Such a scenario also implies greater potential for a full-fledged banking sector crisis given the currency mismatch on banks' balance sheets and potential for loan quality to deteriorate substantially.
terms. Despite this, food consumption is still growing at a tremendous rate. In the next five years, food consumption is expected to continue growing rapidly, despite the current economic slowdown. Between 2012 and 2017, per capita consumption is forecast to grow by 55.7% (nominal growth rate in local currency terms), which translates into a compound annual growth rate (CAGR) of 9.3%. With the size of the Brazilian population forecast to increase by 6% over the same period, total food consumption is expected to grow by more than 60%. This growth is expected to be driven by consumers trading up to higher-value, branded and premium products and by lowerincome consumers simply buying more. In urban locations, there is also an ongoing trend towards value-added convenience foods as working lifestyles increasingly come to mirror those in the developed world. Industry confidence in the continued growth of domestic demand is reflected both in investments in production facilities and in a renewed focus on popular multinational brands. Processed Food: Canned food volume sales compound annual growth to 2017: +4.3% Canned food value sales compound annual growth, local currency, to 2017: +9.4%
Industry Forecast
Food Consumption: Headline food consumption compound annual growth, local currency, to 2017: +10.1% Per capita forecast food consumption compound annual growth, local currency, to 2017: +9.3%
Brazilians are very fond of canned foods, especially vegetables, meat, fish and beans, sales of which are expected to increase over the forecast period, both in terms of values and volumes. This is especially true among the poorer segments of the population, where these comparatively cheap and easy-to-store products form a substantial part of the average person's diet. Dairy: The dairy sector in Brazil remains one of the most archaic and fragmented sectors within the country's agricultural industry. This means that the supply of raw milk is limited and that prices are higher than they might otherwise be. This in turn limits scope for expanding consumption among the country's large low-income population, with per capita consumption of dairy products low, even in comparison with some of the world's other emerging markets. On the plus side, the undeveloped nature of the sector leaves tremendous room for further growth, and dairy consumption has been rising steadily. This strong growth is a result of riswww.businessmonitor.com
Due to rapid income growth and a steady increase in the value of the Brazilian real against the dollar, per capita food consumption (food and drink, excluding alcoholic drinks) in Brazil is now above average for the Latin America region in US dollar
47
BRAZIL Q2 2013
ing disposable incomes, population growth and the increased perception of dairy products as healthy and nutritious. In the meantime, the Brazilian dairy sector is rapidly consolidating, with all of the leading firms keen to secure market share. With the number of remaining opportunities diminishing, all the big firms are now concentrating on soaking up the smaller, regional firms that can help their expansion in less-consolidated regions. In a move further encouraging this trend, in November 2008, Brazil joined the International Dairy Federation (IDF), bringing IDF's global representation up to 54 countries and increasing IDF's presence in Latin America alongside Mexico. With dairy produce becoming one of the fastest-growing food sectors in Brazil, this process of consolidation is expected to remain in place over the next five years. A recent report from Rabobank suggests that growth in Brazil's dairy sector is expected to be driven by the yoghurt and cheese markets, which are both relatively immature. Confectionery: Confectionery volume sales compound annual growth to 2017: +6.8% Chocolate volume sales compound annual growth to 2017: +10.1% Sugar confectionery volume sales compound annual growth to 2017: +4.6% Gum volume sales compound annual growth to 2016: +1.4%
this trend, value sales of confectionery are expected to increase slightly faster than volume sales. Discussion about obesity levels and dietary choices has been intensifying, with busier lifestyles and consumption of convenience foods having led to an increase in related diseases. Thus, demand for healthier food and confectionery options, which retail at a premium, is increasing in Brazil in line with global trends as consumers try to adopt healthier lifestyles. A key challenge and opportunity for manufacturers is to serve the north and north east of the country, where income levels are lower but growing quicker, as distribution has so far been focused mostly on the more affluent south east. In 2012, Brazilian biscuit consumption was expected to be 9.9kg per capita. This compares with per capita consumption of 6.9kg in 2002 and demonstrates the rapid advancement of the market. This relatively high level of consumption can be attributed to a longstanding tradition of biscuit consumption at every socioeconomic level, with biscuits already purchased by 98% of Brazilian households. This wide base means that consumption can be expected to continue advancing rapidly as affluence increases throughout the income spectrum. We are currently forecasting that per capita consumption will reach 12.9kg in 2017, representing growth of 35% in the size of the overall market (in volume terms) over the next five years. Hot Drinks:
Coffee volume sales compound annual growth to 2017: +6.1% Coffee value sales compound annual growth, local currency, to 2017: +11.3% Tea volume sales compound annual growth to 2017: +16.5% Tea value sales compound annual growth, local currency, to 2017: +22.2%
Over the 2006-2011 review period, confectionery value sales in Brazil increased significantly. In 2011, an estimated 67.5% of the overall market was accounted for by chocolate confectionery, followed by sugar confectionery and gum, with market shares of 25.5% and 7% respectively. Between 2012 and 2017, overall confectionery sales in local currency terms are forecast to nearly double, with all sub-sectors expected to continue to grow rapidly thanks to the country's strong economic growth and large youth population. There is a gradual trend towards the purchase of premium confectionery products, particularly among Brazil's growing middle-class population. This trend explains the success of premium chocolate manufacturer and retailer Kopenhagen, which has retail outlets in most Brazilian malls. As a result of
Brazil is the largest grower of coffee in the world and the second largest coffee market, behind the US. The increased popularity of coffee in Brazil can be attributed to the improved quality of locally processed coffee (ABIC the country's coffee industry association introduced a coffee quality programme in 2004), as well as rising consumer affluence. The industry is set to receive a further boost from growing international demand for coffee that has been processed in Brazil.
48
KEY SECTORS
According to figures from ABIC, total domestic volume sales of roast/ground coffee increased by more than 20% between 2004 and 2009, while sales of soluble/instant coffee increased by 35%. Despite this strong growth, per capita consumption remains relatively low in comparison with more mature markets such as Argentina, leaving plenty of room for further increases. Nevertheless, consumption growth has increased markedly since 2003, and in June 2008 US coffee shop chain Starbucks revealed that its Brazilian stores were currently generating the highest number of sales transactions per store in Latin America. As a consequence of this success, it announced in August 2010 that it would take full control of its operations in Brazil through the acquisition of local firm Cafs Sereia do Brasil Participaes, which owned a 51% stake in the network. Starbucks also said it plans to expand aggressively in the country. The success of Starbucks highlights the growing demand for higher-value gourmet coffee varieties and this trend should mean value sales increase at a faster rate than volume sales over the next five years. The company's US origins and high prices have made it something of a status symbol for affluent young Latin Americans. In addition, Starbucks has brought a consistency of quality to the market place, which is currently lacking in the region's independent coffee houses, which use lower quality beans to keep prices affordable. The firm has been to some extent limited by the number of consumers willing to pay up to US$5 for a cup of coffee. However, the ongoing explosion in the number of middle class consumers in emerging markets such as Brazil means this problem is gradually diminishing. Growing international demand for coffee that has been processed in Brazil is set to give a further boost to the coffee industry. The emergence of a sophisticated local market has facilitated the development of higher-quality domestic processing and ABIC figures reveal that, during 2008, Brazilian exports of roasted and ground coffee more than doubled. While this sub-sector still represents only a tiny percentage of Brazil's total coffee exports, the phenomenal growth rate is an indicator of the industry's potential and, with domestic consumption also on the rise, the Brazilian coffee-processing industry looks to have a bright future. Meanwhile, tea value sales are expected to increase over the forecast period, albeit from a low base, as consumers drink more herbal and speciality varieties thanks to the perceived health benefits. Neverthelesss, at the end of the forecast period
in 2017, tea sales are expected to represent no more than 15% of the total value of the hot drinks market, with per capita consumption still only just 0.61kg. Alcoholic Drinks: Alcoholic drinks volume sales compound annual growth to 2017: +5.7% Alcoholic drinks value sales compound annual growth, local currency, to 2017: +10.7%
The economic slowdown, combined with increased duty, have combined to slow growth in the previously very dynamic beer sector. During 2011 sales in volume terms were virtually flat, and in 2012 the market continued to prove tricky. In the beer sector, BMI expects the market share of premium beers to increase over the next five years. We are therefore forecasting that value sales will grow at a faster rate than volume sales. In the next five years, BMI expects value sales to increase by 69% in local currency terms, while volume sales are expected to increase by 33% to come in at 16.6bn litres in 2017. Meanwhile, wine is gradually becoming more popular among middle-class Brazilians as an accompaniment to a meal, and value consumption is thus forecast to gradually rise over the forecast period. Despite the historic dominance of beer, BMI believes a shift towards wine remains a long-term possibility as consumer affluence increases. In European markets traditionally dominated by beer, such as Germany, Ireland and the UK, the past 20 years have witnessed a phenomenal rise in wine consumption and an associated drop in the consumption of beer. This has been driven by wine's well-publicised health benefits, the growing trend towards drinking at home and the increased affordability of good-quality wine. All of these trends may eventually be mirrored in Brazil. BMI believes the final factor the availability of good quality, affordable wine is likely to be the main sticking point currently limiting consumption growth. High import taxes and low sales volumes mean that foreign wine is expensive and can often be difficult to find, while the quality of Brazil's domestic wine often leaves a lot to be desired. However, with this now changing, with wine distribution increasing and investment in the local industry increasingly resulting in wines of comparable quality to its regional neighbours, the Brazilian wine sector could potentially be one of the most dynamic in the Latin American food and drink industry over the next five years.
49
BRAZIL Q2 2013
Brazil already has a fairly strong spirits culture and over the next five years we see gaining market share from the beer sector. Rising affluence will increasingly push consumers towards premium varieties and as a result BMI is forecasting that total spirits sales in Brazil will increased by 52.3% in value terms to reach BRL45.95bn in 2017. Soft Drinks: Soft drinks volume sales compound annual growth to 2016: +3.6% Soft drinks value sales compound annual growth, local currency, to 2016: +9.3%
Hypermarket sector value compound annual sales growth to 2017: +7.3% Discount sector value compound annual sales growth to 2017: +10.4% Convenience sector value compound annual sales growth to 2017: +11.3%
Brazil's climate favours the consumption of cold soft drinks, while consumption is also boosted by the young average age of the country's population. However, sales figures released by the country's national soft drink association ABIR show that growth in the sector has not been uniform across categories, with volume sales of fruit juice/juice drinks and energy drinks greatly outperforming sales of carbonated soft drinks, iced tea and bottled water. This contrasting growth is expected to be a feature of the sector for the five years to 2017 and is reflected in our five-year forecasts, with volume sales of carbonated soft drinks expected to grow by 15%, sales of fruit juice expected to grow by 52% and sales of bottled water forecast to grow by 24%. We also expect strong growth of the functional drinks market through to 2017, of 46% in volume terms. Mass Grocery Retail: Mass grocery retail value compound annual sales growth to 2017: +8.7% Supermarket sector value compound annual sales growth to 2017: +8.4%
The dynamism of the Brazilian consumer has translated into strong growth for the mass grocery retail segment. While retail sales moderated following the global financial crisis, the indicator remained in positive territory throughout the downturn. With the favourable economic climate adding wind to a sector that is already powering forward thanks to changes in consumer behaviour and sustained investment, we are anticipating dynamic levels of growth in the mass grocery retail (MGR) sector over the next five years. BMI forecasts that sales in the MGR sector will grow by nearly 52% between 2012 and 2017, compared with the 62% growth in the 2007-2012 historical period. Supermarkets will continue to take the lion's share of sales by value, but of increasing importance are the convenience, discount and hypermarket formats, which are all expected to register significantly more rapid growth over the forecast period. Hypermarkets are growing in popularity, and through their sheer size and selling power per unit are expected to experience significantly more rapid sales growth. Smaller outlets in the form of discount stores will also experience considerable growth rates, albeit from a lower base. The large number of low-income consumers in Brazil, and the recent focus on the discount format by the country's major retailers, means that sales from discount stores are forecast to grow by 64% through to 2017. Sales in convenience stores are expected to increase by 71% over the forecast period as they become increasingly popular with Brazil's growing number of urban middle-class consumers.
TABLE: FOOD CONSUMPTION INDICATORS HISTORICAL DATA & FORECASTS, 2010-2017

2010
Food consumption (BRLbn) Food consumption (US$bn) Per capita food consumption (BRL) Per capita food consumption (US$) Total food consumption growth, BRL (% y-o-y) 350.3 199.0 1,797 1,021 11.00
2011
374.2 223.4 1,903 1,136 6.82
2012f
407.9 203.9 2,056 1,028 9.00
2013f
451.5 210.0 2,257 1,050 10.69
2014f
495.0 217.6 2,454 1,079 9.63
2015f
544.1 224.4 2,676 1,104 9.92
2016f
598.9 249.5 2,924 1,218 10.07
2017f
660.6 293.6 3,202 1,423 10.31
NB nominal growth rate; f=BMI forecast. Source: Agency for Statistical and Geographic Information, BMI
50
KEY SECTORS
The key task to master for MGRs will be taking advantage of Brazil's large consumer base while accounting for the fact that large parts of the population continue to suffer from low incomes. In terms of future market position, the degree to which individual operators manage to attract today's low-income consumers, many of which might belong to the middle classes of tomorrow, will be decisive. MGRs, in the medium-to-long term, are expected to benefit from the Growth Acceleration Programme, which is aimed at increasing infrastructure-related investment via tax incentives and large public and private investments. The planned measures, if successful, could ease retailers' logistical problems, which are mainly caused by poor road networks in many parts of the country. Trade: Exports value compound annual growth to 2017 (US$): +8.8% Imports value compound annual growth to 2017 (US$): +2.2%
Brazil has a highly positive food and drink trade balance thanks to the country's highly developed agricultural sector. Brazil is the world's largest exporter of coffee, soybean, poultry, beef, orange juice and sugar. Statistics from the UN Conference on Trade and Development show that Brazil's food and drink exports continue to grow rapidly. The rapidly rising global demand for food caused by the swift economic advancement of emerging markets means that BMI forecasts Brazil's food and drink exports to grow by 53% over 2012-2017. In 2017, exports are forecast to reach a value of US$88.1bn, with imports amounting to just over US$5.3bn, having grown by 12% in the five years to 2017.
51
KEY SECTORS
Other Key Sectors

Latest Forecast Data
Below are the latest forecast tables for our other core key sectors:
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS
2009
Construction industry value, BRLbn [1,2] Construction industry value, US$bn [2] Construction industry, real growth, % y-o-y [2] Construction industry value, % GDP [2] 146.78 73.4 -6.26 4.5
2010
182.48 103.7 11.70 4.8
2011
204.07 121.8 3.62 4.9
2012e
222.86 114.2 2.21 5.1
2013f
247.95 116.6 5.76 5.2
2014f
274.98 120.9 6.20 5.3
2015f
303.11 125.0 5.23 5.4
2016f
333.73 139.1 5.30 5.5
2017f
367.38 163.3 5.48 5.5
Notes: e BMI estimates. f BMI forecasts. 1 http://www.sidra.ibge.gov.br/bda/cnt/default.asp. Sources: 2 IBGE.
TABLE: PHARMA SECTOR KEY INDICATORS

2012e
Pharmaceutical sales, US$bn [2] Pharmaceutical sales, US$bn, % chg y-o-y [2] Pharmaceutical sales, BRLbn [2] Pharmaceutical sales, BRLbn, % chg y-o-y [2] Health expenditure, US$bn [3] Health expenditure, US$bn, % chg y-o-y [3] Health expenditure, BRLbn [3] Health expenditure, BRLbn, % chg y-o-y [3] Communicable, maternal, perinatal and nutritional conditions, DALYs [1,4] Non-communicable diseases, DALYs [1,4] 25.880 -9.88 51.760 7.60 208.229 -7.88 416.457 9.99 4,839,006
22,051,353
2013f
25.882 0.01 55.645 7.51 212.627 2.11 457.149 9.77 4,699,774
22,272,002
2014f
26.272 1.51 59.769 7.41 218.789 2.90 497.746 8.88 4,564,905
22,483,891
2015f
26.450 0.68 64.142 7.32 222.482 1.69 539.518 8.39 4,434,404
22,687,012
2016f
28.656 8.34 68.775 7.22 242.942 9.20 583.061 8.07 4,308,273
22,881,355
2017f
32.746 14.27 73.679 7.13 281.770 15.98 633.982 8.73 4,186,518
23,066,912
Notes: e BMI estimates. f BMI forecasts. 1 Data is DALYS, disability-adjusted life years. Sources: 2 The Brazilian Pharmaceutical Industry Federation (Febrafarma), Group of Executives of the Pharmaceutical Market (Grupemef), IMS Health, BMI; 3 World Health Organization (WHO), BMI; 4 WHO, World Bank, IMF, BMI research.
TABLE: TELECOMS SECTOR KEY INDICATORS

2011
Number of Main Telephone Lines in Service ('000) [1] Number of Main Telephone Lines in Service, % chg y-o-y [1] Number of Main Telephone Lines/100 Inhabitants [1] Number of Cellular Mobile Phone Subscribers ('000) [2] Number of Cellular Mobile Phone Subscribers, % chg y-o-y [2] Number of Mobile Phone Subscribers/100 Inhabitants [2] Number of Mobile Phone Subscribers/100 Inhabitants [2] Number of Mobile Phone Subscribers/100 Inhabitants, % chg y-o-y [2] Number of Internet Users ('000) [3] Number of Internet Users, % chg y-o-y [3] Number of Internet Users/100 Inhabitants [3] Number of Internet Users/100 Inhabitants, % chg y-o-y [3] Number of Broadband Internet Subscribers ('000) [1] Number of Broadband Internet Subscribers, % chg y-o-y [1] 42,691 1.6 21.7 242,232 19.4 123.2 123.2 18.3 92,365 12.1 47.0 11.2 16,497 19.6
2012e
42,928 0.6 21.6 266,455 10.0 134.3 134.3 9.1 102,370 10.8 51.6 9.9 19,548 18.5
2013f
42,761 -0.4 21.4 287,771 8.0 143.8 143.8 7.1 112,473 9.9 56.2 8.9 21,550 10.2
2014f
42,541 -0.5 21.1 307,570 6.9 152.5 152.5 6.0 122,079 8.5 60.5 7.7 23,440 8.8
2015f
42,374 -0.4 20.8 319,442 3.9 157.1 157.1 3.0 129,379 6.0 63.6 5.1 24,910 6.3
2016f
42,289 -0.2 20.6 331,261 3.7 161.7 161.7 2.9 135,201 4.5 66.0 3.7 26,355 5.8
2017f
42,286 -0.0 20.5 342,988 3.5 166.3 166.3 2.8 139,284 3.0 67.5 2.3 27,760 5.3
Notes: e BMI estimates. f BMI forecasts. Sources: 1 World Bank (International Telecommunications Union ITU), BMI research, Teleco, Operators, Anatel; 2 World Bank (International Telecommunications Union ITU), BMI research, Operators, Anatel; 3 World Bank (International Telecommunications Union ITU), BMI research, Teleco, Anatel, Ibope.
53
BRAZIL Q2 2013
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS

2011
Defence expenditure, BRLmn [1] Defence expenditure, BRL, % chg y-o-y [1] Defence expenditure, % of GDP [2] Defence expenditure, BRL per capita of population [2] Defence expenditure, US$mn, constant prices [1] Defence expenditure, US$, constant prices % chg y-o-y [1] Defence expenditure, constant US$ per capita of population [1] 65,871.9 7.7 1.6 335.0 36,843.9 6.7 187.4
2012e
69,279.6 5.2 1.6 349.3 30,500.9 -17.2 153.8
2013f
78,777.0 13.7 1.6 393.8 30,646.0 0.5 153.2
2014f
89,349.7 13.4 1.7 443.0 31,470.1 2.7 156.0
2015f
101,802.8 13.9 1.8 500.8 32,159.2 2.2 158.2
2016f
115,665.8 13.6 1.9 564.7 35,279.0 9.7 172.2
2017f
131,104.1 13.3 1.9 635.5 41,101.4 16.5 199.2
Notes: e BMI estimates. f BMI forecasts. Sources: 1 SIPRI/BMI; 2 SIPRI, BMI calulation.
TABLE: FREIGHT SECTOR KEY INDICATORS

2011
Port of Santos container throughput, TEU Port of Santos container throughput, TEU, % y-o-y Air Freight Tonnes (000) Air Freight Tonnes % chg y-o-y Source: BMI 2,985,922 14.8432 1,179.60 3.55
2012e
3,105,359 4.0000 1,251.09 6.06
2013f
3,291,680 6.0000 1,359.86 8.69
2014f
3,495,568 6.1940 1,470.79 8.16
2015f
3,707,883 6.0738 1,592.66 8.29
2016f
3,939,106 6.2360 1,732.25 8.76
2017f
4,191,138 6.3982 1,882.60 8.68
This report is abstracted from BMI's industry report series, which covers 22 sectors across global markets. Every quarter, we will provide tables showing the latest five-year forecasts for key industries as well as a forecast scenario for a key sector. If you would like to order a full report, or find out about BMI's other 1,113 industry reports, please contact subs@businessmonitor.com
54
Chapter 6:
BMI Global Assumptions
Global Outlook
Growth May Be Turning The Corner
Our global real GDP growth forecasts remain steady, at 2.9% in 2013 and 3.4% in 2014 and 2015, following estimated 2.5% growth in 2012. Nonetheless, we have upwardly revised growth estimates and forecasts for a few key states, most notably the US and China. Despite these amendments, our core global outlook remains relatively unchanged. We believe that 2013 is likely to see improved economic activity, with cyclical indicators beginning to indicate that the near-recessionary conditions seen in mid-2012 are abating. Developed states still have a long way to go before recovering pre-crisis output levels, while emerging market (EM) performance will be mixed. With the global economy only likely to slowly pick up moTABLE: GLOBAL ASSUMPTIONS
2011
Real GDP Growth (%) US Eurozone Japan China World Consumer Inflation (ave) US Eurozone Japan China World Interest Rates (eop) Fed Funds Rate ECB Refinancing Rate Japan Overnight Call Rate Exchange Rates (ave) US$/EUR JPY/US$ CNY/US$ Oil Prices (ave) OPEC Basket (US$/bbl) Brent Crude (US$/bbl) e/f = estimate/forecast. Source: BMI 107.52 111.05 1.39 79.74 6.46 0.00 1.00 0.10 3.0 2.6 -0.2 5.6 4.1 1.7 1.6 -0.6 9.1 3.1
mentum, further stimulus is desirable, particularly in developed states where economic slack remains significant. Japan and the US are set to up the ante on this front in the new year. Given the state of the Japanese economy, we believe that the further enactment of expansionary monetary and fiscal policy is almost guaranteed, and we expect budget proceedings to come to the fore in Q113. Although we believe that the Bank of Japan (BoJ) is likely to expand its asset purchases at its next few meetings, we expect the newly elected Liberal Democratic Party government to keep pressure on the central bank to increase money supply further, and see scope for the party to exert influence over the appointment of the next BoJ governor. In the US, the decisions announced by the Federal Reserve (Fed) on December 12 2012 changed the game for monetary policy once again. The Fed will now purchase an additional US$45bn
2012e
2.2 -0.7 0.5 7.7 2.5 2.1 2.1 0.0 3.0 3.5 0.00 0.50 0.10 1.27 79.00 6.34
2013f
2.1 0.4 0.9 7.5 2.9 2.1 1.7 0.3 2.6 3.3 0.00 0.50 0.10 1.25 75.00 6.40
2014f
2.5 1.4 1.2 6.7 3.4 2.1 1.8 0.8 2.9 3.2 0.00 0.50 0.10 1.20 76.00 6.55
2015f
2.5 1.7 1.1 6.0 3.4 2.1 1.9 1.3 2.8 3.2 0.00 0.50 0.10 1.20 78.00 6.60
2016f
2.4 1.9 1.1 5.8 3.5 2.1 2.1 1.8 2.7 3.3 1.00 1.00 0.25 1.20 82.25 6.60
2017f
2.4 1.9 1.1 5.8 3.5 2.1 2.2 2.3 2.7 3.3 2.25 1.50 0.50 1.20 84.75 6.60
107.05 110.00
99.10 102.00
96.15 99.00
95.20 98.00
93.25 96.00
93.30 96.00
55
BRAZIL Q2 2013
per month in 'longer-term' treasury securities, meaning that, beginning in January 2013, the growth of the Fed's balance sheet will accelerate to US$85bn/month, with US$40bn accounted for by QE3. The Fed also set out explicit quantitative targets that must be reached before monetary policy is tightened, so will keep rates at near-zero levels 'at least as long' as the unemployment rate remains above 6.5% and the one- to two-year inflation outlook remains below 2.5%. Our view on US rate policy is not substantially changed by the newly created explicit targets, and we continue to expect the next funds rate hike in 2016; however, we now expect to see at least US$1trn in asset purchases until early 2014, marking a substantial expansion of the Fed's balance sheet by around a third.
Developed States
Our developed state aggregate growth estimate for 2012 has risen to 1.0% from a previous forecast of 0.9%, while it has fallen to 1. 3% from 1.4% for 2013. The 2012 upgrade is due to a change in our US real GDP growth estimate for that year, which has been revised up to 2.2% from the 2.0% forecast we set out at the beginning of the year. Our general outlook for a slow and erratic growth path for the US economy therefore remains in place. Our 2013 growth forecast for the eurozone has slipped slightly to 0.4% from 0.5% previously, owing mainly to a downgrade in the Italy projection to -0.2% from 0.0%. Meanwhile, we have downgraded other growth forecasts for both 2012 and 2013, including those of Austria, Sweden and the UK.
TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS

2011
Developed States Aggregate Growth G7 Eurozone EU-27 Selected Developed States Australia Austria Belgium Canada Denmark Finland France Germany Ireland Italy Japan Netherlands Norway Portugal Spain Sweden Switzerland UK US e/f = estimate/forecast. Source: BMI 2.3 2.7 1.8 2.6 1.0 2.8 1.8 3.0 1.4 0.5 -0.6 1.2 1.6 -1.6 0.8 3.9 2.1 1.0 1.7 3.2 0.4 -0.5 2.0 -0.1 -0.4 -0.2 0.7 -0.5 -2.3 0.5 -1.1 3.5 -3.4 -2.1 0.6 0.7 0.0 2.2 1.5 0.9 1.1 1.9 1.2 0.6 0.6 1.3 0.3 -0.2 0.9 0.6 2.1 -1.9 -0.5 1.2 1.5 1.0 2.1 2.0 1.5 1.6 2.5 1.7 1.9 1.4 1.9 1.4 1.2 1.2 0.9 2.3 0.1 0.5 2.6 1.8 1.4 2.5 1.4 1.4 1.6 1.7
2012e
1.0 1.2 -0.7 -0.5
2013f
1.3 1.5 0.4 0.7
2014f
1.9 2.0 1.4 1.5
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS (%)
US
2012 2013 Bloomberg Consensus BMI Bloomberg Consensus BMI n/a = not available. Source: BMI, Bloomberg 2.2 2.2 2.0 2.1
Eurozone
-0.4 -0.7 0.1 0.4
Japan
1.7 0.5 0.7 0.9
Brazil
1.5 1.0 3.8 3.5
China
7.7 7.7 8.1 7.5
Russia
3.6 3.4 3.5 3.4
India
n/a 5.7 5.8 6.2
56
BMI GLOBAL ASSUMPTIONS
Emerging Markets
EMs are estimated to have grown by 4.7% in real terms in 2012, and we forecast a slight acceleration in growth in 2013 to 5.0%. While our aggregate regional forecasts are relatively steady, we have modestly downgraded the 2013 outlook for some major EM economies, including Turkey, the Czech Republic, Poland, Brazil and India. Owing to the strength in the recent rebound in economic data and upside risks to the external economy, we have upgraded China's real GDP growth forecast for 2013 to 7.5% (from our previous forecast of 7.1%). We have been calling for a cyclical bounce in Chinese growth for a couple of months, and a
number of leading and coincident indicators suggest that this is now well in play. Despite this upward revision, we remain below the consensus forecast of 8.1% for 2013 and believe that the current growth momentum is likely to fade towards the middle of the year.
TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS

2011
Emerging Markets Aggregate Growth Latin America Argentina Brazil Mexico Middle East Sub-Saharan Africa South Africa Nigeria Saudi Arabia UAE Egypt Emerging Asia China Hong Kong India* Indonesia Malaysia Singapore South Korea Taiwan Thailand Emerging Europe Russia Turkey Czech Republic Hungary Poland 5.6 4.1 8.9 2.7 3.9 3.9 4.0 3.1 7.4 7.1 4.2 1.4 7.2 9.1 5.0 6.5 6.5 5.1 4.9 3.7 4.0 0.1 4.8 4.3 8.5 1.9 1.7 4.3
2012e
4.7 3.0 2.8 1.0 4.0 5.1 4.2 2.3 6.6 5.2 3.3 2.2 6.1 7.7 1.8 5.7 6.2 4.2 1.9 1.9 0.9 4.3 2.6 3.4 3.0 -1.2 -1.2 2.3
2013f
5.0 3.4 0.9 3.5 3.4 3.9 6.1 2.8 7.1 4.5 3.6 3.0 6.2 7.5 2.5 6.2 5.6 4.5 3.6 3.0 3.0 4.4 3.2 3.4 4.4 0.5 1.2 2.3
2014f
5.1 3.7 2.7 3.7 3.7 4.8 5.8 3.4 7.2 3.6 4.3 5.2 6.0 6.7 3.6 6.6 6.5 4.3 3.4 4.6 4.0 4.4 4.0 3.6 5.0 1.9 2.3 3.7
e/f = estimate/forecast; *Fiscal years ending March 31 (2011 = 2010/11). Source: BMI
57
Business Monitor International Limited, 85 Queen Victoria Street, London, EC4V 4AB, UK Tel: +44 (0)20 7248 5162 Fax: +44 (0)20 7248 0467 Email: subs@businessmonitor.com Website: www.businessmonitor.com
2013 Business Monitor International. All rights reserved.
Analyst: Katherine Weber Editor: Mark Schaltuper Sub-Editor: Kerry Lambeth Subscriptions Manager: Shineade Nicol-Sey Marketing Manager: Joanna Ashton Production: Neil Murphy, Reema Patel Publishers: Richard Londesborough, Jonathan Feroze
All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or organisations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International, and as such no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor International Ltd. All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the time of publishing. Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting any part of the content.
Copyright of Brazil Business Forecast Report is the property of Business Monitor International and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.

Brazil Business Report

Diunggah oleh

Informasi Dokumen

Deskripsi Asli:

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Brazil Business Report

Diunggah oleh

Hak Cipta:

Format Tersedia

IMPORTANT NOTICE:

BUSINESS FORECAST REPORT

On The Road To A Modest Recovery

BRAZIL MACROECONOMIC INDICATORS

Nominal GDP, US$bn [2]

Nominal GDP, BRLbn [2]

Nominal GDP, EURbn [3]

GDP per capita, US$ [3]

GDP per capita, EUR [3]

Real GDP growth, % y-o-y [3]

Private final consumption, % of GDP [3]

Private final consumption, real growth % y-o-y [3]

Government final consumption, % of GDP [3]

Government final consumption, real growth % y-o-y [3]

Fixed capital formation, % of GDP [3]

Fixed capital formation, real growth % y-o-y [3]

Unemployment, % of labour force, eop [5]

Consumer prices, % y-o-y, ave [3]

Lending rate, %, ave [6]

Central Bank policy rate, % eop [7]

Exchange rate BRL/US$, ave [8]

Exchange rate BRL/EUR, ave [8]

Budget balance, US$bn [1,6]

Budget balance, % of GDP [1,6]

Goods and services exports, US$bn [6]

Goods and services imports, US$bn [6]

Balance of trade in goods and services, US$bn [6]

Balance of trade in goods and services, % of GDP [6]

Current account, US$bn [7]

Current account, % of GDP [6]

Foreign reserves ex gold, US$bn [7]

Import cover, months g&s [6]

Business Monitor International Ltd

Chapter 1: Political Outlook..................................................................................................................... 7

Long-Term Political Outlook................................................................................................................................... 10

Chapter 2: Economic Outlook................................................................................................................ 13

Exchange Rate Policy ............................................................................................................................................. 19

Regional Economic Activity ................................................................................................................................... 25

Chapter 3: 10-Year Forecast................................................................................................................... 31

Chapter 4: Business Environment......................................................................................................... 35

Chapter 5: Key Sectors........................................................................................................................... 43

Other Key Sectors.................................................................................................................................................... 53

Chapter 6: BMI Global Assumptions..................................................................................................... 55

Business Monitor International Ltd

Key Risks To Outlook

Major Forecast Changes

Business Monitor International Ltd

Brief Methodology Political Outlook

BMI Political Risk Ratings

Business Monitor International Ltd

Crime has surged in the state of So Paulo in recent months,

Main Political Parties (number of seats in parliament)

Next Election Key Relations/ Treaties

Business Monitor International Ltd

Strong Rating At Risk?

Brazil Colombia Peru Mexico

Potential For Deterioration

Assessing The Implications Of Gang Violence

Long-Term Political Outlook

Key Challenges To Governance And Stability

Consolidation Over, What Now?

Business Monitor International Ltd

BMI Economic Risk Ratings