Brazil: Political uncertainty could hit BRL - BBH

Analysts from Brown Brother Harriman consider that the current agenda of reforms will be hard to keep, no matter who wins the presidential election in October. 

Key Quotes: 

“Brazil’s economy continues to recover. GDP continues to accelerate, and grew at 2.1% y/y in Q4 2017, the most growth since Q1 2014.”

“Brazil’s inflation pressures have been low and stable.”

“The BCB is expected to lower rates by 25bp in its March meeting, and to signal the end of its easing cycle at the next meeting in May.”

“The political situation remains unclear. After months of escalating violence in Rio de Janeiro, the Brazilian federal government placed the military in control of public security until the end of December. As the country’s constitution cannot be amended during the military’s operation, the pension reform bill, which requires revision of the constitution, will be postponed until the next government takes office.”

“Primary fiscal deficits should reach 2.4% of GDP in 2018, and the next administration may kick the can on passing pension reform. The fragile fiscal stance is the main variable that should halt the cutting rate.”

“Brazil’s presidential and national elections will be held in October.”

“Whoever wins the election, it will be hard to keep the fiscal and pension reform going. All candidates fully understand that the lack of support for current President Temer comes from his reform policies. If pension reform is not passed, the government needs to find further austerity measures for improving fiscal conditions. Without them, fiscal deterioration could lead to a weaker real, which would boost inflation and require monetary tightening.”

“Externally, the threat of a tariff war and uncertainty around the number of hikes in the US should increase the real’s volatility.”