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Brazil to emerge from recession by year end

Brazil’s economy will emerge this quarter from its deepest recession on record and reach a growth rate of up to 3 per cent by the final three months of the year, central bank chief Ilan Goldfajn has said. 

The recovery would be driven by a combination of easier monetary policy as inflation falls to levels not seen since January 2010, economic reforms that are boosting investor confidence and lowering risk perception, and micro-reforms to improve business conditions, Mr Goldfajn told the Financial Times.

“This year will be the year when growth recovers,” said Mr Goldfajn, who is attending this weekend’s G20 finance leaders meeting in Germany.

The bullish outlook comes as the President Michel Temer’s government seeks to pull Latin America’s largest economy out of a deep recession. Brazil’s economy shrank 3.6 per cent last year after a 3.8 per cent contraction in 2015. But economists believe it is finally hitting the bottom, with signs of improving investor confidence. 

Mr Goldfajn, a former chief economist with Brazil’s largest private bank, Itaú, said the recovery was helped by the fact that inflation had fallen more quickly than many in the market had anticipated. 

When Mr Goldfajn was appointed by Mr Temer in June amid the turmoil surrounding the impeachment of former president Dilma Rousseff, inflation was running at close to 9 per cent — well above the target of 4.5 per cent plus or minus 2 percentage points. However by February it had fallen to 4.73 per cent, the lowest level in seven years. 

“I do believe we’re in a moment where we are back to normal, back to basics. It’s not a good scenario because you still have recession but at least you don’t have inflation with recession,” Mr Goldfajn said.

He forecast that gross domestic product would start recovering in the first quarter that concludes at the end of this month.

Market forecasts are for cumulative full-year growth this year of about 0.5 per cent. Mr Goldfajn said the economy would pick up during 2017 so that by the fourth quarter, GDP would be growing at up to 3 per cent, compared with the same period of the previous year. 

This year will be the year when growth recovers

This forecast is based partly on Brazil persisting with its difficult reform programme. 

The Temer government has frozen budget spending in real terms for up to 20 years and is seeking to pass reforms to Brazil’s pension system to help rein in a ballooning budget deficit. 

It is also passing a series of “micro-reforms” to improve conditions for doing business in Brazil, such as opening up the oil sector to greater foreign investment, reforms to bankruptcy procedures, reducing bureaucracy, and the sale of infrastructure concessions for airports, roads, electricity and ports.

Mr Goldfajn said cuts to interest rates had also helped to bring down inflation, which has fallen 200 basis points to 12.25 per cent since October.

Transport workers went on strike this week in protest at the pension reforms. There have also been mass street protests in São Paulo and Rio de Janeiro.

In a vote of confidence, however, Moody’s Investors Service raised its outlook on Brazil’s Ba2 sovereign credit rating to stable from negative. It cut the rating to junk in February last year, citing the deteriorating fiscal outlook. 

“The downside risks reflected in the negative outlook are abating and macroeconomic conditions stabilising, with the economy showing signs of recovery, inflation falling and the fiscal outlook clearer,” Moody’s said.

Via FT