Good news at last! Social Security reform is racing towards final approval; a comprehensive trade agreement between the European Union and Mercosul members has been concluded; The PPI program (Programa de Parcerias de Investimento) is off to an impressive start; BNDES is reducing disbursements, and private credit markets are “crowding in.” Core inflation is 3.8% YoY, and long-term expectations are stable, creating room for an accommodative monetary policy. External accounts are healthy, given a projected 2019 trade surplus of $55 billion and FDI inflows of $80 billion. The fiscal situation is stable, thanks to the “budget ceiling law” passed under the Temer administration, now supported by Social Security reform. Fiscal deficits do remain, and public sector debt is a worrying 80% of GDP, but debt stabilization now appears achievable.
The outlook for the real economy is less positive. Real GDP contracted in Q1/19, with full year growth of 0.8% forecasted. Investment has collapsed and not restarted, despite optimism for the new administration’s policies. After 4 years of recession and very low growth, the poor economic outlook has mobilized a call from politicians for “emergency” measures, even as the model of the state as an engine of growth is fully discredited. The question is whether the Social Security reform, the PPI program, and perhaps tax reform can galvanize the private sector to initiate a robust investment cycle.
Paulo Vieira da Cunha, Partner, VERBANK Consulting, LLC
Mauricio Moura, President, Ideia Big Data USA
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