Brazilian economic outlook for 2018 extremely binary, says Scotiabank

Brazilian economic outlook for the next year is extremely binary. If reforms are approved, and a market-friendly candidate is elected, there might be additional relied for Brazilian markets, and FDI flows gain additional traction. Few places in Latin America require solid foreign investment as much as Brazil does at the moment, given the sluggishness of its uncompetitive manufacturing sector, highly levered households, and a stretched public sector balance sheet, which have led to the nation’s worst recession on record, noted Scotiabank in a research report.

On the household front, the share of after-tax income that Brazilian households devote to debt service continues to be close to its historic high and around the levels reached in the U.S. or Spain before their respective debt crises. There is possibility for some relief for households as interest rates drop; however, consumption is expected to stay relative weak until household’s balance sheets improve, stated Scotiabank.

On the government level, the balance sheet is restricted by rating pressures, that avert it from going on a spending spree to stimulate the economy. According to Scotiabank, the fiscal deficit is likely to again come in around 8 percent of GDP, and gross public debt is nearing 90 percent of GDP.

The manufacturing sector might see some improvements from base effects, as industrial production continues to be near 2004 levels in real terms; however, two factors act as constraints – whatever competitiveness it got from the Brazilian real’s initial depreciation was eaten away by high inflation, and a large share of corporates themselves are highly levered.

“The weakness in domestic economic drivers due to stretched balance sheets makes foreign investment appetite very important for any potential Brazilian rebound”, added Scotiabank.

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