Brazil fit to grow according to Santander

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Brazil fit to grow according to Santander

Post by Progresso » Fri Aug 31, 2018 19:18

What to Expect?
In our view, whoever wins the October elections will have incentives to keep responsible economic management and
restore market confidence, as we have seen in 2002 and 2014. Particularly at this point of the business cycle, following a
long recession and a deep process of deleveraging (both external and domestic), with relatively low inflation and stimulative
monetary policy, Brazil is, in our view, “fit to grow.” Most of the next presidential term may happen under a cyclical economic
recovery, which would probably give the next president a good likelihood of reelection in 2022. With that in mind, we see the
current level of the BRL/USD exchange rate as well above the one that should prevail after the electoral process.
Figure 2 shows Brazil’s real effective exchange rate (versus a trade-weighted basket) at constant August 2018 price. Recent
history shows that the currency has traded weaker than the BRL 4.10/USD during only 15% of the time since 1994, meaning, in
our view, that the BRL can be considered cheap from this long-term fundamental perspective. Another important aspect is that
inflation is currently low and anchored by a wide output gap, so the nominal BRL depreciation translates almost fully into a real
depreciation—an important difference from Turkey and Argentina, for example. A weaker BRL should contribute to a narrower
current account deficit in the future, counterbalancing the effects of occasional portfolio outflows.

Source: Santander

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