Levy has pledged to pursue a primary fiscal surplus target of 1.2% of GDP in 2015 and “at least” 2.0% of GDP in 2016 and 2017, to create conditions to stabilize the gross public debt. We believe the 2015 target is tough but feasible, under the right combination of tax hikes and spending cuts. For the next years, however, we take a more cautious stance. If our growth scenario for 2015 proves correct, Rousseff will suffer enormous pressure to abandon the adjustment and reinstate expansionary policies at a moment when the she could be politically vulnerable due to the repercussions of the Petrobras scandal and difficulty in controlling a very fragmented Congress. Rousseff started her first mandate by tightening fiscal and monetary policies in 2011, but quickly reversed course as economic conditions deteriorated.

The BCB is taking a tougher stance on inflation, which could contribute to restore confidence as well. The COPOM has raised the SELIC overnight rate by 75bps since October, and we expect additional hikes of 50bps in January and 25bps in March (although the risk seems skewed towards lower rates due to weak economic activity). However, due to the needed adjustment in administered prices and expected exchange rate depreciation, we still do not see much relief on the inflation front, and continue to forecast a 6.2% increase in the IPCA consumer price index next year.

We forecast a current account deficit of 4.2% of GDP for 2014 and 2015, a relatively large deficit considering that economic growth has ground to a halt. The deterioration in terms of trade due to lower commodity prices means that a weaker exchange rate will be needed to prevent a larger current account deficit. Moreover, higher interest rates in the US could aggravate the pressure on the BRL even if domestic fundamentals improve. We expect the BCB to taper its FX intervention program gradually, allowing the BRL to depreciate slowly so as to adjust the balance of payments without putting undue pressure on inflation. 

Eoin Treacy's view

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The appointment of Levy as Finance Minister with his first-hand knowledge of the machinations of the financial market is to be welcomed. However a willingness to embrace reform by the entire administration in a falling commodity price environment will be required to deal with the pressure currently facing the Brazilian economy. 

The US Dollar has paused in the region of the 2008 peak over the last month but a break in the short-term progression of higher reaction lows will be required to question medium-term scope for additional upside. 

Against this background the Ibovespa continues to underperform and a clear upward dynamic will be required to question the downward bias.