The political scene will be increasingly dominated by preparations for the October 2008 municipal elections and early campaigning for the 2010 presidential ballot. This will further dim prospects for the advance of the reform agenda. A fiscal reform submitted at end-February could face delays until 2009, and little else in the way of reform seems likely in 2009. The ruling coalition will weaken ahead of municipal elections in October 2008. The race for the presidential election in 2010 is open. Given his record level of popularity, the president, Luiz Inacio Lula da Silva of the leftist Partido dos Trabalhadores (PT), will be influential behind the scenes. Regardless of who wins the next presidential ballot, the transition will be peaceful and will further consolidate democracy. Prudent macroeconomic policies should be maintained.
Brazil’s economy is forecast to grow by an annual average of 4.1% in 2008-12, slightly below the average of 4.4% for 2004-07, but much stronger than its long-term average of only 2.2%. Domestic demand, and in particular investment, will make a much stronger contribution to growth than in the past, supported by deepening domestic financial markets. The Economist Intelligence Unit assumes that inflation will be contained below 4% in the medium term, notwithstanding stronger pressures in 2008-09. But the risk to this forecast has increased amid growing inflationary pressures stemming from higher commodity prices. The trade surplus will be eroded as domestic demand growth draws in imports, and the current-account is expected to record a small deficit in 2008-12. However, amid continued stability and widening investment opportunities, capital inflows will remain firm and the Real will depreciate only modestly in 2008-12.
Brazil is Latin America’s largest market, the world’s fifth-most populous country and the world’s tenth-largest economy. GDP growth will be sufficient to allow real incomes to rise in the forecast period, albeit at a more moderate pace than in 2005-07. Disinflation and income support programmes for the poorest families have contributed to a significant reduction in poverty rates and income inequality in recent years, but Brazil will remain one of the world’s most unequal societies during the forecast period.
Modest improvements to Brazil’s business environment, mainly driven by the consolidation of macroeconomic stability and better domestic financing conditions, will keep the country’s position broadly stable in our global and regional rankings. But the tax system will remain complex and burdensome, the pension system will weigh on public-sector finances and vested interests will continue to distort productivity gains.
source: © The Economist Newspaper Limited 2008.
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