Well, you know what they say: when it rains it pours, especially when you’re the poster child for an epic emerging market unwind and you’re suffering through the worst stagflation in over a decade while trying to clean up the feces ahead of the summer Olympics.. or something.
Make no mistake, Brazil is in a tough spot.
Here’s a list of problems: 1) collapsing commodity prices, 2) the worst inflation-growth outcome in over a decade, 3) deficits on both the fiscal and current accounts, 4) street protests calling for the President to be sacked, 5) a plunging currency, 6) allegations of rampant government corruption. And we could go on.
On Friday, the latest quarterly GDP print shows the country sliding into recession (of course these determinations are always backward looking and just about every indicator one cares to observe seems to show that the economy is closer to depression than it is to the early stages of recession) as output contracted 1.9% in Q2. Here's the summary from Barclays:
Q2 15 real GDP in Brazil surprised on the downside, contracting -1.9% q/q sa and compatible with a y/y print of -2.6%. This follows a downwardly revised -0.7% q/q sa Q1 real GDP print (previous: -0.2%), and also a flat real GDP print in Q4 14 (previous: 0.3% q/q sa). As a matter of fact, the past three quarters were revised to the downside, which now implies a strong negative carry-over for this year: if real GDP is flat in H2 15, the annual growth would be -2.3%.
Relative to our forecast, household consumption, fixed-assets investments and imports all surprised on the downside. These components reflect the adverse conditions for domestic demand, as a reflection of higher inflation, interest rates, fall in income and weaker currency.
And from Goldman:
The forecasted deeper 2015 recession will contaminate the 2016 growth outlook. Given the worse-than-expected 2Q figure and the downward revision to 1Q sequential growth, our profile for 2H2015 growth points now to a 2.6% contraction of real GDP in 2015 (down from our previous -2.1% forecast) and worsens the statistical carry-over for growth in 2016 to -0.8%. That is, were the economy to stay flat throughout 2016 at the expected 4Q2015 level, real GDP would contract by 0.8% in 2016. Hence, we are now forecasting real GDP to contract 0.4% in 2016 (down from the previous -0.25% forecast). This is consistent with average quarterly real GDP growth of 0.10%-0.20%, a path that is still subject to obvious downside risks given the prevailing high level of macro and political uncertainty and recognized negative skew in the distribution of domestic and external risks.
The latest on the political front is that President Dilma Rousseff has 15 days to explain to the the Federal Accounts Court why everyone seems to think that she intentionally delayed nearly $12 billion in social payments last year in an effort to make the books look better than they actually were. And while we won’t endeavor to weigh in one way or another on that issue, what we would say is that if someone in Brazil is doctoring this year’s books, they aren’t doing a very good job because things just seem to keep going from bad to worse.
Case in point, on Friday, Brazil said its primary budget deficit was R10 billion in July, far wider than expected. The takeaway: "no primary surplus for you!"
Here’s Goldman with the breakdown:
The consolidated public sector posted a worse than expected R$10.0bn deficit in July, driven by the weak performance of both the central and regional governments. The central government posted a R$6.0bn deficit in July and the states and municipalities a larger than expected R$3.2bn deficit. Finally, the state-owned enterprises added another R$810mn to the overall deficit.
On a 12-month trailing basis the consolidated public sector recorded a 0.9% of GDP primary deficit in July, worse than the 0.6% of GDP deficit recorded in December and, therefore, increasingly distant from the new unimpressive +0.15% of GDP surplus target. Hence, it is increasingly likely that we may observe a second consecutive year of primary fiscal deficits.
The overall public sector fiscal deficit (primary surplus minus interest payments) widened to a very large 8.81% of GDP, from 6.2% of GDP in the 12 months through December 2014. The net interest bill is running at 7.92% of GDP in the 12 months through July.
Gross general government debt worsened to 64.6% of GDP, up from 58.9% of GDP at end 2014 and 53.3% of GDP in 2013.
The twin combined fiscal and current account deficits now exceed a disquieting 13.2% of GDP.
Overall, we have yet to detect a visible turnaround in the fiscal picture. The overall fiscal deficit is tracking at a disquieting 8.8% of GDP, driven in part by the surging net interest bill, which was exacerbated by the large losses on the central bank stock of Dollar-swaps. We expect the gradual fiscal consolidation process to last at least 3-4 years, perhaps longer.
As Barclays recently argued, a downgrade to junk is now just "a matter of time," a development which may well usher in a new era in which the world's emerging economies begin to backslide into "frontier" status, and as we put it earlier this month, after that it'll be time to break out the humanitarian aid packages.
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Bonus: Charting a Brazilian nightmare
Bonus Bonus: "That aint no unpopular President, THIS is an unpopular President"...
Stay positive Brazil...