Abstract
Brazil has embarked on a major programme to upgrade its armed forces, planning
to buy and build
equipment to defend offshore oil riches and a porous
border in the Amazon jungle. Brazilian President
Luiz Inacio Lula da Silva
has pushed for an increase of more than 50% in Brazilian defence spending
through to 2010. The country is now in the process of developing a national
defence plan. In it, Brazil
indicates it will increase the troops in the
Amazon, build nuclear and conventional submarines to protect
offshore oil
fields and modernise its weapons industry. In late December 2008, Brazil
signed an
agreement with France to buy 50 military helicopters and five
submarines, including one nuclear-powered
vessel, the value of which could
exceed $11bn. However the backdrop to this new defence programme is
a
significantly deteriorating economy will may force a cut back in spending. The
political situation is also
fluid with an election coming up in 2010.
President Inácio Lula da Silva is increasingly losing political control
to the coalition Partido
Movimento Democrático Brasileiro (PMDB), which
now controls both houses of parliament. We see
growing risks to the
cohesion of the coalition and are beginning to doubt the PMDB' s likely support
for
Lula' s presidential candidate, Dilma Rousseff. We believe that all
cards remain on the table, and expect
Brazilian politics to remain
eventful ahead of the 2010 election. Indeed, back in October, we first
flagged
up the possibility that Neves may leave the PSDB to become the
PMDB' s candidate in 2010. Neves began
his political career at the PMDB.
Moreover, we have, for some time now, suggested that Lula could be
making
overtures to Neves, however, a scenario of Lula backing an outside candidate
is now looking less
likely given that the president has openly confirmed
his backing for Rousseff following the October poll.
An alternative risk
to our outlook would be for Lula, in an act of desperation or political
shrewdness, to
propose a change of Brazil' s constitution - in light of the
severe economic challenges facing the country -
allowing the most popular
president in Brazilian history to run for re-election.
The record
quarter-on-quarter 3.5% contraction in real GDP during the last quarter of
2008 is indicative
of the severity of Brazil' s ongoing economic downturn
and has prompted us to adopt our most pessimistic
scenario for the
economy: We believe consumption levels will keep falling during the early
stages of
2009. We see little scope for overall output to recover for most
of the year, and expect Brazil' s negative
output gap to worsen. With only
a government stimulus package to fall back on, we now believe a fullyear
recession will be unavoidable in Brazil and have pencilled in a real
contraction of 0.6%.
BMI' s baseline outlook for the Brazilian economy has
fundamentally shifted towards our most pessimistic
scenario. Having
assessed the fourth quarter GDP data published by Brazil' s Geographic and
Statistical
Institute (IBGE), we now see a sharper decline in output
levels in the economy during the upcoming
quarters. With little for the
economy to fall back on aside from public spending programmes, we now feel
that a prospective recovery during the final quarter of 2009 will not be
sufficient to keep the full-year real
GDP growth rate positive. As such,
we are revising our economic growth outlook for Brazil to -0.6%
(from
positive 0.8% previously).
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