Public debt sustainability requires the administration to rein in mandatory expenditure, which cannot happen without social security reform

Please open the attached pdf to read the full report and forecasts.
• Our forecast for 2018 GDP growth remains at 1.3%. We have raised our estimate for 2019 to 2.5% from 2.0%, based on more expansive financial conditions (asset prices). The sustainability of this improved scenario depends on reforms being approved.

• We expect the primary budget deficit to reach 1.8% of GDP in 2018. We have trimmed our call for 2019 to 1.3% of GDP from 1.5%, but the actual result may be better, as there is a possibility of extraordinary revenues. However, debt sustainability will require progress on reforms that lower mandatory expenses, such as pension reform.

• We have revised our year-end forecast for the exchange rate to 3.75 reais per dollar from 3.90, reflecting the market’s perception of lower uncertainty surrounding the implementation of reforms. For 2019, we expect the Brazilian currency to weaken to 3.90 due to a narrower interest rate differential (internal vs. external rates).

• Our inflation forecasts have been revised downward to 4.2% for both this year and next, reflecting the impact of the recent drop in gasoline prices and lower inflationary inertia going into 2019.

• Monetary policy: The Brazilian central bank’s monetary policy committee sees fewer asymmetrical risks for inflation and has kept its forecasts around the target for the next year in its baseline scenario. Hence, we now expect the Selic benchmark interest rate to remain at 6.5% p.a. throughout 2019.

Please open the attached pdf to read the full report and forecasts.