20180924-法国巴黎银行-Brazil_s_election__Choices_matter_15页_651kb

Summary of Brazil's Election Analysis

Core Content

This document analyzes the potential economic implications of Brazil's October 2018 general election, focusing on how different policy outcomes could affect GDP growth, inflation, interest rates, and the overall economic cycle in 2019. The analysis is based on a macroeconomic model that incorporates 30 domestic and global variables.

Main Points

• Economic Impact of Policies: The policies of the next president could lead to a GDP growth difference of up to 3 percentage points (pp) in 2019.
• Scenario Analysis: Three scenarios are considered:
  • Base Case: Continuity of the current reformist framework.
  • Pessimistic Scenario: A reversal of recent reforms and a negative economic impact.
  • Optimistic Scenario: Strong structural reforms leading to improved growth and lower inflation.

Key Scenarios

Base Case

• Assumptions: Continued reforms and market-friendly policies.
• Outcomes:
  • GDP growth: 3.0% (2019)
  • Inflation: 3.5% (2019)
  • Policy interest rate: 7.5% (2019)
  • Gross debt: 82.0% of GDP (2019)
  • Current account: -0.7% of GDP (2019)
• Notes: The base case is positive and closer to the best-case scenario than the worst.

Pessimistic Scenario

• Assumptions: No pension reform and reversal of recent reforms.
• Outcomes:
  • GDP growth: 1.0% (2019)
  • Inflation: 5.2% (2019)
  • Policy interest rate: 11.0% (2019)
  • Gross debt: 95.0% of GDP (2019)
  • BRL depreciation: Expected
• Notes: The central bank may need to raise rates to double digits, and the current account deficit could widen.

Optimistic Scenario

• Assumptions: Robust market reforms and structural changes.
• Outcomes:
  • GDP growth: 4.0% (2019)
  • Inflation: 3.0% (2019)
  • Policy interest rate: 6.0% (2019)
  • Gross debt: 75.0% of GDP (2019)
  • BRL appreciation: Expected
• Notes: Structural reforms like tax and trade liberalization could lead to a virtuous cycle of growth and lower inflation expectations.

Fiscal and Structural Factors

• Pension Reform: Central to the fiscal scenario, with the optimistic case assuming a reform similar to the 2016 proposal.
• Spending Ceiling: In the base case, spending is expected to exceed the ceiling by 1% of GDP, while in the optimistic case, it would be respected.
• Primary Budget Deficit: Expected to remain in deficit until 2022 in the base case, and could reach 4% of GDP in the pessimistic scenario.
• Gross Debt: Could rise to 100% of GDP in the pessimistic case due to low growth, high rates, and lack of reform.

Macroeconomic Model

• Variables Used: Domestic (GDP, inflation, interest rates, CDS spreads, BRL) and global (commodity prices, US Treasury yields).
• Scenario Building: Only domestic variables were adjusted, with global factors held constant.
• Key Equations:
  • Growth Equation: Links output gap to real interest rates.
  • Labour Market Equation: Based on Okun's law, linking growth to unemployment.
  • Inflation Equation: Based on the Phillips curve, linking inflation to output gap, FX, and commodity prices.
  • Monetary Policy Rule: Based on Taylor rule, linking interest rates to inflation and growth deviations.
  • Interest Rate Curve Equation: Links one-year swap to Selic rate, CDS, output gap, and inflation expectations.
  • Revenue and Spending Equations: Based on GDP performance and pension reform assumptions.
  • Gross Debt Equation: Links debt dynamics to growth, inflation, interest rates, and fiscal balance.
  • External Account Equation: Links current account to currency and growth.

Market Implications

• Investment Strategy: A positive outlook with a hedge for potential negative outcomes.
• Hedging Instruments:
  • USDBRL call spread (1x2) at 4.00–4.40.
  • USDBRL one-touch spread (long OT at 4.70, short OT at 5.40).
• Market Expectations: Brazil's risk premium is high, but may fall as the election outcome becomes clearer.

Legal Disclaimer

• This document is a marketing communication and not investment research.
• It is not intended for distribution to the public and is subject to legal restrictions.
• BNPP does not offer financial, legal, or tax advice and disclaims liability for any reliance on the content.
• Information is based on public sources and may not be accurate or complete.
• Past performance is not indicative of future results.
• The document may contain simulated performance data, which is for illustrative purposes only.