Brazil’s recent spurt of economic expansion is expected to slow down as the country faces persistent sovereign debt concerns and the likelihood of continued interest rate hikes, according to a report by Capital Economics on Wednesday.
Despite the anticipated fiscal measures, the political climate does not seem conducive to significant austerity, which could have reassured investors and addressed the fiscal issues more robustly, the firm said.
The government’s piecemeal approach to fiscal tightening is predicted to keep the public debt-to-GDP ratio on an upward trajectory.
Capital Economics expects that this approach is unlikely to ease the high risk premium currently embedded in Brazil’s financial markets, which suggests that the Brazilian real will continue to struggle.
“We expect the real to end the year at 6.00/$, compared with its current level of 6.18/$ and 4.85/$ at the start of 2024,” Capital Economics said in the note.
The firm also suggested that the GDP growth for this year is estimated at 2.3%, which, despite being slightly above the central bank’s consensus, would mark the weakest annual growth since the pandemic.
Overall, the economic outlook for Brazil suggests that while a hard landing is unlikely, the country’s strong growth period is set to conclude, with quarter-on-quarter growth averaging around 0.4%. This is a decrease from the more robust average growth experienced last year.
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