Alger Emerging Markets Outlook

OUTLOOK 2/8

Encouragingly, third- quarter corporate results suggest a rebound in Brazilian business with earn- ings before interest, taxes, depreciation, and amortiza- tion (EBITDA) and net income growing 19% and 21% year over year. Revenues increased at a median rate of 9%. Fourth- quarter results to date are also constructive.

of 2017 and is estimated to have grown only 1% for all of 2017 (See Figure 2). The growth would be an improvement from the 2.4% contraction in 2016. Estimates call for gross domestic product (GDP) to grow 2.5% this year. Encouragingly, third- quarter corporate results suggest a rebound in Brazilian business with earnings before interest, taxes, depreciation, and amortization (EBITDA) and net income growing 19% and 21% year over year. Revenues increased at a median rate of 9%. Fourth-quarter results to date are also constructive. The upcoming presidential election in October could dampen investor sentiment for Brazil. At the end of 2017, former President Lula da Silva and right wing Congressman Jair Bolsonaro were the leading presidential candidates. Da Silva, however, faces legal hurdles after an appeals court in January upheld his corruption conviction. The development is a continuation of corruption scandals, one of which resulted in former President Dilma Rousseff being impeached and removed from office. She was replaced by Vice President Michel Temer, who is unlikely to seek re-election. With little clarity on the upcoming election, investors are unable to assess the likelihood that potential candidates will be reformminded and if reforms initiated under Temer will be continued. Temer has assembled a pro-growth “dream team” of leaders that remains in place, and his government has enacted a fiscal spending cap that is expected to last 20 years. The cap limits spending growth to the rate of trailing inflation for all federal government branches. With more than 75% of government expenditures being mandated by law, this spending cap is extremely important. Other reforms involve making employer labor relations more flexible while permitting collective bargaining. Going forward, pension reform is sorely needed, with retirement payments now representing almost 50% of government expenditures. Pension payments are growing quickly and will soon crowd out discretionary spending; however, such reform is unlikely this year. During 2017, the Central Bank reduced the SELIC (overnight benchmark lending rate) rate 675 basis points (BPS) to 7%. The easing cycle is likely to continue into early 2018 before stabilizing. With the bulk of the easing cycle completed, government fiscal restraint will be essential. (%)

Figure 2 Brazil GDP Growth (%)

5.7

5.3

2.6

2.6

2.5

2.5

data 1.02 5.33 5.69 2.57 2.48 2.55 -0.31 -5.76 -2.46 1 2.5

1.0

1.0

-0.3

Year-Over-Year Change (%)

-2.5

-5.8

2010

2008

2009

2011

2012

2013

2014

2015

2016

2017E

2018E

Source: Bloomberg