Although Mrda Silva's centrist stance has not been fully accepted by the ruling Partido dos Trabalhadores (PT), it has broadened cross-party consensus in favour of disciplined monetary and fiscal policies. Whatever the result of the election, a radical change in policy is not in prospect. However, rapid progress on structural reforms is unlikely because the incoming government, whatever its composition, will struggle to secure congressional support for sensitive proposals from a range of generally undisciplined political parties.
A long-standing pattern, whereby a new government has fewer than 18 months to push through major reforms before its coalition begins to unravel, is expected to remain a feature of the Brazilian political process, unless major political reforms are passed and the political culture is transformed. The current government's fiscal and regulatory reforms will make little further headway in advance of the elections. An orthodox macroeconomic policy framework, encompassing fiscal discipline, a floating exchange rate and inflation-targeting, will be maintained.
Our projections are premised on the assumption that fiscal policy will continue to be geared towards stabilising the public-debt dynamics, with high real interest rates helping to bring inflation down towards OECD levels. In the absence of major shocks, confidence in macroeconomic stability will strengthen and the public debt/GDP ratio will fall, allowing for some relaxation of fiscal and monetary policy from 2007 and helping to underpin a modest acceleration of growth towards the end of the outlook period. The size and structure of the public debt remains a potential source of vulnerability.
A sudden deterioration in external conditions could prompt a sharp adjustment in interest rates, which would cause an immediate deterioration of public debt ratios. Another risk to medium-term prospects may stem from growing dissatisfaction with the stringency of fiscal targets, which could prompt a loosening of policy earlier than we assume.Key indicators200520062007200820092010Real GDP growth (%)2.
33.13.33.
63.63.8Consumer price inflation (av; %)6.
94.34.04.
14.14.0Central budget balance (% of GDP)-3.
8-3.2-3.1-2.
7-2.5-2.3Current-account balance (% of GDP)1.
81.20.50.
50.30.7Selic overnight rate(av; %);(d)19.
115.313.113.
512.512.0Exchange rate R:US$ (av)2.
442.212.352.
442.512.
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