From: Daniel Sabba

From: Daniel Sabba To: Daniel Sabba CC: Vahe Stepanian >, Jay Lipman < Subject: making sure you saw this - Special Report - Brazil: A Recession Is Coming [C] Date: Wed, 11 Feb 2015 00:45:40 +0000 Attachments: DB_SpecialReport_2015-02-06_0900b8c089355122.pdf Inline-Images: image001.gif Classification: Confidential Deutsche Bank - Fixed Income Research Special Report - Brazil: A Recession Is Coming 06 February 2016 (11 pages! 843 kb) Fiscal tightening, rising interest rates, lower commodity prices, the financial difficulties faced by oil company Petrobras and the growing risk of water and energy shortages all conspire against Brazil's economic recovery. Although we are not yet assuming energy rationing, we believe the risk is already affecting investment decisions, so we have cut our 2015 GDP growth forecast to -0.7% from 0.3%. The likely decline in GDP in 2015 and the much larger-than-expected consolidated primary fiscal deficit of 0.6% of GDP posted in 2014 will make it more difficult for Finance Minister Joaquim Levy to deliver the targeted primary surplus of 1.2% of GDP this year. While we still expect the government to announce a sizeable spending cut after Congress passes the 2015 budget, we think that additional tax hikes would be necessary to guarantee the 1.2% target. Raising more taxes could aggravate the recession and face strong resistance in Congress, which is becoming increasingly hostile to President Dilma Rousseff. Consequently, we cut our 2015 primary surplus forecast to 0.8% from 1.2% of GDP. We do not believe that cutting the primary surplus target would necessarily make Brazil lose its current investment grade status. It is important to bear in mind that a primary surplus of 1.2% of GDP is not enough to restore public debt sustainability, and would be just the first step toward restoring fiscal solvency, to be followed by additional tightening in the next years. Under current economic conditions, jumping immediately to 1.2% might be just too costly. In our opinion, the government could improve its fiscal policy significantly by promoting transparency, making a strong effort to rein in discretionary spending, introducing reforms to fix structural problems, and indicating the pathway for further improvement in the next years. Nevertheless, given the combination of low economic growth, high inflation, large current account deficit and lack of structural reforms, agencies that currently rate Brazil two notches above investment grade (e.g. Moody's, with its negative outlook) might decide to cut Brazil by one notch, aligning their ratings to Standard & Poor's and raising market volatility. The correction of administered prices (especially of electricity) and the hike in fuel taxes have increased the pressure on inflation, prompting us to raise our 2015 IPCA forecast to 7.2% from 6.6%. We have also raised our year-end SELIC rate forecast to 12.75% from 12.50%, and our year-end FX forecast to BRL2.90/USD from BRL2.80/USD. Jose Faria, Deutsche Bank - Fixed Income Research. +55(11)2113-5185- EFTA00864776 Click/ copy this link into a browser to access the report: httplipull.db-gmresearch.comip/1368-0A2B/60502056/DB SpecialReport 2015-02-06 0900b8c089355122.pdf . If you have any difficulty accessing the report. please forward this email with the word 'PDF' in the subject line to GIAResearch.Subscriptionsadb.com . After 90 days you can access the report on our web site: SI i://gm.db.corn. You have received this mail because you have subscribed to Brazil Daily Update. Special Report For changes to your current research subscription, visit https://gm.db.comfrsm or email GMResearch.Subscriptionsadb.com Please refer to the applicable legal disclaimers in the full report. 090Ctic089355122lamytanAdb coin This communication may contain confidential and/or privileged information. If you are not the intended recipient (or have received this communication in error) please notify the sender immediately and destroy this communication. Any unauthorized copying, disclosure or distribution of the material in this communication is strictly forbidden. Deutsche Bank does not render legal or tax advice, and the information contained in this communication should not be regarded as such. EFTA00864777