Boston, MA -- (ReleaseWire) -- 02/27/2014 -- Since our last update, the Brazilian economy has shown increasing signs of deterioration. Indeed, consumer confidence has headed lower, inflation has remained near the upper limit of the central bank's tolerance band, the real has sold off aggressively to trade near 2009 levels, and interest rates continue to head higher. With the economy's recovery showing signs of weakness, we believe that economic activity is likely to stagnate in H213, informing the downward revision of our 2013 real GDP growth forecast to 2.0%, from 2.6%.
We are downgrading our real private consumption growth forecast for 2013 to 1.2%, as we believe that price pressure will continue to erode consumer confidence and eat into purchasing power in the coming months, while higher interest rates are likely to constrain consumers' take-up of credit. Food and retail consumption is likely to outperform among the country's private consumption items, and we project generally strong sales growth for the main companies in the sector. We also believe that a moderation in input prices (grains) could help margins for these companies to recover in the coming months.
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Headline Industry Data (local currency)
- 2014 per capita food consumption = +7.2% y-o-y; forecast compound annual growth rate (CAGR) to 2018 = +7.4%.
- 2014 alcoholic drink sales = +9.1% y-o-y; forecast CAGR to 2018 = +9.4%.
- 2014 soft drink sales = +8.4% y-o-y; forecast CAGR to 2018= +8.3%.
- 2014 mass grocery retail sales = +7.4% y-o-y; forecast CAGR to 2017 = +7.8%.
Key Company Trends
More Short-term Weakness Before Price Recovery: We have revised down our forecast for Brazilian sugar production to 39.0mn tonnes in 2014/15, compared with 39.1mn tonnes previously, and we could see more downside risks to this forecast in the coming months. This is because we expect most of the increase in sugar cane yields has already happened after the country's farmers replanted more efficient varieties of sugarcane in the previous years. Also, the surface of stand-over cane, the part of the crop that is typically not harvested every season, has decreased this year, leaving little upside for the coming 2014/15 season. Finally, we continue to expect more cane to be diverted to ethanol as the local ethanol/sugar price ratio is still high by recent standards.
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