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 ISSN: 0969-5966

July 2018 Contents

Vol 35 Issue 7

Latin America Monitor

Election Update: Outlook Remains
Uncertain 1
External Shock Ends Rate Cutting
Brazil Cycle 4
Fiscal Reform Prospects Dimming
Election Update: Outlook Remains Uncertain Amid Pushback 6
BMI View: We do not expect to make a call on the Brazilian election until mid-August,
at the earliest, when the field of candidates will be officially settled and campaigning Consumer Recovery Not Without
begins. Downside Risks 8
Migrant Crisis Raising Risks Across
• While a centre-right, reform-supportive candidate will most likely mount a competitive Latin America  10
campaign, there is a substantial likelihood of a second round between two non-reform
supportive candidates.
• The balance of risks to economic growth is skewed to the downside and weakening
investor sentiment will likely lead to selling pressure on Brazilian assets over the
coming months.

Our baseline assumptions about Brazil's general election are unchanged (see '2018
Election Initial Thoughts: Corruption Critical To Outlook', August 22 2017). Corruption
will be a dominant theme; the next administration will need to address pension reform;
policy uncertainty will likely lead to volatile swings in sentiment that will pose headwinds Copy Deadline: 24 May 2018
to near-term investment; and the centre-right has a modest overall advantage. The first
round of voting will be held on October 7, with a run-off scheduled for October 28. The Analysts: Jeffrey Lamoureux

field of candidates remains crowded and is likely to shift before campaigning officially Editor: Katherine Weber
...continued on page 2
Sub-Editor: Inez Valla
Fiscal Reform Prospects Dimming Amid Pushback  6 Subscriptions Manager: Lyan Chan
We have downwardly revised our forecast for Brazil's budget deficit in 2018 to 7.7% of GDP,
Marketing Manager: Julia Consuegra
from 7.5% previously, in light of higher than expected expenditures in Q118 and our view for
more muted revenue gains over the coming quarters. Production: Kavita Saini

Consumer Recovery Not Without Downside Risks  8

We maintain a positive consumer outlook as the country's economic recovery is set to strengthen
in 2018. Lower inflation will lead to lower interest rates, boosting consumer purchasing power
and credit uptake over the year ahead. However, much of these improvements are cyclical
rather than structural, and come on the back of a severe two-year recession.

REGIONAL INDICATORS
Latin America 2016 2017e 2018f 2019f Head Office
Nominal GDP, USDbn 6,142.4 4,953.7 5,488.2 5,589.3
30 North Colonnade, London
Population, mn 631.3 637.9 644.5 650.9
E14 5GN, UK
GDP per capita, USD 9,730.1 7,765.2 8,515.7 8,587.2
Real GDP growth, % 0.7 -0.2 1.8 2.7
Inflation, % 6.8 9.6 6.5 5.8 Company Locations
Goods Exports, USDbn 1,003.0 975.1 1,086.7 1,159.0 London | New York | Singapore
Goods Imports, USDbn 1,047.4 957.4 1,036.4 1,094.9 Hong Kong | Dubai | Pretoria
e/f = BMI estimate/forecast. Source: BMI

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 Brazil | July 2018

LATIN AMERICA RISK INDEX

BMI's Country Risk Index scores countries on a 0-100 scale, evaluating short-term and long-term political stability, short-term economic
outlook, long-term economic potential and operational barriers to doing business. For a detailed methodology, visit bmiresearch.com or
contact us using the details on page 1.

RISK INDEX TABLE

Short Term Long Term Operational Country
Political Economic Political Economic Risk Risk
Chile 76.0 70.2 83.2 68.4 65.2 71.4
Uruguay 71.5 63.5 75.3 65.2 53.7 64.0
Mexico 56.0 68.8 62.7 65.6 51.6 59.4
Peru 57.1 69.2 62.5 66.5 50.5 59.4
Brazil 55.0 59.4 68.9 63.1 46.3 56.6
Colombia 61.5 63.8 60.4 63.3 49.0 57.9
Argentina 65.8 56.3 61.6 58.1 46.5 55.8
Ecuador 51.3 56.3 50.1 58.5 47.1 51.8
Venezuela 36.0 27.1 44.8 31.8 29.5 33.3
Regional Average 58.9 59.4 63.3 60.1 48.8 56.6
Global Average 63.4 53.1 62.1 53.6 49.8 55.3
Note: Scores out of 100; higher score = lower risk. Source: BMI

POLITICAL OUTLOOK
...continued from front page

begins on August 16. We do not expect to make a call on the most likely victor until the Centre-Right Still Lagging
First-Round Voter Intentions, % (Aggregate)
field is formally set, including the electoral court's formal decision on former President
Luiz Inácio Lula da Silva's candidacy (see 'Quick View: Lula's Imprisonment Still Leaves
Uncertain Field', April 6).

We expect the election will boil down to a three-way race between can-
didates representing the left, centre-right and populist votes:
• The Left: With Lula imprisoned and highly unlikely to be allowed to contest the
election, there are at least three candidates with a plausible chance of becoming the
standard bearer for the country's left. Marina Silva, an environmentalist who has twice
run for president, currently polls between 11-15%. Ciro Gomes, a career politician, polls
Source: Datafolha, Ibope, CNT/Sensus, CNT/MDA, Itau
just below 10%. Fernando Haddad, the most frequently mentioned potential successor
to Lula for the Partido dos Trabalhadores (PT), polls around 3%.

At the moment, Gomes appears most likely to become the leading leftist candidate. Despite
stronger polling, Silva lacks strong party support and will be afforded significantly less public
airtime due to her party's small congressional representation. She also breaks from much
of the left on social issues and is less likely to gain the PT's support.

By contrast, Gomes' platform is similar to Lula's and he has a relatively wide network of
support. Meanwhile, Haddad has yet to establish himself and is likely weakened by the PT's
continuing insistence on keeping Lula as their candidate.

• The Centre-Right: Governor of São Paulo Geraldo Alckmin (PSDB) is currently the
best polling candidate from the centre-right, although he has yet to break above single
digits. A number of other candidates, including Speaker of the House Rodrigo Maia,
Finance Minister Henrique Meirelles and even President Michel Temer, are considering
running, but they appear likely to renounce their candidacies over the coming weeks in

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 Brazil | July 2018

response to low polling and pressure to coalesce around a single ticket, in line with our Growth Improvement Likely To Support Centre-Right
Monthly Economic Activity, % y-o-y
view (see 'Election Season To Weaken Investor Sentiment', March 9).

Alckmin will benefit from significant party support and a substantial share of public air
time, which will most likely see his polling improve as the campaign gets underway.
However, his extensive ties to the political establishment and support for economic
reforms will put him at a distinct disadvantage amid the public's anti-incumbent
sentiment. Most opinion polls show more than 70% of respondents disapprove of the
current government, reflecting dissatisfaction with corruption allegations, security
concerns and a weak economy.
Note: 2018 Real GDP growth denotes BMI forecast. Source: BCB, BMI
• Populists (or Outsiders): The electorate's broad rejection of the political
establishment has created space for candidates from outside the mainstream
political parties to mount competitive campaigns. Former President of the Supreme
Court Joaquim Barbosa briefly entertained a candidacy, and could likely have run
competitively as an anti-corruption outsider. However, Barbosa's abstention leaves
Jair Bolsonaro, a right-wing populist running on an anti-corruption and law and
order platform, the candidates best position to benefit from public anger. Bolsonaro
has consistently polled second behind Lula and first in polls removing Lula from
Currency Weakness Suggests Risks Coming To Fore
consideration, winning in all second-round scenarios except against Silva. At this point, Exchange Rate, BRL/USD
we believe his candidacy is here to stay and he has a strong possibility of making it to
the second round.

The centre-right maintains a modest overall advantage. The larger size of the main centre-
right parties will allow them to mount more expansive advertising and get out the vote
campaigns, especially if party's such as Temer's MDB, Alckmin's PSDB and Maia's DEM
form a coalition. A stronger economy, with a more stable labour market and historically low
inflation, could also support a government-backed candidate.

Disunity among the left could keep Gomes, Silva or Haddad from reaching the second Source: Bloomberg, BMI

round, particularly in light of the PT's weakened state following the 2016 municipal election.
Meanwhile Bolsonaro's high rejection rate will likely place a ceiling on his support.

Nonetheless, there is a distinct possibility of a second round between a leftist and

Bolsonaro. If the left unites behind a single candidate like Gomes, and the centre-right
continues to struggle to gain support, the election could result in a choice between
two broadly anti-establishment candidates unlikely to drive reforms forward. Gomes is
campaigning on a pledge to reverse reforms pursued under Temer.
Bond Yields Could Rise Further
Generic USD Five-Year Bond Yield, %
Bolsonaro is not anti-reform, but he describes himself as weak on economic policy and
his statements are occasionally contradictory. Moreover, given the political difficulty
of enacting pension reforms in a legislature likely to be split among dozens of parties,
Bolsonaro's limited legislative accomplishments suggest he may be ill-prepared for complex
legislative negotiations.

Uncertainty over the election's outcome will place downside pressure on Brazilian assets
and keep fixed investment subdued over the near term. Brazilian assets have weakened
over recent weeks, as rising US interest rates and a strengthening dollar have driven
capital outflows from riskier emerging markets (see 'EM In Crisis Of Sorts, Will It Spread?', Source: Bloomberg, BMI

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 Brazil | July 2018

May 9). As has been in the case in Argentina, less benign external conditions will make financial market investors more sensitive to
political events, potentially triggering sell-offs (see 'Sell-Off Is A Correction, Not An Inflection', May 7).

In turn, fixed investors are likely to hold back. We are below consensus on real GDP growth this year, forecasting 2.5% growth, and we
see downside risks growing should sentiment deteriorate substantially (see 'Weakening Sentiment Signals Rising Downside Risks',
April 13).

ECONOMIC OUTLOOK

External Shock Ends Rate Cutting Cycle

BMI View: Brazil's 18-month rate-cutting cycle is over earlier than the central bank intended due to less favourable external
conditions. Given weak domestic economic activity, a rate hold through end-2018 is most likely, although risks are weighted to
the upside.

• .The Banco Central do Brasil (BCB) has concluded its rate cutting cycle earlier than it Modest Inflation Over Near Term
Interest Rates & Inflation
intended in response to rising US interest rates and downward pressure on the real.
• The bank will likely hold rates through end-2018 in light of subdued inflation and weak
economic activity growth
• Inflation is likely to pick up modestly over the coming quarters, but remain with the
bank's target range through 2019.

Forecast Changes:
• We have upwardly revised our end-2018 interest rate forecast to 6.50%, from 6.25%
previously.
• We have downwardly revised our average inflation forecasts to 3.1% in 2018, from 3.2%,
Source: BCB, IBGE, BMI
due to below-expectation inflation in the year through April.

The BCB's 18-month rate cutting cycle ended earlier than we anticipated. Against our
expectation, on May 16 the bank unanimously voted to hold the Selic rate rather than cut
by an additional 25 basis points (bps) as it had signaled in March (see 'Dovish Signaling
Suggests Further Cuts', March 26). The bank's change in position comes in response to less
favourable external conditions. Rising US interest rates have supported dollar strength and
led to selling pressure on emerging market assets (see 'EM In Crisis Of Sorts, Will It Spread?',
May 9). The real has been hit particularly hard, closing on May 18 down 11.4% in the year to
date, though it has subsequently pared back some losses.

The BCB will most likely hold its benchmark Selic interest rate at 6.50% through end-
2018. We expect the US Federal Reserve will continue increasing interest rates over the
coming quarters (see 'Fed On Course To Deliver Six Hikes In 2018-19', April 4). As a result,
Brazil's real interest rate differential with the US will steadily narrow and Brazilian assets,
particularly the real, will continue to face downside pressure. This will effectively close
off the possibility of additional rate cuts, as cuts would risk worsening capital outflows.
Interest rate futures are increasingly pricing in an expectation for a rate hold through
the end of the year.

Below-target inflation and weak economic activity growth will discourage hikes over the
coming months. Despite external conditions putting upside pressure on rates, domestic

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 Brazil | July 2018

conditions favour accommodation. At 2.8% y-o-y in April, inflation has been below the Futures Shift Up Due To Rising Global Rates
Interest Rate Futures Swaps
bank's 3.0-6.0% target range for 10 consecutive months. Historically low inflation in part
reflects weak domestic demand. Growth slowed in Q118, with monthly economic activity
contracting in month-over-month terms and unemployment rising.

Inflation will rise just above 3.0% over the coming months and tick higher in 2019. We
expect a depreciated exchange rate will generate modest pass-through effects on inflation,
while higher oil prices will lift transport costs. However, unemployment of 13.1% in March
suggests the economy is still operating well below capacity, which should keep demand
side pressures contained. Additionally, we see rising downside risks to our expectation for
a modest acceleration of economic activity this year as investor sentiment weakens ahead
Source: Bloomberg, BMI
of the October general election (see 'Weakening Sentiment Signals Rising Downside Risks',
April 13).

Rate hikes are most likely in to begin in 2019, but could come in Q418. Its unlikely the BCB
will begin hiking interest rates before the October election, as rising rates amid uncertainty
over policy direction would pose significant downside risks to investment and activity over
the near term. However, the BCB could begin hiking within 2018 if currency weakness
or rising oil prices lead to higher inflation than we currently anticipate, or if deteriorating
investor sentiment due to the upcoming election leads to more substantial selling pressure
on Brazilian assets.

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 Brazil | July 2018

ECONOMIC OUTLOOK

Fiscal Reform Prospects Dimming Amid Pushback

BMI View: Brazil's fiscal deficit is unlikely to narrow significantly in 2018, as political pushback hinders government efforts to reduce
spending.

• Pressure to reduce fuel costs illustrates potential for fiscal slippage ahead of the Little Consolidation Likely In 2018
Budget Balance
October general election.
• Presidential candidates' shift in tone towards spending restrictions will likely
undermine already weakening investor sentiment.

Forecast Changes:
• We have revised our forecast for Brazil's budget deficit in 2018 down to 7.7% of GDP,
from 7.5% previously, in light of higher than expected expenditures in Q118 and our
view for more muted revenue gains over the coming quarters.

We do not expect Brazil will make significant progress in narrowing its budget deficit in f = BMI forecast. Source: BCB, BMI
2018. Our revised forecast for a shortfall of 7.7% of GDP is only marginally below the 7.8%
gap posted in 2017 (see 'Pension Reform Defeat Signals Rising Risks', February 22), and
follows both disappointing results in Q118 and likely fiscal slippage in H218 as the country
approaches the October general election. In Q118, the cumulative budget shortfall
of BRL84.8bn equaled an estimated 15.0% of GDP, with expenditures outpacing our
expectations.

We expect gradual fiscal consolidation over the ensuing years, but we acknowledge
significant risks to our view in light of the election. Our base case assumes that the
next administration adheres to the spending cap amendment, which caps expenditure
growth at the rate of inflation, and addresses the growth of statutory spending
obligations, principally pensions. Under these assumptions, we see the fiscal deficit
at 4.3% of GDP in 2022.

Political pushback is likely to curtail the government's efforts to rein in spending over the
coming quarters. On May 24, a strike waged by the national truckers' union in response to
rising fuel prices entered its fourth day as the administration scrambled to placate demands.
The Chamber of Deputies passed a measure that partially granted a long-delayed removal
of payroll tax breaks for certain sectors and exempted diesel fuel from two federal taxes
(PIS & Cofins) until the end of the year. A third tax on fuel (Cide) is also reportedly set to be
eliminated.

However, the measure's future is uncertain. Reports suggest the Senate lacks a quorum
to convene a session due to lawmakers returning home for a recess. Additionally, the
administration's economic team is reportedly seeking to get President Michel Temer to
veto the bill. The truckers' union has vowed to continue its strike until the measure is signed
into law, raising the risk of a prolonged and economically disruptive conflict. Commerce
throughout the country has already been significantly undermined.

The impending election makes it increasingly unlikely that any significant fiscal reforms will
progress this year. Lawmakers have shown little appetite for reforms, as tax increases have

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 Brazil | July 2018

been opposed by business interests and spending cuts opposed by unions and constituents. Debt Levels Set To Edge Higher
Total Government Debt, % of GDP
The elimination of payroll tax breaks was delayed by months and the measure ultimately
passed by the Chamber included only 28 of the 56 proposed sectors. A broader proposed
effort to simplify value-added taxes has shown little progress. Similarly, the government's
efforts to privatise state-owned enterprises has slowed to a crawl. On May 23, the Chamber
of Deputies formally announced the removal of a measure to privatise Eletrobras from the
body's agenda. Privatisation efforts are strongly opposed by large portions of the public.

Public opposition to fiscal reform efforts will bleed into the presidential campaign. On May
23, leading centre-right candidate Geraldo Alckmin publicly doubted the wisdom of the
spending cap amendment that has, thus far, been President Michel Temer's signature
f =forecast. Source: Fazenda, BMI
achievement in promoting long-term fiscal sustainability. He also claimed that granting
formal independence to the central bank was a low priority issue. While Alckmin also
expressed his belief in the need for fiscal consolidation, his comments illustrate the political
difficulty of promoting fiscal reform amid a challenging political environment.

This supports our view that populist candidates will dominate public discourse and
potentially have a lasting effect on policy formation (see 'Election Season To Weaken
Investor Sentiment', March 9). Even if candidates like leftist former President Luiz Inácio Lula
da Silva or conservative populist Jair Bolsonaro are defeated, strong grass roots support for
their campaigns will make it more difficult for a future administration to build and maintain
support for orthodox policy reforms.

Rising risks to fiscal sustainability will undermine investor sentiment over the coming
quarters. We have long expected the election cycle to generate volatile shifts in investor
sentiment (see '2018 Election Initial Thoughts: Corruption Critical To Outlook', August 22
2017). Sentiment has already started to weaken, with the real selling off significantly over
recent weeks amid less favourable external conditions and concern over the election (see
'External Shock Ends Rate Cutting Cycle', May 22). Total government debt is likely to reach
76.3% of GDP and the risk that the next government will lack the willingness or ability to
pursue fiscal reforms will likely drive selling pressure on Brazilian assets.​​​​​​

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 Brazil | July 2018

ECONOMIC OUTLOOK

Consumer Recovery Not Without Downside Risks

BMI View: We maintain a positive consumer outlook for Brazil as the country's economic recovery is set to strengthen in 2018. Low-
er inflation will lead to lower interest rates, boosting consumer purchasing power and credit uptake over the year ahead. However,
much of these improvements are cyclical rather than structural, and come on the back of a severe two-year recession. Moreover,
Brazil's political climate is highly volatile ahead of a Presidential election in October, and there are signs that this is dampening the
country's economic activity amid underwhelming retail sales and unemployment data in Q1 2018.

Our core view is for the Brazilian economy to gain momentum in 2018. We forecast Consumption To Drive 2018 Economic Rebound
Private Consumption & Real GDP Growth
the country's real GDP growth to come in at 2.5% in 2018, up from 1.0% in 2017 and
a 3.6% contraction in 2016. The Brazilian consumer will be key in driving the country's
economic recovery, following two consecutive years of decline over 2015/2016, as low
inflation and lower interest rates boost purchasing power, particularly when it comes to
big-ticket items.

Our forecasts show private consumption is set to grow by 2.6% y-o-y in 2018, a marked
improvement on recent years. However, we note a number of downside risks to this positive
view in light of disappointing Q1 2018 data and mounting political uncertainty ahead of the
October 2018 election.
f = BMI forecast. Source: IBGE, IMF

Inflation in Brazil is hovering at multi-year lows and is likely to remain modest over 2018,
underpinning our constructive outlook for the Brazilian consumer. Inflation levels in
Brazil decelerated rapidly over the course of 2017 on the back of a more favourable
exchange rate (lower import costs as currency strengthens). Decelerating inflation has
continued in early 2018, with inflation coming in at 2.7% in March 2018 (latest available
data), down from 2.95% at the end of 2017, and a dramatic improvement from the 2016
average of 8.8%.

On the back of tepid inflation, the Banco Central do Brasil (BCB) is cutting interest rates,
Lower Interest Rates Amid Low Inflation
which will encourage credit uptake and further support consumer spending, especially on Interest Rates & Inflation
high value items such as automobiles and furniture. Following a 25 basis point interest rate
reduction in March 2018, we expect one additional 25 basis point rate cut in 2018, bringing
the policy rate to 6.25% by end-2018. The BCB cited below-target inflation expectations
amid a still-nascent domestic economic recovery justify continued lowering of interest
rates.

While not a concern for consumers, we forecast inflation to pick up slightly over the second
half of 2018, meaning that the BCB will most likely begin raising interest rates again in 2019.
We forecast inflation to average 3.2% in 2018, rising to 3.4% by end-2018 and 4.7% at end-
2019. There are three key reasons for this: Source: IBGE, BCB, BMI

1. As Brazil's economic recovery takes hold, we expect that rebounding consumer

spending supported by credit expansion, will place some upward pressure on prices.
2. Transport costs are likely to rise. Brazil remains a net oil importer and our Oil & Gas team
remains bullish on prices in 2018.
3. Falling food prices have kept price growth in check, but seasonal effects are likely to
take hold in the final months of 2018, when price growth historically accelerates.

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 Brazil | July 2018

We also note a number of downside risks to our broadly optimistic outlook for the Brazilian Consumer Confidence Still Fragile
Retail Sales (y-o-y) & Consumer Confidence Index
consumer:

Underwhelming Start To 2018

Low inflation and interest rates generally create a supportive environment for
consumers, but this has so far not played out in 2018. While we still expect consumer
activity to strengthen over the coming quarters, high-frequency economic indicators in
early 2018 have been disappointing, and there are some signs that the strong consumer
momentum we saw in Brazil over the final months of 2017 is faltering. Retail sales growth
slowed to 1.3% in February 2018, a deceleration from the 4.2% average retail sales
growth in Q417.
Source: Confederacao Nacional Industria (CNI), BMI

Unemployment also rose in the first three months of 2018, coming in at 13.1% in March
2018, with the number of unemployed persons rising by 1.38mn, compared to Q4 2017,
to 13.7mn. While consumer confidence has strengthened slightly since the end of 2017,
overall it remains fragile and there is a risk that any further rise in unemployment will
weigh on wage growth and dampen consumer sentiment over the coming months.

Uncertainty Building Ahead Of Presidential Election

A general election scheduled for October 2018 does bring with it some uncertainty,
which could hold back business and consumer confidence over the coming months. The
upcoming election is likely to have significant consequences, and especially if the public's
deep dissatisfaction with the political class creates space for outsider candidates that could
threaten the durability of ongoing economic reforms.

It is still too early to hold a view on the likely outcome of Brazil's October presidential
election with the field of candidates yet to be formally confirmed. That said, it is safe to say
that anti-corruption and anti-establishment voices will dominate election discourse and
will like have a lasting effect on policy formation from 2019 onwards.

On a more positive note, given the size and potential of Brazil's consumer market, major
global retailers such as Carrefour and Amazon appear willing to downplay near-term
political volatility in order to make strategic investments in the country.

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 Brazil | July 2018

LATIN AMERICA – POLITICAL OUTLOOK

Migrant Crisis Raising Risks Across Latin America

• Venezuela's economic collapse has sparked a migrant crisis in recent quarters, Mass Exodus Seen In 2017
Latin America – Venezuelan Asylum Applications
impacting many of the country's regional neighbours.
• Outmigration, particularly of skilled workers, poses a long-term risk to Venezuela's
economic growth trajectory.
• Colombia and Brazil are most exposed to the crisis and the influx could potentially see
social stability deteriorate in the months ahead.

The collapse in Venezuela's standard of living amid a deep economic contraction has led
to mass migration out of the country in recent quarters. Widespread shortages of food
and medicine and hyperinflation have resulted in reports of hunger and sharp increases in
infectious disease. Growing poverty has also contributed to rapid increases in violent crime; Source: UNHCR, BMI
while official statistics from the government are not available, independent estimates
report that Venezuela is among the most violent countries in the world.

Outmigration over recent quarters has been rapid, and appears to be gaining speed. The
UN Refugee Agency (UNHCR) estimates that 1.5mn Venezuelans have been displaced
within the region, with other estimates for total outmigration approaching 3.0mn. Roughly
5,000 migrants are leaving Venezuela every day, putting the country on pace for a loss of
another 1.8mn people over the course of 2018, or 5.0% of the population. Below, we outline
the ramifications of the migrant crisis for the major countries in the region, as well as any
steps those countries are taking to address the crisis.

Venezuela
Outmigration will be a major drain on Venezuela's long-term economic growth. While official
data on the composition of migrants is unavailable, anecdotal evidence suggests that they
are disproportionately young and educated, with many working abroad to support elderly
family members who cannot easily leave the country. This reduces the size and available
skills of Venezuela's workforce, accelerating the decline in domestic production (see 'No
End In Sight For Economic Collapse', February 26).

This risk is most pressing in the oil sector, where national oil company PdVSA has seen
its skilled workforce gradually dwindle under the current Partido Socialista Unido de
Venezuela (PSUV) regime. This trend has accelerated as hyperinflation eats away at
employee wages, leading to mass resignations that hasten production declines (see
'Heavy Declines Exacerbating Production Downtrend', April 5). A reduced workforce
also undermines the country's tax base, which will cause the country's already massive
budget deficit to expand.

Outmigration underpins our view that long-term growth potential has been significantly
undermined by the current crisis. Large-scale population loss, chronic underinvestment
and reduced investor confidence will all take a significant amount of time to reverse, posing
structural headwinds to growth. As a result, our forecasts assume that the Venezuela
economy will not be able to return to historical rates of growth until 2021 at the earliest.

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 Brazil | July 2018

Attracting migrants back to the country will be a key goal for any eventual successor government to the PSUV. While many migrants are
likely to return following a change in government, given personal ties to the country, many will likely put down roots in neighbouring
countries and, thus, be hesitant to leave. The longer it takes for the Venezuelan crisis to resolve itself, the more difficult we expect it will
be to bring immigrants back. Future Venezuelan governments may be forced to offer economic incentives, such as increased social
transfers or public employment, which will cut into the government's budget for other needs.

Colombia
Colombia has received a majority of recent Venezuelan refugees, with estimates ranging from 600,000 to over 1mn Venezuelans
currently in-country. The composition of migration has shifted as the crisis has unfolded, from temporary migrants seeking food and
medical supplies, to migrants seeking permanent residency and employment. Of the 4,000 entering Colombia per day, roughly half
now opt to stay permanently.

The massive influx of Venezuelans has become a prominent political issue in Colombia, with reports indicating that many feel
threatened by migrants willing to work for less pay while also crowding Colombian schools, hospitals and shelters. This shift has
been reflected in reports of a recent uptick in violence and harassment against Venezuelans. We expect that arrivals will continue to
accelerate as Venezuela's economy collapses, posing significant downside risks to social stability in Colombia in the quarters ahead.

In recent months President Juan Manuel Santos has authorised tighter border controls, suspended daily entry cards and ordered 3,000
Colombian security personnel to protect the border. Additionally, since April 2018 Colombia has partnered with the UNHCR to register
all Venezuelans entering or currently residing in Colombia, while religious and nonprofit organisations run many of the humanitarian
shelters that provide food and medical attention.

The leading candidates in Colombia's upcoming presidential election – Iván Duque, Gustavo Petro, Sergio Fajardo and Germán Vargas
Lleras – are in broad consensus that given the size and porousness of the border, the inflow will continue, though the country will do
what it can to monitor migrants and control the border. All three agree that the country will need international assistance to manage the
influx. Duque, who we view as the election favourite, has been the most critical of the Maduro regime and is most likely to tighten border
controls, though logistical challenges will make this difficult to enforce.

Brazil
Brazil has seen an influx of migrants from Venezuela over the last two years, much of it concentrated in the northern border province
of Roraima. Venezuelan refugee applications surged from 40 in 2015 to 22,000 in 2017 and have already surpassed 20,000 in the year
through April. The Brazilian military has been working with the United Nations to organise the government's response, constructing
refugee camps, distributing aid and, more recently, transporting Venezuelan's to other provinces beyond Roraima.

Venezuelan migration has yet to become a significant national political or security issue for Brazil. However, in the regions most directly
impacted, it has raised concerns over resources, jobs and security. In April, the governor of Roraima sued the federal government over
closing the border and providing additional funds, citing overwhelmed social services and a spike in crime. Given its weak fiscal position
and still-nascent economic recovery, Brazil is poorly positioned to provide significant resources to an influx of refugees, which could
result in migration becoming a more pressing issue.

Others
Venezuelan migration is impacting a number of other countries across the region, including Ecuador, Peru, Chile and various Caribbean
islands. Ecuador has seen a major influx of migrants, with as many as 180,000 entering in Q118, compared to 230,000 in all of 2017.
However, the country's Ministry of the Interior has reported that roughly 80.0% of migrants then leave the country, with the vast majority
going to Peru, Chile and Argentina, which feature stronger labour markets and more stable political outlooks. While Chile and Peru have
been forced to create new regulations to handle migrants, these countries are generally better able to absorb the influx, and we do not
expect that immigration will become a destabilising issue in the quarters ahead.

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 Brazil | July 2018

The Caribbean islands of Curacao, Aruba and Trinidad & Tobago have also struggled with Venezuelan migration, the majority of which
consists of unregistered immigrants arriving via raft. In Curacao in particular, the arrivals have raised political tensions, as they have
placed pressure on the island's social services and competed for jobs in the labour market. Local politicians have been sharply critical
of migrants, accusing them of driving a rise in crime on the island. Similarly, in Trinidad & Tobago the government reportedly deported
dozens of asylum seekers, which drew international criticism. Tensions in Aruba have not reached a similar fever pitch, though the risk of
deteriorating social stability will remain until the inflow stops.

BRAZIL – DATA AND FORECASTS

2014 2015 2016e 2017e 2018f 2019f 2020f
Population, mn 204.21 205.96 207.65 209.29 210.87 212.39 213.86
Nominal GDP, USDbn 2,454.9 1,799.9 1,794.8 2,055.0 2,066.0 2,087.6 2,185.1
GDP per capita, USD 12,021 8,738 8,643 9,819 9,797 9,828 10,217
Real GDP growth, % y-o-y 0.5 -3.5 -3.5 1.0 2.5 2.5 2.4
Industrial production, % y-o-y, ave -2.9 -8.2 -6.4 2.4 2.8 3.0 3.1
Consumer price inflation, % y-o-y, ave 6.3 9.0 8.8 3.5 3.1 4.3 4.7
Consumer price inflation, % y-o-y, eop 6.4 10.7 6.3 2.9 3.3 4.5 4.9
Central bank policy rate, % eop 11.75 14.25 13.75 7.00 6.50 7.25 8.00
Exchange rate BRL/USD, ave 2.35 3.33 3.49 3.19 3.36 3.55 3.64
Exchange rate BRL/USD, eop 2.66 3.96 3.26 3.31 3.51 3.59 3.69
Budget balance, BRLbn -343.9 -613.0 -562.8 -511.4 -523.7 -516.1 -470.3
Budget balance, % of GDP -6.0 -10.2 -9.0 -7.8 -7.5 -7.0 -5.9
Goods and services exports, USDbn 264.1 223.9 217.8 251.7 273.3 278.8 284.3
Goods and services imports, USDbn 318.8 243.1 203.2 221.5 248.6 259.9 269.3
Current account balance, USDbn -104.2 -59.4 -23.5 -9.8 -26.2 -33.5 -37.8
Current account balance, % of GDP -4.2 -3.3 -1.3 -0.5 -1.3 -1.6 -1.7
Foreign reserves ex gold, USDbn 363.6 356.5 365.0 374.0 385.2 396.7 404.7
Import cover, months 13.7 17.6 21.6 20.3 18.6 18.3 18.0
Total external debt stock, USDbn 556.9 543.4 543.3 499.3 471.8 451.9 435.7
Total external debt stock, % of GDP 22.7 30.2 30.3 24.3 22.8 21.6 19.9
Crude, NGPL & other liquids prod, 000b/d 2,346.3 2,527.0 2,614.1 2,732.7 2,912.1 3,142.9 3,304.6
Total net oil exports (crude & products), 000b/d 146.8 459.2 599.8 694.0 837.6 1,023.2 1,149.9
Dry natural gas production, bcm 20.4 20.4 20.6 24.0 25.0 25.8 26.4
Dry natural gas consumption, bcm 41.6 43.7 41.5 42.2 43.1 44.5 45.6
e/f = BMI estimate/forecast. Source: National sources, BMI

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