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Brazil next in trouble? Economy to shrink by 1.7 percent, worst recession in 25 years: analysts

Analysts surveyed by the central bank forecast that Latin America's largest economy will shrink by 1.7 percent this year, the worst recession in 25 years, as unemployment and family indebtedness rise.

When Brazil revises its 2015 budget estimates Wednesday afternoon, the question investors will be asking is how much more spending can be cut without deepening an economic recession.
Tax revenue has dropped below government estimates this year as the economy slows amid austerity measures designed to mend the worst budget deficit on record, and rate increases intended to curb above-target inflation. With Finance Minister Joaquim Levy's budget target looking increasingly unattainable, speculation has grown that the government will lower the goal.

"Everyone knows the budget situation is bad, so we need a more realistic, transparent target," said Luciano Rostagno, chief economist at Mizuho Bank's Brazil subsidiary. "Cutting investments and raising taxes would be bad for recovery -- what's needed is a downsizing of the state, a reduction in ministries and discretionary posts."



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The Public Provident Fund (PPF) will now offer 7.9% but experts say it is still a good option for investors. Given that consumer inflation is down to 3.65%, the real rate of return of the PPF is a healthy 4.25%. 

"This is quite impressive for an option that offers assured returns," says Amol Joshi, Founder, PlanRupee Investment Service. "Investors should continue to take advantage of this long-term tax-free product," he adds. 

Even if you compare the PPF rate with the 10-year government bond yield, the scheme is attractive. "The 10-year bond yield is a better benchmark for PPF than consumer inflation," says Manoj Nagpal, CEO, Outlook Asia Capital
Currently, the 10-year bond yield is around 6.8% and the PPF at 7.9% makes it for a premium of 110 basis points. "Historically, the average premium has been around 75 bps. So, the PPF investor is today earning a higher real return," says Nagpal. Even so, some investors may be feeling disappointed by the cu…