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Opinion

The outlier in Brazil isn’t politics

While growth forecasts for Brazil for 2018 are turning optimistic, a few – a surprisingly small number in fact – are warning about a growing downside risk for next year: a negative hit from a persistent drought.

While the two leading domestic banks are predicting growth of around 3% for next year, their chief economists’ presentations to the Felaban conference in Miami in mid November disregarded the risk to growth from drought.

Sylvio-Castro-2017-160x186
Sylvio Castro, Credit
Suisse Hedging-Griffo

However, according to Sylvio Castro, CIO at Credit Suisse Hedging-Griffo Private Banking, investors on Brazil “shouldn’t ignore the energy and lack-of-water risk in 2018, which is being over-looked. The truth is we are very much reliant on the hydroelectrical power for growth.” Rainfall in Brazil’s latest rainy season ending in April was below average and the country is entering the dry season with much less water than in 2016. Reservoir levels in the southern/mid-west region, which represent 60% to 70% of the country’s hydropower generation, stood at 42% of capacity as of March in contrast to 62% in March 2016. In the northeast, reservoir levels – at 30% – are the lowest for the past four years.

Research from Moody’s points to the impact on power generation.

“To preserve reservoir levels, more expensive oil-fired thermal power plants will have to be fired up, causing spot prices to jump.

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