This post is a summary of five articles. The first was published at http://money.cnn.com/2016/01/19/news/economy/imf-brazil-recession-worsens/. The second was published at http://www.bloomberg.com/news/articles/2016-01-04/brazil-analysts-ring-in-new-year-with-deeper-recession-forecast. The third was published in October 2015 at http://www.americasquarterly.org/content/what-economic-recovery-brazil-might-look. The fourth was published at http://www.business-standard.com/article/opinion/brazil-s-big-fall-115120801153_1.html. The fifth article with the title above was published in November 2015 at http://bruegel.org/2015/11/brazil-playing-with-fire/
Brazil endured a brutal 2015 and it is looking like it may be deja vu in 2016. International Monetary Fund (IMF) downgraded its economic forecast for Brazil Tuesday. It was by far the largest revision of all major countries. Brazil fell deep into a self-inflicted recession last year, the long downturn for the country since thr 1930s. The IMF and other forecasters thought Brazil would still be in a recession this year. The economy over the past year has unraveled as investment has plummeted. Unemployment has shot up, inflation is soaring and the country's currency has lost 35% of its value. The IMF now believes Brazil's economy will shrink 3.5% this year down from its previous estimate of a 1% contraction. Brazil shrank 3.8% last year, the IMF reports. In other words, the light at the end of the tunnel may not come in 2016. Brazil is suffering from a few key factors. Its economy relies on commodities like oil, soy and coffee. Commodity prices have fallen off a cliff in the past year, which hurts economic growth in development countries. But other commodity-driven countries are still growing despite the crash in prices. Brazil is also suffering mightly from poltical instability and the ongoing investigation into the bribery scandal at the government-run oil company Petrobras.
Brazil's economy will contract more than previously forecast and is heading for the deepest recession since at least 1901 as economic activity and confidence sink amid a political crisis. Latin America's largest economy will shrink 2.95% this year, according to the weekly central bank poll of about 100 economists. Analysts lowered their 2016 growth forecast for 13 straight weeks and estimate the economy contracted 3.7% last year. Brazil's policy makers are struggling to control the fastest inflation in 12 years without further hamstringing a weak economy. Finance Minister has faced pressure to moderate austerity proposals aimed at bolstering public accounts. The last time Brazil had back-to-back years of recession was 1930 and 1931, and has never had one as deep as that forecast for 2015 and 2016 combined, according to data from institute IPEA that dates back to 1901.
It seems hopeless now, but Brazil's economy could turn around by late 2016. Now might seem like an odd time to look for signs of hope in Brazil. Dilma Roussef has an approval rating of just 10%, she faces possible imprachment procedings, inflation runs around 10% and the economy is expected to shrink 3% this year. Yet, amid all the gloom, we've also recently begun to see tentative hints of what a recovery might look like. Economists expect inflation to slow next year to 6%, still high, but under the 6.5% target ceiling. The exchange rate had devalued from 2.2 reais to over 4.2 reais per dollar. Economists expect it ti hover around 4 throughtout 2016. If the stability of the real exchange rate is maintained and a major, debt-driven emerging-market financial crisis is avoided, then when inflation slows, the central bank can begin to cut interest rate from the current 14.25% to 10%. This possible reduction in rates, plus a weakened and more attractively valued exchange rate, would help attract needed fixed investment in the real economy. Fixed investment, combined with corporates focuses on efficiency, deleveraging and cost-cutting, could stimulate some economic growth and recovery. Such recovery growth could also alleviate pressure on the currently unsustainable fiscal deficit. Indeed, without further reforms, the longer-term economic growth picture in Brazil will be anemic and below the levels necessary to reduce poverty and improve the quality of life of its citizens. Bazil needs to not only reduce its fiscal deficit but also to shrink overall government spending as a percentage of gross domestic product (GDP). Its faster-growing neighbors such as Chile and Peru, spends about 25% of GDP versus Brazil's government spending at more than 40%. Brazil must embrace a more open trade agenda and deepen engagement with the world at large. The current crisis may provide just the pressure needed for these changes to allow brazil to optimize the value of its human capital and regain its growing footing. Nations like Canada and Australia, with a commodity-dependent export base, have accomplished developed country per-capita income levels for their citizens. With the right economic policies, Brazil can still achieve the same outcome, even if things look bleak right now.
Till a few years ago Brazil was a star among emerging markets. Fuelled by a global commodities boom, the economy grew 7% in 2010, and social policies combined with market-friendly economic policies saw a sharp reduction in poverty. In 2008, Standard & Poor's (S&P) first awarded Brazil investment grade status. Yet, now S&P downgraded Brazil's credit rating to junk status, the economy is expected to shrink 3% in 2015, inflation is in double digits and the budget deficit is nearing 9% of GDP. Much of this is the result of waning demand from China, the principal buyer for Brazil's oil, ores and soya. But a large part of its problem is due to mishandling by the goverment and the political instability surroundings a series of corruption scandals. Ms. Roussef was narrowly re-elected, after the economy grew just 2.2% during her first term in office (2011-2014). However, was not offset by the necessary fiscal discipline. As a result, the government's debt to GDP stands at 66%, nowhere near Greece, but vastly problematic for an economy in which interest rates hover at 14%.
Rattled by political turmoil and in the midst of severe stagflation, Brazil is really 'playing with fire'. Urgent measures are needed to reduce the fiscal deficit along with key structural reforms. Brazil is no longer a star performer, the economy is slowing down and falling into an abyss. Raising inflation and weak GDP growth have placed Brazil in a dilemma regarding monetary policy, while the large fiscal deficit prevents the government from using any fiscal stimulus. Brazil is experiencing the consequences of a lack of reform during its golden age. The Dutch disease, poor infrastructure, low quality education and inefficient pension system are all obstacles to restart the economic engine. A shaky political situation, emanating from corruption scandals has delayed the action needed for economic recovery. The option confronting Brazil are limited and short-term pain in recession is unavoidable for a better long-term future. There are a number of structural issues that place Brazil in an especially difficult position. First, after a successful stabilisation in the second half of the 1990s, Brazil is back to square one, with mismanaged macroeconomic environment. The key futures are stagflation and a twin deficit (fiscal and external). Secondly, Brazil's structural problems are acute. Starting with the most recent, de-industrialisation stemming from the Dutch disease generated by the commodity boom, there are also even more deeply-rooted problems such as poor educational levels, a lack of infrastructure and a bloated government structure. Finally, its offers some Brazil's current woes, divided in three groups. 1) Raising inflation, in recession since 2014, large current account deficit, high fiscal deficit,, commodity prices, China slowdown, FED interest rates. 2) The boom years have not been used to support reform: Dutch disease and ensuing de-industrialisation, infrastructure lagging behind, low-quality education, too much spending on pensions, poor corporate governance in state-owned enterprises. 3) Shaky political situation, corruption scandal, low approval rate, government reshuffle,.
