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Today we want to talk about the largest economy in Central America "Brazil". Brazil is still considered as developing country, therefore still has a lot of growth prospects and investment opportunities.
Everything seems bigger in Brazil. When it comes to political and economic crisis, few countries managed to do better than the South American giant for the last few years. Unemployment, budget deficit, inflation, corruption, political impeachment, prison sentence, all the elements were reunited to make what is now considered to be the biggest recession in Brazil’s history; but recently some brightness appeared in the middle of this two-year storm. Therefore, HNFC gives you its analysis of the economic and political health of a tremendously ill country.
Two years of Political and Economic storm
Brazil Finance Minister, Henrique Meirelles, called the 1st of July a “historic day” for the country, “exciting its worst recession ever”. In 2017, Brazil entered its third year of economic crisis and recorded some 14 million unemployed people, meaning a rate of more than 13%. The country closed years 2015 and 2016 with a respective decline of 3.6 and 3.8% of the GDP after years of growth, and government deficit reached $1.7 billion in 2016. Never, in the history of Brazil, all these symptoms had been combined at such a high extent. This level of public deficit had not been reached since 2001, the GDP had not been falling for two years in a row since 1931 and unemployment had more than doubled since 2014. If this was not enough, besides this Brazil has also been in the centre of international attention for its political issues, also known as “The Petrobras scandal”.
In February of 2014, the Federal Police launched a large-scale investigation called “Operation Car Wash” to enlighten the biggest corruption scandal in Brazil’s history. This investigation looked into suspicious contracts worth more than $22 billion. A large number of politicians from the PT (The Worker’s Party) were involved but two political figures were aimed at in particular, former president Luiz Inàcio Da Silva – also called “Lula” – and actual president at the time Dilma Roussef. Both of them were accused to have accepted bribes between 2003 and 2010 from the Petrobras board, which is a state-owned company. As the investigation went on, charges of money laundering were also held against Lula. Never, before that, a president had been convicted for corruption allegations in the history of Brazil.
As a result of this situation, Dilma Roussef was formally impeached and removed from office on the 31st of August 2016, leaving her seat to Vice-President Michel Temer despite him being under investigation too. The court finally rejected all the allegations against him, leaving him in charge until the next election in 2018. As for Lula, this summer the former president was found guilty of accepting more than $1.2 million in bribes and sentenced to nine and a half years in prison, today his appeal is still pending. If his sentenced is confirmed, he will also be barred from running for office for 19 years and this without even considering his judgement concerning money laundering, that has not been brought to court yet. Lula has been considered for long as the head-runner for the 2018 election and his absence would leave a big gap in the centre-left political spectrum.
The first signs of recovery
However, in the first quarter of 2017, Brazilian GDP finally expanded 0.1% compared to the previous three months. “It’s a decent number, nothing to write home about, but we see the early dynamics of a cyclical recovery” said Alberto Ramos, economist with Goldman Sachs. This cyclical recovery has been confirmed on the next quarter with a registered growth of 0.2%. The Temer administration has built up an experienced and credible economic team led by Henrique Meirelles and Ilan Goldfajn – President of Brazil’s Central Bank. The first has tried to stabilize budget while the other managed to lower inflation rates, quite successfully.
Disinflation has also allowed the Central Bank to lower the benchmark SELIC rates from 14.25% down to 8.25%. In addition, the administration managed some important fiscal reforms concerning subsidized loans offered from the National Development Bank or government spending. Moreover, this turnover in Brazil’s economy is largely due to a strong agricultural sector helped by a plentiful harvest, allowing prices to drop around 5.3% compared to last year. A recovery in private consumption has been registered, showing results of the positive dynamic in place. “Private consumption is supported by declining inflation, which is supporting real wages and credit conditions are becoming slightly less restrictive” according to A. Ramos.
Some way to go…
Despite some good results, economists still wonder if Brazil can be considered as cured from its economic disease. According to statistics, the strong performance of agriculture in the first quarter masked a negative figure for final domestic demand. Indeed, investment is still weak with a downfall of almost 30% compared to its pre-crisis peak. This is probably due to the latest political scandal involving Temer’s administration. Despite promising stability and a return to economic health, Dilma Roussef’s successor now finds himself facing stronger corruption allegations than Roussef ever did. As H. Meirelles said in a statement” there is still some way to go to achieve a full economic recovery, but we are heading in the right direction”. The problem is that corruption seems to be rooted too deeply into the Brazilian political landscape and the uncertainty surrounding next election is slowing the economic recovery. The biggest economy in Latin America is facing one of the biggest and deepest political scandals in recent years, keeping the country in the biggest economic crisis of its history… As we said, everything seems bigger in Brazil.
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Written by Tim Rouger│Independent Stock Analyst
Edited by Vee Venski
This article is not a promotion of financial investment. Investing money in financial instruments is risk-reward process. Losses and gains are part of financial investment process. Only invest money you can afford to lose.