Brazil stumbles after failure to implement fiscal reform
Poster boy for emerging markets pays price for failure to invest and distrust of private sector involvement in projects
Demonstrators protest in Rio de Janeiro during the national strike day last month against the economic policies of Brazilian president Dilma Rousseff. Since June, Brazil has seen street protests to demand better public services and an end to political corruption. Photograph: Vanderlei Almeida/ AFP/Getty
When Brazil avoided the fallout from the financial crisis on 2008, it became a darling of foreign investors desperately seeking somewhere to put their money to work. With an expanding middle class, huge new oil finds and a World Cup and Olympics to host, the South American giant seemed full of potential.
But sustained growth has proved elusive and now the country has been hit by a triple whammy. With the Federal Reserve signalling an end to quantitative easing, many investors have started to pull money out of emerging markets in anticipation of higher returns in the United States. As a result Brazil’s currency, the real, has plummeted.
Despite heavy central bank intervention, the real recently hit a four-year low, stoking fears about inflation which is already at the top of the bank’s range.
The economy has also been hit by the slowdown in China, the country’s number one trade partner. Brazil’s exports are still heavily concentrated in commodities where prices have fallen as growth in Chinese demand for its foodstuffs and mineral ores tapers off, forcing companies to rethink their investment plans.
Meanwhile, the internal economy looks to have come to the end of a decade-long expansionary cycle driven by consumer demand and fuelled by cheaper credit that followed reforms in the 1990s.
Brazilian shoppers have piled up debts in recent years and many are reluctant to take on more, while banks have reined in lending after a recent jump in personal insolvencies.
As a result, consumer confidence has fallen to levels last seen in 2009 at the height of the global financial crisis while, this year, the São Paulo stock exchange has lost more than a quarter of its dollar value as investors wonder what will drive future growth.
The country is also paying the price for a lack of investment in infrastructure which is not able to cope with the last decade’s growth spurt. City streets are clogged with new cars. The country’s booming agriculture sector sees much of its profit margin eaten up by having to send produce thousands of kilometres on rutted single-lane highways to ports.
Once it gets there it often has to join long lines of trucks waiting to offload cargo onto ships lying idle at sea waiting for berths to become available. In a recent survey by the World Economic Forum, Brazil’s infrastructure ranks 104th out of 142 countries.
Despite a much trumpeted federal investment programme, the government has not managed to lift investment spending above 18 per cent of GDP, well below the emerging market average and short of the 24 per cent investment-to-GDP ratio economists say is necessary to drive sustainable growth of 4 per cent a year.
The government is paying the price for its reluctance to court the private sector as many of the investment projects undertaken by the state have proven disappointing.
“As an investor, the state is very inefficient and very slow to make decisions,” says Adriano Pires, head of the Brazilian Infrastructure Institute. “If you look at some of its investment programmes, it has not even managed to invest the amount budgeted for it and it has been riddled with scandals.”