The Brazilian government withdrew $255 million from its sovereign wealth fund to finance public accounts, according to Newsmax. The fund was created in 2008 out of the commodities boom, but harder times forced authorities to withdraw money in 2012 to meet budget obligations. The latest withdraw comprised a third of the fund’s overall worth.
Today’s Fitch downgrade is a stark reminder that Brazil continues to suffer from a toxic mix of high inflation, recession, low commodity prices, and heightened political uncertainty. Because we see no end in sight for these negative factors, we believe Brazil assets will continue to underperform.
Political Outlook
Brazil’s government scored an important set of political victories yesterday, many of which impact the fiscal accounts. It is too soon to say that the tide has decidedly changed, but there are some positive signs, and asset prices are responding accordingly.
Although Brazil has greatly improved its impact on the environment since 2000 (cutting deforestation and reducing its carbon footprint by 40 percent), the Organization for Economic Cooperation and Development (OECD) warns that much more is needed to reach environmental sustainability.
Due to corruption and a tanking economy, recent polls show that President Dilma Rousseff is the most unpopular leader since Brazil’s reestablishment of democracy in 1985, according to the Associated Press. Brazil suffers from plunging consumer spending, record-high unemployment and a low-value currency. Brazil is suffering from economic slowdown not seen in 25 years.
This could be a decisive week for Brazil as the toxic mix of complicated politics, worsening fundamentals and financial market stress comes to the fore. Today, the congress is supposed to vote on whether to uphold or overturn the decision by President Rousseff to veto a sharp increase in spending.
The reasons for Brazil’s downgrade to sub-investment grade are clear, and do not need further discussion beyond noting that the numbers are going to get much worse before they get better. While it is always tempting to say that Brazil selling has gone too far too fast, we see nothing on the horizon that could be “good” news for the nation’s investment outlook.
According to experts, Brazil may take years to make a substantial economic recovery. Brazil’s currency fell to its lowest level in 12 years when compared to the dollar.
Brazil’s economy receded 0.2 percent in the first few months of 2015, and analysts expect the lack of growth to continue. Analysts believe Brazil’s GDP will shrink by 1.2 percent for 2015, which will be the nation’s largest decline in 25 years. Brazil’s annual inflation rate stands at 8.17 percent, exceeding the government’s threshold of 4.5 percent.
The Brazilian economy only grew 0.1 percent in 2014, barely keeping the country out of a recession. This marks the worst economic news for Brazil since 2009.
Brazil may have technically averted a recession, but other economists maintain that the nation already entered a recession last year, and other analysts say the country will enter a recession in 2015. Regardless of the differing views, many agree that Brazil’s current trajectory is unsustainable. The nation’s central bank forecasts a 0.5 percent decline this year.
