Brazil, Latin America’s biggest economy, is risking a recession as politicians and policy makers make a desperate gamble to bring down inflation. The push is led by Brazilian President Dilma Rousseff who has promised to do “whatever it takes” to lower inflation and win back investor confidences.
As Brazil’s central bank continued raising interest rates, inflation in the world’s second largest South American market reportedly rose to 7.14%, from 6.41% at the beginning of 2015. This is way above the government’s earlier estimated 4.5%.
Brazil’s statistic agency mentioned in a statement that according to the national benchmark IPCA (Indices de Precios de Consumo Armonizados) index, monthly inflation has risen from 0.78% in December, to 1.24% in the month of January. This is the quickest pace of inflation since 2003.
Yesterday we attended an event with Brazil’s Finance Minister Levy. Our takeaway was that policymakers are willing to accept a subpar 2015 in the hopes of getting the economy on track by 2016, when the country will hold the summer Olympics. As one would expect, Finance Minister Levy said all the right things about arresting fiscal slippage, encouraging foreign investment, and fixing past mistakes. But he also stated that it is possible to achieve the 1.2% primary surplus target without “draconian measures.”
Brazil’s swap rates soared recently as an official report showing over-achieved inflation levels and the announcement of an increase in fuel prices. These developments have fuelled speculation that the country’s central bank will continue to increase borrowing costs in the coming weeks by a half-percentage point in a bid to curb rising inflation.
Brazil’s own short-term swap rates rose for the first time in five days as both analysts and investors predicted that the central bank would again increase borrowing costs.
If Brazil has ever suffered from a financial turmoil, it mostly has been more of a contagion effect like the 1997 Asian Crisis and 1998 Russian Crisis. It has been considered one of the strongest emerging markets and a large contributor towards global growth. However, things started looking a bit foggy for Brazil since 2008 financial crisis. It was observed that a country that could be a potential contributor to global growth could also pose an equal threat to financial stability.
With increased, focused government spending and tight fiscal discipline measures in place, the Brazilian economy is finally out of its recession. However, with the gross domestic product (GDP) expanding a meager 0.1% in the third quarter, economic growth is just a financial figure rather than a clear indication of GDP growth.
At the close of September this year, the central bank in Brazil lowered its prediction for the annual growth of the country’s economy from 1.6% down to a disappointing 0.7%. Such a low expectation for growth sets Brazil firmly behind many other Latin American countries, except for Venezuela (which is corrupt and socialist) and Argentina. For example, this year:
* Columbia should see growth of 4.7%
* Mexico expects to grow at 2.7%
Dilma Rousseff has secured her Workers’ Party (PT) its fourth consecutive electoral victory. Winning with just a 3% margin, the fragility of her victory reflects divides in Brazilian society and the economic challenges ahead for the country.
Several variables are changing simultaneously which are hurting the prospects for Brazilian assets. The main ones are: (A) Dilma is gaining ground and Marina losing momentum faster than we expected, (B) the broad strong dollar trend hitting EM across the board, and (C) a global equity sell off.
The sharp decline in economic growth during the FIFA World Cup was an unexpected result of the global event, but it was a result that many in the football mad country could weather. Many- but not most. Now that the event has passed, the country is experiencing an 11 billion dollar hangover. The massive layoff of scores of temporary workers is not helping matters either.
