Is Brazil another economy on the brink?

It is obvious there is something wrong going on in South America. Nobody still talks about the BRICS as the next giant economic field of the 21st century’s bullish opportunities. In fact, the term BRICS has lost much relevance as the growth miracle of a country like Brazil has been spoiled by political scandal and economic uncertainty. The appointment in December 2014 by leftist President Dilma Rousseff of Joaquim Levy, a fiscal conservative who graduated from the University of Chicago, as Brazil’s finance minister was much welcomed by investment professionals. So far, the change in Brazil’s economic policy has demonstrated strong willingness on behalf of the government to take the bull by the horns with, as top priority, the preventing of a downgrading of Brazil from investment to junk by rating agencies. Russia, a prominent member of the BRICS, was downgraded to junk recently.

As a result, the Rousseff-Levy tandem opted for unpopular belt-tightening austerity policies hoping that positive results will show at the end of 2015. “This is a process that will last as long as necessary to rebalance our economy,” Rousseff warned. “Brazil is removing the last vestiges of tax cuts and government spending aimed at bolstering the economy as we work to correct the fiscal slippage of the last few years,” Levy told investors in the United States. It’s urgent indeed because all the lights are red. From a 4 percent annual economic growth in 2002-2008, Brazil averaged less than 2 percent since then. Worse, the GDP is likely to contract 0.5 percent this year. Inflation has been the fastest in almost a decade, the pace of national debt’s increase has dramatically accelerated and the national currency Real has declined the most in 11 years.

Despite the unattractive context, there remains diffuse optimism that Brazil, Latin America’s largest economy, will finally recover if it sticks to its economic commitments. The main risk, sources told Cyceon, is Rousseff’s political ability to lead the efforts in the long term. The major corruption scandal at the state-run oil company, Petroleo Brasileiro SA (Petrobras), has deteriorated the political situation to the point that in February 2015 a mere 30 percent of people – down 22 points since December 2014 – thought Rousseff was doing good work running the country. Relative optimism would probably vanish if more political instability added to current economic difficulties.