Brazil: Risk Assessment
Business Climate Rating1
Brazil’s economy enters recession
The Brazilian economy enters recession. The country recorded a contraction in activity in the first two quarter of this year; the outlook for the following quarters is hardly encouraging as the domestic and external economic environment is unfavorable to growth.
Domestically, household consumption, the main growth engine, is likely to slow down under the effect of high interest rates on loans and the fall in the real wage caused by the upswing in inflation. Investment will probably decline further because of the close to 40% reduction in the 2015-2019 investment programs for the oil & gas giant Petrobras and the repercussions on companies in related sectors such as military and civil shipbuilding. This comes on top of a steep social cost in terms of employment. Industry should continue to suffer from the shortfall in infrastructure and skilled labor, resulting in a faster rise in costs to the detriment of productivity. Externally, foreign trade remains negatively affected by the long-lasting fall in commodity prices, especially iron ore, and by the fall in Chinese demand. Agricultural exports, conversely, will probably grow, at least in volume terms, due to the increase in oilseed, grain and legume crops (including soybeans). The depreciation of the real against the dollar should improve the competitiveness of exports, but the simultaneous depreciation of several other currencies in the region is reducing the competitive advantage of similar Brazilian export products. Lastly, the rise in inflation since the start of 2015, due to the realignment of subsidized electricity, petrol and transport prices and rates, should continue under the effect of imported inflation linked to the depreciation of the Brazilian currency, despite a significant monetary tightening that has not yet borne fruit.
An austerity policy whose results are rather mixed
Rebalancing public finances in order to restore investor confidence and prevent a possible downgrade of the country’s sovereign seems inconclusive: Brazil’s sovereign rating was cut of investment grade that it enjoyed for 7 years by one of the rating agencies. One the one hand, initial tax revenue figures seem disappointing due to the slowdown in activity and the additional adjustment measures (increases in certain taxes, asset sales and budget cuts) are struggling to be approved by Congress. On the other hand, the president can’t anymore rely on its former political allies to pass these reforms and the business community becomes more reluctant with regard to the government.
Slight improvement in the current-account balance thanks to the fall in imports
The current-account deficit is expected to post a slight improvement in 2015 thanks to the expected return of the trade surplus, caused by the fall in imports. The weakening of the Brazilian currency combined with the slowdown in investment and consumption is indeed reducing demand for imported goods, which have become more expensive. Despite the improved competitiveness of exports thanks to the exchange-rate adjustment, exports remain negatively affected by the long-lasting fall in commodity prices (agricultural and mining). The services and income balance (tourism, dividends, interest) remains in the red. The current-account deficit should be partly financed by foreign direct investment (around 2.6% of GDP, excluding reinvestment) and by public debt.
The search for a new economic boost despite the political tensions surrounding the Petrobras affair
Dilma Rousseff’s administration has been weakened politically and is struggling to meet its objective to break with four years of lackluster growth. The government is seeking to revive the economy, in particular via a plan for concessions (roads, airports, railway lines), estimated at close to $64 billion, in order to offset part of the shortfall in infrastructure that is hampering Brazilian productivity. The Petrobras affair may nevertheless have negative repercussions on domestic investment (the company has already reduced its five-year investment plan by nearly 50%) and on FDI flows because of the lack of investor confidence in the country. Despite a certain upswing in confidence in the government after the removal of the company’s senior executives, the imprisonment of leaders of building and public works companies accused of price collusion and the publication of Petrobras’ quarterly results, Dilma Rousseff’s image could deteriorate further if the accusations about the financing of her 2014 electoral campaign by the companies involved in this scandal were to be proved. Meanwhile, protests are held in many Brazilian states calling for the departure of President.
- 6th-largest economy worldwide
- Growing active population
- Varied and abundant mineral and agricultural resources
- Advanced manufacturing industry: aerospace, chemicals, pharmaceuticals and oil engineering
- Resistance to external shocks: creditor external position, considerable reserves
- Major macroeconomic balances maintained
- Lack of qualified labor/incomplete educational system
- Shortcomings in infrastructure (transport, energy)
- Insufficient investment
- High production costs (wages, energy, logistics and credit)
- Public expenditure high and inefficient
- Corruption flourishing due to inequalities