The BRICS: Brazil’s Economic Woes

As part of our analysis of the BRICS economies, our business editor analyses Brazil’s economic troubles

Rio de Janeiro. Image: Marcelo Druck

Rio de Janeiro. Image: Marcelo Druck

Brazil’s economic transformation has become somewhat anaemic. Since the story of the massive corruption and cronyism scandal at the state-owned oil company Petrobras, interest in Brazil’s seeming fall from grace has heightened. The country’s previously glittering rise as one of the world’s most encouraging emerging economies has stalled beset by numerous issues the government in Brasilia has struggled to tackle.

Brazil’s growth averaged between 4-6% growth rates during the noughties- peaking at 7% per annum being achieved by 2010. However, in the past 5 years the economic outlook for Brazil has become increasingly difficult. The average GDP growth rate has declined to the lowest rate of all the BRICS countries at 1.2%, the second poorest performing South Africa is 2.2% indicating Brazil’s relative poor performance. Indeed, in 2014 the economy contracted by 1.6% and is struggling to recover. The issue of declining growth has been coupled with high inflation with prices increasing by 12% on the previous year thus reducing consumer purchasing power. The government in Brasilia has failed to tackle the issue of inflation, and due to a loosed fiscal policy, the central bank interest rate has risen considerably to sure up the currency but this has failed to halt the inflationary spike.

As with all good corruption scandals, the Petrobras bribes reads like a shopping list for Harrods – Rolex watches, $3,000 bottles of wine, yachts and helicopters

The Brazilian president Ms Rousseff loosed fiscal policy has caused financial markets to become jittery as Brazilian public sector debt continues to rise. This increase in public sector debt has meant that as inflation continues to rise; it has also made Brazil’s $230 billion dollar-denominated debt dearer by the day. So far the financial ministry has removed 70 million Reais from the budget but with the threat of a credit downgrade and a weakened currency, the ministry is fighting too many fires without sufficient water to combat the flames. Ms Rousseff has also been beset by appallingly low levels of business confidence and high unemployment. Under her leadership, the Brazilian state pressured the private sector into accepting low levels of return on infrastructure and housing projects stifling the profit incentive. An unemployment rate expected to hit 8% has further depressed the economic mood of Brazil’s business community.

As previously alluded to add to Brazil’s problem, corruption and cronyism in state industries, most notably Petrobras has made the economic situation more bleak. As with all good corruption scandals, the Petrobras bribes reads like a shopping list for Harrods – Rolex watches, $3,000 bottles of wine, yachts and helicopters. This has been coupled with very high profile citizens, including the President herself, being implicated. One employee Pedro Barusco pledged to return $100 million of the money he’d taken from the company. Indeed, the grand total of this corruption has been valued at $3 billion and 117 criminal cases are currently pending.

Brazil’s difficult times mirror those of the other BRICS economies. The combination of high unemployment, inflation and debt coupled with unpleasantly  massive corruption and low business confidence, it’s easy to see why Brazil is struggling so much.

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