A current view of Brazil

Brazil is big. In lots of ways. It has the world’s largest area of arable land in a single country, is the biggest economy in Latin America and 9th largest internationally.

 

It's also the 5th in population. It’s largest city, São Paulo, is amongst the top 20 global megacities in 2016, and is set to remain there in 2030 with an estimated population of almost 25 million.

Following the Great Recession in the global economy in 2008-9, Brazil bounced back in 2010 with a 7.5% real rate of GDP growth. The increase was due to a sharp rise in commodity prices and Chinese demand for Brazilian product. Following that brief spurt of growth, things went south. Dilma Rousseff was in office as Lula’s successor as of 2011 and facing re-election in 2014, launched a reckless spending program to force growth. By the end of 2014, growth fell almost to zero as a result of the fiscal deficit caused by the spending orgy. For the next two years the economy fell into deep recession. (Growth in 2016 is estimated and 2017 and 2018 are forecasts.)

The devastation caused by what is called The War of the Kleptocrats was extensive. By the end of 2016 the Brazilian economy in just two years had shrunk 7.2% and was only slightly larger than it was in 2008 in US dollars on a current price basis, and what it was between 2012 and 2013 on a purchasing price parity basis. Furthermore, the numbers fail to convey the suffering imposed on Brazilians during the recession. Some 12.1 million Brazilians are unemployed and some 2.8 million of them might not have jobs to go back to when things improve. Consumers and companies alike are having to renegotiate debt. Some 60 million consumers are in arrears for a total of R$256 billion. The federal government faces continuous loss of tax revenues and states and municipalities are virtually broke in several major states (e.g. Rio de Janeiro, Minas Gerais and Rio Grande do Sul) and are desperately trying to negotiate federal assistance.

It
is estimated that 50% of Brazil’s businesses are also in arrears and many are now re-negotiating their original debt workout negotiations. The investment rate is estimated at 16.9% of GDP, well below the long-term average rate of 18%, which was also considered inadequate for an economy the size of Brazil. Economic policy is moving in the right direction, albeit slowly since everything has to be negotiated with a legislature that does not appear to be sensitive to the plight of its constituencies. The time required to get at least the economy moving in the right direction is a crucial variable. Presidential elections are scheduled for 2018 and so far, the likely candidates do not seem to have the leadership capabilities to accelerate the recovery process much less lead on the various structural and governance reforms necessary to ensure a return to sustainable long-term prosperity and growth. Brazil needs to fortify its institutional framework for governing the country. And this will depend on how successful the Judiciary is in weeding out a significant amount of corruption in the system. In short, we are looking at a system of interdependent variables all of which requirement adjustment in a sequential manner.

Finally, Brazil needs to undertake a major overhaul of its economic infrastructure ranging from seaports to high- ways, basic urban sanitation, and an overhaul of the public health system. Each is a relatively monumental task.
 

It also needs to develop appropriate public sector governance rules. The president of Petrobrás recently announced that senior directors can no longer sign contracts individually! Henceforth, all projects and investments will be subject to procedures, review, and sign offs prior to final approval. Can you imagine a director in your company empowered to individually sign off on a billion dollar investment?! It’s almost a miracle that the company did not hit the skids long ago!! How many other public companies allow the same degree of individual autonomy? The mind boggles!

It should be noted that infrastructure improvements and development offer excellent opportunities for business IF the government can begin to generate sufficient revenues to fund the projects and subject the projects to appropriate review. A recent analysis of the urban sanitation area alone predicted that Brazil would not have universal water and sewage treatment until 2054. And that’s just one area.

For more up-to-date information on economic and political viewpoints on Brazil, I recommend reading Jim Wygand's blog. Jim is a former economic advisor to a US Congressman and consultant to US State Department. Presided over 3 international companies in Brazil to provide business intelligence and economic analysis to corporate clients.

 

Jim Wygand's Blog

 

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