Slow deterioration
In a less favourable macroeconomic and macro-financial backdrop for emerging countries, the weaknesses of the Brazilian economy are becoming increasingly apparent. Inflationary pressures and the deterioration of public finances reflect the limits of Brazil’s growth model and increasingly highlight the need for vital reforms that the electoral calendar keeps pushing back, at least until next year. In the meantime, the lack of visibility could strain investor confidence and undermine the country’s external resilience.
Clouds are accumulating
In a less favourable macroeconomic and macro-financial environment for emerging countries, Brazil is seen as one of the most vulnerable economies. Sovereign risk premiums have widened since May 2013 (see chart 1), following the announcement of the imminent tapering of the QE3 in the United States. Since early 2014, bad news have been accumulating for the Brazilian economy: fears of slowdown in China, Argentina’s forced devaluation, the contraction in industrial output, sluggish confidence indicators, record trade deficits, stubbornly high inflation despite the ongoing monetary tightening, the downgrade of its sovereign rating to one notch above the speculative grade category (BBB- with a stable outlook) by Standard & Poor’s, as well as the drought that has swept several of the country’s agricultural regions. Looking beyond cyclical factors, Brazil’s economic fundamentals show several structural weaknesses at the domestic level that could end up affecting the country’s external resilience and dampen investor confidence.
Internal imbalances are confirmed
The Q4 2013 GDP growth figure was higher than expected at 0.7% q/q and related to the exceptional increase in exports pertaining to Libra’s pre-salt oilfield concessions (+4.1% q/q). Full-year GDP growth reached 2.3% in 2013 thanks to the strong performance of the agriculture (up 6.5%), buoyed by a bumper soybean harvest. Growth in the industrial sector was limited to 1.2%. On the expenditures side, higher interest rates and the sharp slowdown in real wages (from an average increase of 4.8% in 2012 to less than 2% respectively in 2013) ended up eroding household consumption, which rose only by 2.3%. Investment slowed sharply in H2, but the full-year performance was good at 6.3% albeit driven by increasing lending to the agricultural sector at preferential rates. This upturn is likely to be short lived, however, given the slowdown in subsidised loans from public banks.
BY Alexandra WENTZINGER