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NS4540 Winter Term 2016 Brazilian Economy. Brazil WEF I. Brazil WEF II. Brazil WEF III. Brazil Governance. Brazil: Economic Freedom I. Brazil Economic Freedom II. Economic Freedom: Brazil/Uruguay. Economic Freedom: Brazil/Argentina. Overview I.
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Overview I • Brazil is the sixth largest economy in the world • The world’s second largest emerging market • Agricultural production and export of raw materials has historically played a prominent role in Brazil’s economy • However Brazil was one of the earliest industrial powers in Latin America • Coffee production in Brazil in the 19th century resulted in concentration of income in hands of Sao Paulo landed Class • They favored a more diverse investment portfolio • Coffee profits went into transportation and other industrial and commercial enterprises
Overview II • Young industries received further boost from interruption of trade during First and Second World Wars – protection • Early as 1947 manufacturing sector had displaced agriculture as country’s principle sector • However manufacturers did not comprise a significant proportion of Brazilian exports until last quarter of 20th century • Although initially dominated by resource-based products– processed foods composition of exports has shifted reflecting technological upgrading of national industries • Sophisticated heavy manufacturers • Telecommunications • Automobiles and aircraft
Overview III • As with many countries, consistent economic growth and macroeconomic stability has eluded Brazil, especially in 20th century • However by the first decade of the 21st century Brazilian economy was growing at a record pace of 4.5% per year • This economic growth has been accompanied by equally remarkable improvements in living standards and significant achievements in socio-economic areas • Poverty reduction • Improved literacy • Increased life expectancy
Overview IV • These advances in area of human welfare stem from foundation in basic health and education that was constructed in period on inward growth in mid 20th century -- especially • Plan of President Vargas (1930-45) for industrialization, and • The intensive social welfare programs – Bolsa Familia initiative during 1990s and early 2000s • Shift in Brazilian economic paradigm from inward looking, state-led model of growth – characteristic of region in mid-20the century prompted by • Chronic and hyperinflation from 1980s into the early 1990s
Overview V • Hyper inflation generated political capital needed to push through market-oriented reforms • Initiated under President Collor de Mello (1990-92) and • Strengthened under President Cardoso (1995-2002) • Dissatisfaction with fiscal austerity and income and social inequality grew culminating with • Lula de Silva in 2002 and 2006 and • Dilma Rousseff in 2010 and 2014 • Concerns that Lula and Rousseff administrations would reverse market-friendly policies proved unfounded • Pragmatism has increasingly characterized Brazil economic policy making regardless of underlying political ideology
Overview VI • Brazil’s economy in 21st century could be described as • Hybridization of interventionist and free market approaches made possible by Brazil’s large market size • Policy framework has elements that are both export-oriented and foreign investment friendly • Also inward looking and protective of domestic industries. • Fiscal policy favors counter-cyclical stimulus measures • But with a concern for inflation and the exchange rate. • Economic growth is regarded as the means to social ends • Broader access to better education and health • Reduction in poverty and destitution and • Environmental protection and conservation
Overview VII • Record prices world markets for primary commodities led to an abundance of foreign reserves in Brazil in 2004 • Gave fiscal and monetary authorities enormous policy space • Even when global markets were ensnarled by financial crisis in 2008 growing domestic consumer market made it possible for fiscal authorities to delay the immediate effects of the external shock and maintain spending priorities • However, the confluence of • a protracted recovery of global markets falling world commodity prices, and • worsening macroeconomic conditions • Pressing government towards greater fiscal restraint after four years of economic stimulus measures.
Risk Assessment I • Recession to last into 2006 • Slipping into recession in 2015 country has few chances of seeing recovery in 2016 • Outlook for economy less than encouraging due to • Unfavorable internal and external environment for growth • Household consumption main driver of growth expected to suffer from high cost of credit and lower real wages due to the high level of inflation • Banking sector exposed to household indebtedness will be forced to restrict credit supply because of non-performing loans linked to rise in unemployment • Unemployment around 9% at the end of 2015
Risk Assessment II • Repercussions of Petrobras scandal and company’s announced cuts to its 2015-2019 investment program continue to discourage • Investment and • Activity by related businesses, especially in building trades because of the involvement in the scandal of large groups in the construction industry • Industry is likely to continue suffering from lack of infrastructures and skilled labor • Reflected by costs rising faster than productivity • External trade likely to remain affected by slowdown in Chinese demand and its impact on prices of commodities
Risk Assessment III • Export competitiveness set to suffer from weak transport infrastructures and rigid labor laws • Offset any advantage of the ongoing depreciation of the real against the dollar • Worsening Budget Situation Likely to Continue • Inflation and the public deficit have continued to rise • Lack of a majority in Congress and the recession have impacted on the adjustment in the public finances • Led to the decision by two of the rating agencies to downgrade the country to speculative • In 2016 objective of re-establishing equilibrium in the public finances – a primary budget surplus is unlikely • Introduction of new tax package is struggling to gain approval in Congress • Widening deficit would result in an alarming public debt dynamic
Risk Assessment IV • Government losing momentum and weakened by the recession and lack of political support • President Dilma Rousseff’s position remains precarious • Image has continued to worsen since she woas re-elected in October 2014 • Tainted by Petrobras corruption scandal, president faces growing popular discontent and weak support from the political class including from within her own party. • Government struggling to meet demands of the middle-class • Exasperated by corruption and • Declining purchasing power • Inflation and rising unemployment levels could create increased social unrest.
Brazil: State Finances I • Oxford Analytica, Brazil: State taxes rise to cope with recession, February 25, 2016 • February 23, Moody’s cut Brazil’s credit rating by two notches with a negative outlook • Became the last of the leading rating agencies to downgrade Brazil to junk status • Agency noted: • Likelihood of a worsening debt position • Challenging political dynamics and • Limited prospects for fiscal reform
Brazil: State Finances II • Meanwhile state governments have raised taxes on consumption • Further hurting prospects for short term economic recovery • Action done in environment of rising unemployment and declining spending • Increasing taxation represents another constraint on local businesses which rely on sluggish domestic market. • States of Rio de Janeiro, Minas Gerais and Rio Grande do Sul did not have enough resources to pay year end bonuses – a mandatory benefit for formal workers and pensioners in the public and private sectors
Brazil: State Finances III How system works • As part of the strategy that reduced hyperinflation in mid-1990s • The debt of states and large cities was federalized • Implies that sub-national government owes the federal government • Federal government enforces debt repayment by restricting discretionary transfers in event governors and mayors do not honor payment on due date • 27 states owe around 7.6% of GDP to Federal government
Brazil: State Finances IV • Implications • Local authorities will have to deal with a fiscal straightjacket for years to come • For political reasons more likely to cut expenditures rather than raise taxes • Small municipalities are the ones facing the greatest problems with the recession • They have low taxation capacity and rely on federal and state transfers to run basic services such as education and health • Will make it difficult for the country to halt the recession anytime soon
