The Brazilian economy is breaking down, a leading financier warned yesterday amid growing speculation that Latin America’s largest country will be hit by further cuts to its growth outlook by leading international forecasters next week.
“The economy is not functioning properly,” said Ramon Aracena, chief Latin America economist at the Institute of International Finance (IIF). “And there is chaos in the political system, with spill-overs in the economic sphere.”
Daniel Titelman, head of the economic development division of the United Nations’ Economic Commission on Latin America and the Caribbean (ECLAC), added that Brazil was facing “hard times”.
One private sector banker said the gloomy feeling towards the Brazilian economy looked set to extend until the resolution of the current political crisis, meaning it could last until after the next general elections, which are scheduled for October 2018.
The International Monetary Fund looks certain to cut its Brazil growth forecast again for this year when its publishes its World Economic Outlook on Tuesday. ECLAC is poised to follow next week.
The IIF forecasts a drop in GDP of 4.5% this year and a small rebound of 0.5% of GDP in 2017. “It could be another year of recession if the political situation does not improve,” Aracena said.
Titelman said Brazil had the highest public debt ratio and the highest fiscal deficit in the region. “There is some work to do to stabilise variables and regain trust,” he said.
Moody’s, the ratings agency, has described Brazil as an “extreme case” in Latin America due to both its very high debt to GDP ratio and its very low debt affordability, as a result of a combination of weak revenues and high interest rates.
GLIMMER OF HOPE
“It is very difficult to make a consolidation effort when you have a contracting economy,” said Mauro Leos, senior credit officer for Latin America in the sovereign risk unit of Moody’s.
He said Congress was “too distracted with impeachment” — a reference to the current political process against Dilma Rousseff. Moody’s described attempts by finance minister Nelson Barbosa to launch a much-needed pensions reform as “unrealistic”.
Yet there may be a glimmer of hope. “Some financial indicators have been improving. And 2017 may not be as bad as some expect,” said Octavio de Barros, chief economist at Bradesco, a large Brazilian private sector bank.
Some improvement has also been registered on the external front. “We have been betting on early signs of export growth,” said Daniel Godinho, Brazil’s foreign trade secretary.
Last year, Brazil registered a trade surplus because imports collapsed due to the impact of the recession, although exports also declined. Now, Godinho said there was evidence that exports had finally started to bounce back.
The foreign trade surplus, the decline in profit remittances and the decline in spending of Brazilians abroad have helped to reduce the country’s current account deficit. The IIF forecast a deficit of 0.5% of GDP next year, although some economists predict that the deficit will be zero in 2017.
Nevertheless, this may still be little comfort when there is “no fiscal driver, no monetary driver” in the Brazilian economy, Aracena warned.