Brazil’s economy has underperformed since 2011, expanding at an average rate of just 2% per year. Given that high growth rates are central to both the socialist government’s redistribution plans and attracting international investment the malaise has become a serious issue for policymakers. The government’s initial response was a classic combination of monetary and fiscal easing. But these ‘pro-growth’ policies failed to work. “These policies help stoke demand but Brazil’s problem was supply”, explains Nomura Analyst Tony Volpon. “Its manufacturers are uncompetitive so all the extra demand created just boosted imports.” Most pundits agree that what Brazil really needs is to enact deep structural reforms that would make its firms more competitive. Improving infrastructure, increasing transparency and cutting import tariffs would all help to reduce costs for businesses.
“These policies help stoke demand but Brazil’s problem was supply…”
Meanwhile fiscal and monetary tightening is needed to improve government finances and fight inflation. But these types of measures can be politically hard to pass, which is what leads to the next big issue for Brazil. The elections…
The ballot box
This October president Dilma Rousseff will aim for re-election as Brazil goes to the polls. Most pundits have her as a firm favourite, although her position seems less secure than her predecessor and mentor Lula, who won both his elections with a landslide. Business leaders are unhappy with state interferences in the private sector and what they perceive as an ad-hoc economic policy. Perhaps more worrying for Rousseff is the discord within her traditional constituency.
The working classes were involved in a series of protests against the government, which centred on high bus fares and the perception that money needed for the poor is being wasted on the World Cup. After the government’s initial heavy handed approach backfired, it backtracked and managed to placate protestors with a series of concessions. Rousseff should secure her re-election again in November but there is an outside possibility that another wave of protests could take events out of her control.
The World Cup
Whether you like football or not, Brazil 2014 has the potential to become a major investment event. The construction of expensive stadiums for the tournament has already managed to anger locals while delays to the programme have generated plenty of negative headlines around the world. But the tournament itself could also be an important catalyst this summer. Brazil’s already creaking infrastructure is likely to come under a lot of pressure, while its social problems (the government is currently ‘pacifying’ ghettos near strategic World Cup locations) could also come to the fore.
If these underlying issues are exposed and accompanied by negative images of football violence, unfinished stadiums or organisational chaos then Brazil’s international standing would take a battering. Meanwhile a poor performance on the pitch could affect the elections. As crazy as it sounds the performance of the home team at major sporting events has been proven to influence the mood of domestic voters.
All in all it’s a big year for Rousseff and Brazil – and LatAm INVESTOR will be keeping a close eye on the country throughout 2014.