Journalists are often guilty of hyperbole but it seems fair to say that Brazil is in crisis. The country is suffering its worst recession for a generation, public debt is out of control, unemployment is rising, the political and business elite are embroiled in a huge political scandal and president hasn’t got a political mandate. You wouldn’t think it from the stockmarket though – Brazil’s main Bovespa index is at four-year highs.
The reason for the market optimism is that the new president, Michael Temer, is attempting to tackle some of Brazil’s biggest problems head on. Despite his lack of popular support – he only got the job when his predecessor Dilma Rousseff was impeached – he is trying to change the constitution so that inflation-adjusted spending is capped at current levels for the next twenty years. It is hoped that would help turn a budget deficit, which is currently at 10%, into a surplus by the mid 2020s. It should also help to tame debt, which currently stands at 44% of GDP and is rising fast.
For most Brazilians the austerity comes at the worst possible time. Unemployment is up 30% in the last year with 12 million Brazilians now without work. As a result the pressure on the public welfare net is at its greatest, just as Temer is trying to contain it. That makes his package incredibly unpopular. So far he has got it through congress, but it remains for senate to approve it.
Light at the end of the tunnel
But there may be light at the end of the tunnel. Probably not for Temer, who is likely to lose the election in 2018, but perhaps for Brazil. Our map on page 58 shows there are signs that Brazil’s recession is bottoming out. The economy contracted by 3.8% last year, and an expected 4% this year, but in 2017 GDP will fall by just 0.2%. If Temer’s austerity package can convince investors then Brazil may see increased inflows of international capital, which would help to drive growth. Some positive impact may already be discernible. Capital Economics notes that investment expanded for the first time in almost two years in the second quarter of 2016. Another help to business confidence would come from the end of the Lava Jato (carwash) corruption investigation. The stockmarket clearly has a lot of confidence in the economic impact of Temer’s reforms – time will tell if that is misplaced.