February 7, 2017

Brazil is Back in Business

by Carmen in News

After years of policy shaped by neo-liberalism and globalization, benefitting some with reductions in poverty as well as improved access to trade and healthcare, many others have been left behind by global market capitalism and rising inequality. This has made way for an entirely new socioeconomic system, one that relies on pragmatism to prioritize the needs of the local majority over the elite few and address global economic stagnation. The ongoing recovery in Brazil is a prime example.

Brazilian President Michel Temer is determined to restore his country’s star status on the global economic stage, pushing forward with his significant fiscal reform programs that made the Ibovespa and the Real some of the strongest market performers around the world last year.

Since Temer’s centrist, pro-business government came into power following the impeachment of leftist predecessor Dilma Rousseff, a series of groundbreaking and necessary policy moves have taken place to the delight of investors around the world. The consensus on pro-market pragmatism is unprecedented for the country and has been characterized by a landmark law limiting future increases in budget spending to zero in real terms, drastic pension reform and the complete overhaul of education, labor and tax systems across the country. These core issues are at the center of global policy around the world and it is very refreshing to see the Brazilian government taking such a proactive approach. This is a welcome move away from the fiscal profligacy of previous governments that left the country in economic difficulty. Such austerity measures have already made a profound impact on Brazil and they will no doubt leave a long-term legacy of growth and prosperity. While Latin America’s largest economy experienced its second year of recession in 2016, the country’s currency strengthened by more than 20% against the dollar and the Ibovespa rose by 37% in local currency terms.

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FDI in Brazil

Financial Times (2017)

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In order to hit the ground running next year, Brazil has slashed its benchmark interest rate to 13%. Inflation has also fallen to its lowest annual rate since September 2012, keeping within the official target range with consumer prices rising at 5.41%in the 12 months through to January compared with 10.67% in the previous year. This is all extremely promising as it indicates that the necessary elements are in place for economic recovery. Speaking at an event in Säo Paulo last week, Finance Minister Henrique Meirelles stated his expectations that the economy would return to growth within the quarter and accelerate to 2% growth by the end of the year. Credit Suisse, one of the largest investment banks in the country, also shares these expectations.

This is not surprising when you consider the pervasive fiscal reform and continued investment in the country over the last year. Brookfield Asset Management offered $5.2 billion for a 90% stake in a Brazilian natural gas distribution network. China’s State Grid even acquired a majority stake in Brazil’s CPFL Energia for $4.5 billion. Total foreign direct investment for the year was $78.9 billion, up a total 6% on 2015 levels.

 

“If during difficult times money was still coming into Brazil, imagine how it will be with a more favorable environment!”

José Olympio Pereira, Chief Executive of Credit Suisse Group Brazil (2017)

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Let’s not forget that while the Brazilian economy embarks on the road to recovery, the country’s agricultural sector continues to outperform. A resource-rich environment strengthens Brazil’s position on the global economic stage, with the latest OECD-FAO Agricultural Outlook stating that the country will be the world’s largest exporter of foodstuffs and agricultural produce by 2020.

Brazil also happens to be one of the few emerging markets that would be shielded from any Trump-induced turbulence in the global economy thanks in part to an impressively large domestic market. In fact, Donald Trump’s tendency towards protectionism will even offer more opportunity, as members of the Trans-Pacific Partnership and the European Union look further afield for greater trade opportunities.

In an age of political uncertainty, anti-globalization movements and increasing protectionism around the world, countries such as Brazil with fundamental long-term value supported by a pragmatic and pro-market government will become a tremendous source of prosperity and growth for the global economy.