Updated 1 year, 6 months ago

Brazil’s fall from grace

A few years back, Brazil was Latin America’s success story. With an economic growth rate three times faster than the United States, Brazil’s poverty level was alleviated at great speed and the economy was basking in the glory of increasing employment rate.

Today, Brazil is plagued by the Petrobras scandal, an unpopular leader and increasing pessimism in the economy. Overall low confidence in various sectors of the economy, especially the commodity-based sectors has negatively impacted Brazil’s stock market and increased unemployment. Brazil, being a commodity-driven economy is highly dependent on export revenues from its produce of oil and soybeans. Unfortunately, as China (Brazil’s biggest trade partner) cuts its appetite for imports, Brazil is losing a large amount of its Gross Domestic Product (GDP).

On the political side, President Dilma Rousseff is battling to win the support of lawmakers and the public to implement austerity measures. Rousseff’s government aims to use austerity to close the budget gap in public accounts and control the inflation rate. The Brazilian government had a total primary budget deficit of $12.51 billion at the end of 2014 and annual inflation as of July 2015 was pretty high at 9.5%. However, with Rousseff facing challenges to approve her politically unpopular measures with the Congress, the recovery path of Brazil’s public accounts will be long and painful. In fact, just last week, Brazil’s government predicted that Latin America’s largest economy would shrink by 2.44% this year.

The Real (Brazil’s currency) is also facing the consequences of the cooling economy. Today, one U.S. dollar is equivalent to 3.98 Reals, compared to the exchange rate of 2.8 Reals per U.S. dollar when Rousseff took office in 2011. According to Bloomberg, the Real is the worst performing currency this year among 31 major currencies it tracks. The depreciating currency is making imports more expensive, further increasing inflation via imported-inflation.

Brazil’s woes all point to the same solution. The government should consider looking at other trading partners such as Western economies because the emerging markets seem to be a tight position with the slowdown of China and the upcoming hike in U.S.’s interest rate. Besides, the government should consider implementing austerity measures in moderate doses, alongside measures to increase employment rates. Only then will investor and consumer confidence be restored and the Real will recover to a better position. Here’s hoping for the best!

The market mogul | Nareen Kaur Sidhu