Home' Trinidad and Tobago Guardian : March 1st 2015 Contents It is easy for a visitor to Rio to feel
that nothing is amiss in Brazil. The
middle classes certainly know how
to live: With Copacabana and Ipane-
ma only minutes from the main
business districts, a game of volley-
ball or a surf starts the day. Hedge-
fund offices look out over botanical
gardens and up to verdant mountains.
Stray from comfortable districts, though,
and the sheen fades quickly. Favelas plagued
by poverty and violence cling to the foothills.
So it is with Brazil s economy: The harder
you stare, the worse it looks.
Brazil has seen sharp ups and downs in the
past 25 years. In the early 1990s inflation rose
above 2,000 per ent, and it was banished only
when a new currency was introduced in 1994.
By the turn of the century, Brazil s deficits
had mired it in debt, forcing an International
Monetary Fund rescue in 2002.
Then the woes vanished. Brazil became a
titan of growth, expanding at 4 per cent a
year between 2002 and 2008 as exports of
iron, oil and sugar boomed and domestic con-
sumption gave an additional kick.
Now, though, Brazil is back in trouble.
Growth has averaged only 1.3 per cent during
the past four years. A poll of 100 economists
conducted by the Central Bank of Brazil sug-
gests a 0.5 per cent contraction this year, fol-
lowed by 1.5 per cent growth in 2016.
Both elements of that prediction---the mild
downturn and the quick rebound---look opti-
mistic. The prospects for private consumption,
which accounted for around 50 per cent of
GDP growth during the past 10 years, are rot-
ten. With inflation above seven per cent, shop-
pers purchasing power is being eroded. Hefty
price increases will continue.
Brazil is facing an acute water shortage and,
since three-quarters of its electricity comes
from hydroelectric dams, this is sapping it of
energy. To avoid blackouts the government
plans to deter use by raising prices: Rates will
increase by as much as 30 per cent this year.
With the real losing 10 per cent of its value
against the dollar in the past month alone,
rising import prices will bring more inflation.
There is little hope of disposable income
keeping pace. One reason is that Brazilian
workers productivity does not justify further
raises. In the past 10 years, wages in the private
sector have grown faster than GDP. Cosseted
public-sector workers have done even better.
Since Brazil s minimum wage is indexed to
GDP and inflation, a recession will freeze real
pay for the millions who earn it.
Austerity will bite, too, as new Finance Min-
ister Joaquim Levy tries to balance the books.
Higher taxes on fuel are being phased in, a
blow for a car-loving country. If Levy reforms
the generous state pension system, the incomes
of older Brazilians will stall.
Debt payments add to the woes. Total credit
to the private sector has jumped from 25 per
cent of GDP to 55 per cent in the past 10 years.
With total household debt at around 46 per
cent of disposable income, Brazilian households
are much less indebted than those in Italy or
Japan, and yet the price of this borrowing is
sky-high. Four-fifths of it is punishingly costly
consumer credit, with an average rate on new
lending that now is 27 per cent, according to
the Central Bank. Once hefty principal pay-
ments are added in, debt service takes up 21
per cent of disposable income. With the econ-
omy slowing and the Central Bank reluctant
to cut interest rates because of high inflation,
consumers will feel the pinch, said Arthur
Carvalho of Morgan Stanley. On February 25
a survey put consumer confidence at a 10-
There are few compensating sources of
demand. Investment, which rose in eight of
the 10 years to 2013, often substantially, will
sink in 2015. Petrobras, the partially state-
owned oil giant that is Brazil s largest investor,
is mired in a corruption scandal that has paral-
ysed spending and may cost as much as 1per
cent of GDP in forgone investment. On Feb-
ruary 24 Moody s, a credit-rating agency, cut
the company s debt to junk status. If Petrobras
fails to publish audited results soon, it may
be unable to borrow at all.
Exporting is no answer, despite the falling
real. Five countries---China, America, Argenti-
na, the Netherlands and Germany---buy 45
per cent of Brazil s exports. Ten years ago these
economies average GDP growth, weighted by
their heft in Brazilian trade, was 12 per cent,
but this year 5 per cent would be good.
The biggest worry, however, is not that Brazil
will have a bad year, but that its broken policy
levers mean that it will get stuck in a rut.
Brazil spent US$108 billion, 6per cent of its
GDP, on interest payments in 2014, a 25 per
cent increase on 2013. This means that, even
if Levy s fiscal drive---he is aiming for a primary
surplus of 1.2per cent of GDP---works, Brazil
will be nowhere near the black. The state s
expenditures have proven hard to control, with
benefits payments rising despite falling unem-
ployment. In a recession it will be harder still.
Brazil s parlous finances leave
no room for debt-financed
stimulus. At 66 per cent of
GDP its gross public debt
is the highest of the BRIC
countries. Its bonds yield
13 per cent, more than Rus-
sia s, and rates could rise further. Fitch, a cred-
it-rating agency, puts Brazil one notch above
junk, but it has more debt, bigger deficits and
higher interest rates than most countries in
that category. If growth evaporated, a down-
grade would be a certainty, raising debt costs
Such predicaments are not uncommon, but
Brazil s monetary problems are. The governor
of the Central Bank, Alexandre Tombini, must
choose between two nasty paths.
The first is a hard-money approach, keeping
interest rates high despite the weak economy.
This would prop up the real and boost the
bank s inflation-bashing credentials. but it is
not only households that are hurt by high rates---
companies are too. In aggregate the big Brazilian
firms Fitch rates have had negative cash flow
They have plugged the gap by depleting sav-
ings and issuing debt---borrowing is up by 23
per cent in five years. With the risk of default
rising, a fifth of these firms face a downgrade,
in many cases an imminent one.
In reality a tough monetary stance would
have to be softened by an extension of Brazil s
lavish financial subsidies. State-owned banks
such as BNDES, a development bank, and Caixa
Economica Federal, a retail one, made 35 per
cent of loans in 2009. Today their share is 55
per cent. Since many Brazilian firms cannot
pay private market rates---the average rate for
new corporate loans is 16 per cent---BNDES
lends at a concessionary rate, currently 5.5 per
That makes banking in Brazil a fiscal oper-
ation, said Mansueto Almeida, an expert on
the public finances. The funding comes from
the state, which borrows at a much higher
rate than firms pay. The difference is borne
The alternative path for Tombini is to cut
rates despite rising inflation, a daring move
given Brazil s history. The cause of price
increases, after all, is not an overheating econ-
omy, but the real s fall, rising taxes and the
drought. The textbook response would be to
"see through"---ie, ignore this inflation.
Soft money would hurt too, however. It
would cause the real to fall further, and thus
accelerate increases in the prices of imported
goods. Foreign debts, which Brazilian com-
panies and local governments have accumu-
lated due to the lower interest rates available,
would become harder to bear. Data collected
by the Bank for International Settlements show
dollar debts rising from US$100 billion to
US$250 billion during the past five years, but
the burden in local-currency terms has jumped
much more, from around US$73 billion to
The state lends a hand here, too, with the
central bank offering swap contracts to insure
firms against a falling real. The program cost
the bank US$13 billion in the second half of
last year alone.
Faced with these poisonous options, a middle
path is most likely. Interest rates will be too
high for households and companies, so sub-
sidised funding will grow. They will be too
low to protect the real, though, so swap costs
will rise too. Both subsidies put extra pressure
on the government s finances.
By mixing monetary and fiscal policy in this
way, Brazil is slowly rendering both ineffective.
In an economy heading for recession, that is
not a good place to be.
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
The crash of a titan:
Brazil's coming recession
Brazil's parlous finances leave no room for debt-financed stimulus. At 66 per
cent of GDP its gross public debt is the highest of the BRIC countries.
SBG16 | INTERNATIONAL
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt MARCH 1 • 2015
Links Archive February 28th 2015 March 2nd 2015 Navigation Previous Page Next Page