Home' Trinidad and Tobago Guardian : March 27th 2014 Contents With the World Cup in June and July and
a presidential election in October, many Brazil-
ians aren t thinking beyond 2014. But next
year is likely to be memorable for all the wrong
reasons in Latin America s biggest economy.
President Dilma Rousseff, or whoever wins
the election, will have to make deep budget
cuts, raise taxes and take other painful steps
to address Brazil s growing financial imbal-
The fallout will likely be more damaging
than many investors anticipate, resulting in a
fourth straight year of disappointing growth;
a big fall back to earth for a country that last
decade was one of the world s most dynamic
Economists currently expect Brazil s gross
domestic product to grow 1.68 per cent this
year, and two per cent in 2015, according to
a weekly survey by the central bank. Yet the
latter forecast is somewhat misleading, because
many economists admit their estimates are
based on computer models that don t fully
account for what politicians will do after the
"No matter who wins (the election), it s
going to be a difficult year, worse than many
believe," said Fernando Henrique Cardoso,
who was president from 1995 to 2003 and
still retains considerable influence in financial
circles as a leader of the main opposition party.
An official close to Rousseff, speaking on
condition of anonymity, broadly concurred:
"Few people are talking about 2015 right now.
But it will be hard, no doubt."
The biggest and most disruptive task will
be trimming Brazil s fiscal deficit, which
investors and ratings agencies say has been
too high in recent years.
No one expects Rousseff, a pragmatic leftist,
to make painful budget cuts while campaigning
for re-election. As a result, the cuts will need
to be even deeper when the next presidential
term begins on January 1, 2015 - especially if
Brazil s sovereign credit is downgraded in the
interim by Standard & Poor s to its lowest
investment-grade rating, as many in Brasilia
Tax hikes are also likely. So are adjustments
to bus fares, gasoline costs and other prices
administered by the government, which Rouss-
eff has held in check to prevent inflation, run-
ning around six per cent, from rising even
If done properly, belt-tightening policies
could restore balance to the economy and
rebuild Brazil s tattered credibility with the
private sector. That, in turn, could set the
stage for an eventual return to the good old
days last decade when GDP often grew better
than four per cent a year.
Yet, even in a best-case scenario, the meas-
ures will smother domestic demand in the
short term; perhaps not quite enough to cause
a recession, officials and economists say, but
enough to result in another lost year in terms
of GDP growth.
"2015 is going to be the big year of adjust-
ment," said Marcelo Salomon, chief Brazil
economist for Barclays in New York. "What
needs to happen is a credibility shock so that
the government shows it isn t just thinking
in the short term."
Country stuck in traffic
The seeds of Brazil s current predicament
were sown during the good years.
Thanks to strong demand for its soy and
iron ore from China, plus smart fiscal man-
agement and social welfare policies under
Rousseff s predecessors, Brazil has managed
to pull some 35 million people out of poverty
since the mid-1990s. It also became a top
market for foreign automakers, retailers and
But economists say that, generally speaking,
Brazil sold too many cars during the boom
while not building enough roads.
That is, it channeled too much of the wind-
fall toward consumption and not enough on
investment. The result is an economy now
plagued by infrastructure bottlenecks and low
productivity - and, thus, high inflation and
Rousseff, who took office in 2011 just as the
economy was slowing, reacted by making a
series of targeted tax cuts worth approximately
1.5 per cent of GDP, while also keeping fiscal
spending robust to stimulate the economy.
Her actions may have prevented a sharper
slump. The economy grew 2.3 per cent in
2013, and defied predictions of a minor reces-
sion during the second half of the year.
But priming the fiscal pump has carried a
cost: The budget deficit is expected to hit
nearly four per cent of GDP in 2014, a per-
centage point above the past decade s aver-
That s not a huge budget gap by global stan-
dards. But investors hold Brazil to a tighter
standard than most countries because of its
history of runaway spending that resulted in
hyperinflation in the 1980s and early 1990s.
At the slightest sign of fiscal slippage or an
uptick in inflation, it s not just ratings agencies
that get worried. Anyone over age 40 or so
remembers watching their salary get decimat-
"There s been a very large worsening in
expectations" among businesses and con-
sumers alike, said Aloisio Campelo, who runs
economic surveys for the Getulio Vargas Foun-
dation, a Brazilian business school.
"The incoming government will have to
hold the line on fiscal austerity to bring cred-
ibility back," Campelo said.
Waiting for the election
Budget cuts in the first year of a presidential
term have become part of the economic cycle
here. Rousseff made relatively minor adjust-
ments in 2011, while her predecessor Luiz Ina-
cio Lula da Silva made a big austerity push
The size of next year s cuts will depend in
part on who wins the election.
Rousseff, who must cope with an unwieldy
coalition of resource-hungry political parties,
is seen wielding the budget ax with the lightest
touch. But her two opponents - Senator Aecio
Neves and Eduardo Campos, a state governor
- are running to her right, and have suggested
in courting business leaders they would slash
Felipe Salto, an economist for Tendencias
consultancy, said that to recover credibility
while accounting for what s politically possible,
the government will likely need to target a
primary budget surplus of about 2.5 per cent
of GDP in 2015.
By comparison, that goal, which excludes
debt payments from the fiscal balance, is set
for 1.9 per cent in 2014. However, most analysts
said in a Reuters poll last month that they
expect the government to miss that target as
it ramps up election-year spending, making
the 2015 adjustment that much more trau-
Meanwhile, there are other distortions wait-
ing to be fixed.
Rousseff s policy of keeping fuel prices arti-
ficially low has helped subdue inflation, but
it can t last forever. The gap between local
gasoline prices and those abroad has hovered
at about 11 per cent, with a 19 per cent gap
for diesel. That has caused huge losses for
Petroleo Brasileiro SA, the state-run energy
company known as Petrobras.
For Petrobras to be able to afford its ambi-
tious investment plan to develop offshore oil
reserves over the next decade, which the com-
pany recently scaled back because of its strug-
gles, the next president must raise fuel prices.
That would take money out of consumers
Other pent-up pressures are coming from
a severe drought pressuring electricity prices;
a freeze on bus fares in place since nationwide
street protests last June; and the growing tax
burden posed by Brazil s generous pension
None of those issues are expected to be fully
dealt with until after the election is over.
BG12 | REGIONAL
BUSINESS GUARDIAN www.guardian.co.tt MARCH 2014 • WEEK FOUR
The World Bank has approved US$36 million for St Vincent
and the Grenadines and St Lucia after the two Caribbean
countries were affected by a freak storm last Christmas resulting
in the deaths of more than 12 people.
It says more than 30,000 people will benefit from the funds
approved under the International Development Association
(IDA) Crisis Response Window.
The bank said the weather heavily impacted infrastructures
in both countries with substantial damages on roads and
bridges, and the impact was concentrated in areas with the
highest levels of poverty.
The World Bank said the respective governments Rapid
Damage and Loss Assessments, conducted in January with
assistance from the World Bank, the Africa Caribbean Pacif-
ic-European Union (ACP-EU) Natural Risk Reduction Pro-
gramme and the Global Facility for Disaster Reduction and
Recovery (GFDRR) estimated total losses to be about US$108
million, or 15 per cent of St Vincent and the Grenadines gross
domestic product (GDP) and US$99 million or eight per cent
of St Lucia s GDP.
The bank said the disaster took place in the peak of the
"While the financial impact of the disaster remains unknown,
early estimates conclude that this event will affect the agriculture
and tourism sectors and result in economic contractions in
both countries," it said.
Within a few weeks of the disaster, the World Bank said
it was able to make US$1.9 million in emergency funds available
to support the governments recovery efforts.
"The reconstruction efforts are crucial as the hurricane
season in the Caribbean is fast approaching," said Sophie Sir-
taine, World Bank country director for the Caribbean.
World Bank approves funds for St Vincent and St Lucia freak storm damage
faces trouble after
World Cup, election
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