How can Brazil reboot its economy?

Economic growth
Macroeconomics - Economic growth - Monetary Policy

Brazil should have so many reasons to celebrate. As the B in BRICS, it has long been a model of what an emerging economy can achieve and 2016 is a landmark year as the country hosts South America’s first Olympics.

But there is very little party atmosphere. As Brazil’s President Dilma Rousseff addressed the opening session of Congress on February 2, she had to focus instead on the twin problems of the economy and the Zika health scare.

What’s the problem with the economy?

Brazil’s recession deepened last year into what economists say is the country’s worst economic crisis since the Great Depression.

Gross domestic product shrank 4.5% in the third quarter from a year earlier, the biggest contraction since Brazil started measuring GDP by the current standard in 1996.

Source: Brazilian Institute of Geography and Statistics

The International Monetary Fund sharply downgraded Brazil’s outlook when it issued its latest world economic forecast. The IMF now expects the economy to contract by 3.5% this year, compared to an earlier forecast of 2.5%.

At close to 70% of GDP, public debt is large for a middle-income country and rising fast. Because of high interest rates, the cost of servicing it is around 7% of GDP.

Is this unique to Brazil?

Brazil’s situation partly reflects the problems all emerging markets are going through as global investors assess their portfolios in the wake of the US Federal Reserve’s decision to raise interest rates.

Brazil has been hit especially badly by sharp falls in the price of oil and other commodities. A series of political crises has knocked the government of Dilma Rousseff, which has also shaken investor confidence.

On December 16, Fitch became the second of the three big credit-rating agencies to downgrade Brazil’s debt to junk status.

Among 41 countries whose performance was measured by the OECD, Brazil’s manufacturing productivity is the fourth lowest.

The country ranks 75th in the World Economic Forum’s Global Competitiveness Index 2015/16.

What’s the government doing about it?

On Tuesday, Dilma Rousseff asked Congress for support for a new tax, known as the CPMF, to be levied on every financial transaction, including retail purchases, cash withdrawals, and money transfers between individuals and companies. President Rousseff told legislators “We will work for this new system to take effect in 2017.”

The President said the tax would help increase revenue in the short term while the government works on other long-term changes to make Latin America’s largest economy fiscally sustainable. She asked for Congress’s support to give Brazil, “higher levels of justice, solidarity and equality.”

Speaking at The World Economic Forum’s Annual Meeting in Davos in January, Brazil’s Finance Minister, Nelson Henrique Barbosa-Filho, insisted that the government was now committed to implementing a radical programme of fiscal reform coupled with long-delayed infrastructure reforms that are intended to make the economy more competitive.

How is Zika impacting the country?

The Zika outbreak presents a huge challenge for the authorities. The World Health Organisation has declared the outbreak an international emergency due to its link to thousands of birth defects.

Brazil has reported some 3,700 suspected cases of microcephaly. Brazilian Health Minister Marcelo Castro says the epidemic was worse than first believed because in 80% of cases the infected people had no symptoms.

President Rousseff told congress her government will not spare any resources in fighting the disease, "There will be no lack of funding.”

Brazil has won the war against the mosquito before. Following major eradication efforts to prevent the spread of yellow fever, also carried by the Aedes mosquito, it was declared free of this type of mosquito in 1958. But the effort faded and the insect returned from neighbouring countries.

This article was originally published on the World Economic Forum Blog, on February 3, 2016.

Share this