Last week Standard & Poor’s downgraded Brazil’s credit rating to “junk” status, putting a serious dent to the hard work Brazil has done in the last 15-20 years to earn its investment grade status in 2008. A worrying question for the short-term is: How soon will Fitch and Moody’s follow suit with downgrading Brazil to junk status? And how much will that add to Brazil’s woes? The outflow of money from investment funds focused on Brazil will accelerate with the downgrading of one more ratings agency.
The more long-term question is: Where does Brazil go from here? With President Dilma Rousseff’s approval ratings languishing in single digits and likely to remain there until the end of her term, and almost at war with Congress, the President’s hands are tied. Appointing Joaquim Levy as Finance Minister at the beginning of Rousseff’s second term was seen as a positive move by investors, thanks to his business-friendly economic outlook counter-balancing the more interventionist leaning of the ruling PT. However there have been tensions between Levy’s economic plan and the Government’s plans, leading to rumours Levy will resign from his position.
Brazil’s history of economic chaos in the last 30 years suggests Brazil could go through a worrying era of stagflation, low economic growth combined with high levels of inflation (currently at 9.5%) and increasing unemployment. The worry is that the situation will worsen and Brazil will experience some form of economic meltdown as it did in the late 80’s/early 90’s.
There can be some cause for optimism with Brazil’s long-term future. Whether Rousseff is ousted or not, serious reform and development is needed. Brazil’s reliance on commodities exports to the likes of China helped fuel economic growth and bolster Brazil’s reserve currency levels. Now that is over, and Brazil must shift and promote themselves to a wider audience. The country possesses a wide industrial base and growing technology and service sectors, the potential is there for Brazil to regain the path to sustained growth. A recent event at the London Stock Exchange promoting cross-border investments between the UK and Brazil highlights this, with leading Brazilian private-sector banks helping Brazilian firms issues shares on the LSE to attract a wider investor base and grow investment in Brazil.
Yet that is only the beginning, and more can be done. Charles de Gaulle once remarked,
“Brazil is the country of the future, and always will be”
Can Brazil finally do what it needs to prove him wrong 50 years later?