Almost a decade ago, Goldman Sachs’ Jim O’Neill labelled Brazil, Russia, India and China as the future powerhouses of economic growth. In 2013, however, Morgan Stanley shattered this notion by deeming Brazil as one of the “Fragile Five” nations in regards to its stance towards the Dollar and precarious domestic performance. Many argue that the primary culprit is the QE tapering by the Fed, which has caused anxiety amongst large international institutional investors and prompted a large-scale flight of funds.
Brazil and the “Fragile Five”
Guido Mantega, Brazil’s Finance Minister, has openly expressed his disagreement towards comparing the financial conditions of Latin America’s largest economy to the current situations in Turkey, South Africa, Indonesia and India. Despite his nationalistic views, do his arguments truly hold when taking into account the current macroeconomic condition of Brazil?
Brazil has experienced a very troubling fiscal year in 2013. This was a product of the President’s decreasing popularity, incessant national violent protests, a hard-hitting depreciation of the Real, and the fulminous deterioration of Eike Batista’s interconnected empire, EBX.
In 2014, however, the story seems to have changed – at least to a minor degree. Having been lulled by the fireworks on New Year’s Eve, and mesmerised by the upcoming Carnival and World Cup, the Brazilian economy entered 2014, as would have an Olympic sprinter with a twisted ankle. Consumer sentiment rose and the IBOVESPA briefly picked up as the national equities market began to gain international support. The decline of the Real made it cheap for foreign organisations to acquire undervalued assets, and talks regarding the “Pre-Sal” oil and gas gained momentum. As Brazil progressed through the first quarter, nevertheless, volatility and uncertainty took over and unfavourable conditions caused the market to endure another bout of stagnant growth and declining returns.
On February 26th, the Central Bank announced a 0.25% increase in interest rates, from 10.50% to 10.75%. This was simultaneously met by declines in the IBOVESPA as economists cut growth forecasts. Moreover, after excruciatingly poor harvests, the weather patterns began to improve, but with little effect. With 15% of the Brazil’s Arabica destroyed and several other key crops compromised, global markets saw sugar and soy hit record highs, leaving Brazilian exporters with an impoverished and limited supply.
On a more positive note, IBOVESPA climbed 5.3% on February 27th, the highest jump amongst all major indexes. The rise was prompted by bullish movements on behalf of Vale, Brazil’s largest mining corporation, and was reinforced by the sale of Batista’s MMX to Gazit-Globe, Israel’s largest Real Estate Investor. The feeling of euphoria was quickly diminished, nevertheless. On March 1st, Brazil posted the widest budget deficit in four years, prompting an immediate decline in the Real, and outshining recent positive earnings figures.
Stating that the Brazilian Economy is in decline would be an exaggeration, though it is undeniably facing many challenges. With the majority of Eike Batista’s corporations having been acquired by Vulture Funds, and the nations’ GDP growing at twice the expected rate, this could be the turnaround that Dilma Rousseff has been longing for. The extent to which this will hold will depend heavily on how the country manages its over-reliance on the Dollar, and how politically composed it remains until October’s elections.
Brazil has reached a critical stage. The elections, the World Cup and the Olympics are all great opportunities to show the world that it is still Latin America’s sovereign leader – both in influence and in economic potential. Altogether, this shows that Mr. Mantega is incorrect in dismissing Brazil’s status as a vulnerable economy. An important part of the recovery will be to admit that even a small slip up could leave it crippled before it completes the first lap.
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