No plan B for the brazilian economy

The Brazilian economy is in dire straits. However, if the government moves forward with fiscal austerity, the economic and political crisis can be overcome, thinks portfolio manager Daniela da Costa-Bulthuis. Crumbling political support could certainly still throw a spanner in the works though.

For a long time Brazil was a success story within the group of emerging economies. High economic growth was accompanied by declining poverty and less income disparity. The country developed into the world’s seventh largest economy and featured prominently in the BRIC grouping (Brazil, Russia, India and China): large countries with rapid economic growth.

But after 2010 the growth slowed. Excessive government interference in the economy, low investment levels and falling commodity prices started to affect the Brazilian economy. Recently the country slipped into recession. And, despite efforts by the central bank, inflation now stands at 7.7% – the highest level since 2005.

Structural weaknesses

As a portfolio manager who invests in stocks in emerging markets, Daniela da Costa-Bulthuis is closely following developments in her country of birth. “A poorly functioning tax system, bureaucracy coupled with corruption and an inflexible employment market are putting a brake on corporate investment and limiting productivity,” she says. “These structural weaknesses were camouflaged during the commodity boom. But now they are impacting growth and, in addition, there are immediate problems that need to be addressed. Pursuing the wrong policies has led to increases in government debt – which now accounts for over 60% of GDP. And the debt ratio may rise further if the budget deficit is not curbed.”

But it’s not all gloom and doom. Da Costa-Bulthuis highlights the strong aspects of the Brazilian economy such as its diversified nature and the deeply rooted democracy. She is also positive about the new Minister of Finance, Joaquim Levy. “He is pursuing a good policy to restore confidence; his measures are orthodox,” she says. “He is cutting government spending and increasing taxes. A problem, however, is that these measures are meeting resistance from the population. There is considerable dissatisfaction with the government because of the economic situation and corruption scandals. The President is not delivering what she promised during the election campaign. Her electorate feels betrayed.”

Economy can still recover

During last the election campaign, President Dilma Rousseff warned that if the plans of the neoliberal opposition were implemented, then full employment, higher wages and more generous benefits would all be jeopardized. But now, after her re-election, unemployment is rising and more and more consumers are troubled by high debt.

Da Costa-Bulthuis sees the political crisis as the most significant risk factor for a more positive scenario. “If Brazil overcomes this difficult period, the economy can recover next year. But the situation is fragile", she says. “The fraud scandal at oil company Petrobras is detrimental for the government. Let’s hope Rousseff doesn’t give in to the pressure and leaves Levy to get on with his job. There is no plan B – the government has to deal with the situation as it is.”

“The current situation can be compared to a blanket that is too small – pull it up and your feet stick out. But if you want to keep your feet warm, your top half gets cold. Rousseff can’t pander to public opinion and pursue the right policy at the same time. Short-term visibility is low. Which path will Brazil take?”