The economical and political tsunami that struck the Brazilian economy after the Petrobras scandal might be starting to lose strength with the tight new measures that Dilma Rousseff’s administration is taking. However, while exporters seek to capitalize on the Real’s devaluation, Brazil continues to face significant headwinds.
Brazil’s economy was rocked by the fallout of the Petrobras scandal, devaluing the Brazilian Real and leading to significant uncertainty. With this devaluation, however, some sectors are seeing benefits that will affect economic performance as a whole. For instance, exporters are finding themselves more competitive than they used to be, with the American dollar being exchanged above the R$ 3 bar.
The devaluation of the Real seems to be a way in which Dilma Rousseff’s administration is trying to inject a dose of strength into the economy. Last year’s poor economic performance resulted in 0% GDP growth, let alone high inflation.
High inflation rates are a common continental blight in Latin America, with Brazil being no exception. After Venezuela and Argentina, Brazil has the highest inflation rate in South America.
Inflation has been under control for quite some time, averaging close to 5.3 percent over the last nine years. In February 2015, however, the inflation rate rose to 7.7 percent year over year, indicating that the Brazilian economy is not in great health.
With the new exchange rate, Brazilian exporters are once again able to play a larger role in the U.S. market. This window of opportunity is important, as historically, the lack of price competitiveness among Brazilian exporters has seen the American market closed to them. According to the head of the Brazilian International Commerce Association, José Augusto de Castro, the new challenge nowadays is to get other countries to demand Brazilian products.
At the same time, the fiscal adjustments implemented by the Brazilian government will have painful impacts on those sectors that once benefited from public spending. Specifically, Rousseff is trying to stabilize things with higher taxes and tighter control over social assistance schemes. This in response to what currently are two of the biggest silent threats for Brazil: inflation and recession.
On Friday, the IMF reduced its 2015 growth forecast for the region, especially for Brazil, anticipating a 1 percent contraction. According to the IMF, Brazil will face such a contraction due to the lack of a plan to attack existing competitiveness issues, as well as the possibility of water and electricity shortages alongside an ever-growing fiscal deficit.
Adding to Brazil’s woes, problems also exist with Brazilian interest rates. Currently, the Central Bank is not able to fully control inflation, even though interest rates have already been adjusted. The Central Bank is facing a situation where if they choose to increase interest rates to combat inflation, they could accelerate recession in the short term.
This slew of troubles has placed Brazil in a highly compromised position. Government failings aside, Brazil’s actual state of affairs could even be worse.
Since last November, not a single company in the country has been able to shift debt abroad or get money from foreign investors.This contemporary crisis is complemented by the fact that Brazil’s reputation as a flourishing market has been under question in the international community since 2012.
Dilma Rousseff is experiencing fading support on the heels of winning presidential elections last year. Her support could fall further if the chaos unleashed by the Petrobras scandal results in large scale job losses, or if inflation grows out of control, miring Brazil in an Argentina-esque situation.