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This report is taken from the KPMG/Irish Farmers Journal Agribusiness report available with next week's print edition
In less than three months, Brazil will host the 2016 Olympics at a cost of $11bn. But with protests on São Paulo’s main street, Avenida Paulista, it seems these games can’t come fast enough for Brazil’s president, Dilma Rousseff.
Just 18 months ago, the Workers Party president, who has a strong emphasis on social programmes, was voted in for a second term. However, since her re-election, Latin America’s largest economy has plunged into recession and Rousseff is now facing impeachment.
In 2010, Brazil was enjoying 7.6% GDP growth, making it the world’s seventh largest economy. But since the previous president Lula da Silva left office six years ago, Brazil has experienced a major economic downturn.
To make matters worse for Rousseff, Brazil is experiencing one of the worst corruption scandals in the country’s history. An investigation of state-controlled oil company Petrobras has seen its stock fall by 60% over the past year, and the company has had to write off $2bn in bribery-related costs.
Brazil was once among the fastest-growing large countries in the world, booming at China-like growth rates. However, in 2015 its economy shrunk by 3.8% and is expected to suffer a further 3-4% contraction this year.
High unemployment and interest rates
Unemployment now runs at about 7% and is increasing, while Brazil’s high interest rate of around 14% is making borrowing costlier to service. And with a large amount of that debt in US dollars, the recent devaluation of the domestic currency means that the amount to be repaid has significantly increased.
There doesn’t seem to be any light at the end of the tunnel for the 200m Brazilians and especially the 55% termed as middle class. According to the Government, if you earn anything from €90 to €300 a month in Brazil, then you’re middle class.
And the recession is projected to continue this year, due to much-needed fiscal adjustment, tighter monetary policy to contain inflation and a lack of investor confidence related to the political uncertainty. Some economists believe that a slow recovery will unfold by 2017 as confidence in macroeconomic policies improves. Right now, this is hard to see.
Shifting economic pillars
So what went wrong? The three pillars supporting economic policy between 1998 and 2006 were strict fiscal targets, an inflation targeting system and flexible exchange rates. This model persistently reduced inflation and interest rates simultaneously, leading to a flexible exchange rate system. The strict fiscal control and economic growth ensured national debt reduction and therefore secured reduced interest rates and increased public and private investments. However, from 2006 onwards, those pillars gradually changed.
The economic policy focused on fostering demand without fostering competitiveness as a whole. It was hoped that this strategy would deliver demand incentives and create a favourable environment for investments, which would, in turn, create economic growth. However, the economy grew only until full employment was achieved and investments never came.
The government is now trying to incentivise consumption and this is fueling inflation which is running dangerously close to double digits (9.93%) – something Brazilians are all too familiar with having seen inflation spiral and reach an annual level of nearly 5,000% at the end of 1993. This was curbed by the introduction of a new currency, the real, in 1994 and by 1998 inflation rates fell to a low of 2.5%.
Red tape, poor infrastructure and a strong currency (up to now) have rendered much of the economy uncompetitive. Therefore, consumers have been the main source of demand. A low unemployment rate has pushed up wages. In the past 10 years wages in the private sector have grown faster than GDP (public-sector workers have done even better). That allowed consumers to borrow more, which encouraged still more spending.
Inflation rates
In order to keep inflation rates from rising further, economic policies are keeping prices of various products under government control, such as electricity and petrol, artificially low.
Coupled with this, its currency crashed to an all-time low against the dollar last autumn on concerns over the fiscal management and political uncertainty. In the past, one US dollar bought BRL2.5, today it buys BRL4. As the largest producer of sugar cane and the second largest producer of cattle and soya bean in the world, this is boosting exports from Brazil and farmers are feeling the benefit. But it is making everything from clothes to fertiliser and machinery, which must be imported, much more expensive.
Brazil is South America’s largest country, with only Russia, Canada, China and the US larger in terms of size and what happens there clearly affects the global economy.
The country’s plans for the next decade may not just depend on the economic policy adopted over the next five years, but is more likely to depend on whether Rousseff will still be in power in three months' time.
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