International Political Economy
Economic Policy Strategy on Brazil
International Political Economy
Macroeconomic Risks forBrazil
While there are many factors affecting GDP, which are detailed below, a key risk is the overall growth rate of Brazil. From an investment standpoint, many models are based on history and incorporate the strong GDP growth Brazil has demonstrated for quite some time. Forecasts had previously predicted that Brazil’s growth rate would slow from 7.5% in 2010 to 4% in 2011 (InternationalMonetary Fund, 2012). However, actual GDP growth has been well beneath that. The most recent data shows a relatively modest quarter over quarter growth rate of 0.4%, well below previous forecasts or expectations. There is risk that this could continue.
Another key risk is Government spending on social investment. President Rousseff has a goal of eradicating extreme poverty inthe country and these expenditures have been financed through taxes (International Monetary Fund, 2012). Unfortunately, this money has taken away from possible investments in infrastructure and businesses, and prevents Brazil from quickly tackling its debt. As this spending is politically motivated, there is not a great deal of certainty regarding the level of future social investments. Currently,as a percentage of GDP, Brazil’s spending is nearly on par with Europe, and well above many other regions (International Monetary Fund, 2012).
General Macroeconomic Instability
While Brazil’s performance has been good as of late, one cannot discount general macroeconomic instability as a substantial risk of doing business there. Over the last 25 years, the Brazilian landscape has been marredby hyperinflation, stock market calamities, and debt crises, which have all contributed to a high cost of capital (Elstrodt, Laboissière, & Pietracci, 2007). Another measure of this risk can be seen in Business Confidence, which has slowly been eroding.
Another risk to investing in Brazil is currency devaluation. While the exchange rate to the USD is well offprevious highs set back in late 2002, the currency is beginning to weaken. The Real has recently hit a three year low, and has depreciated about 9.7% this year. Part of this is attributable to a flood of bad loans. The default rate on consumer debt increased to 7.6% in April, which is the highest it’s been since December 2009. Additionally, an investor in Brazil needs to worry that the central bank ofBrazil may actively try to devalue its currency to keep exports competitive. Recently Brazil initiated “reverse dollar swaps” to ease the inflow of cash from the US Federal Reserve’s QE3 policy.
Since hitting its high in 2011, inflation has fallen by over 2 percentage points and is now at around 5 percent. Tax cuts on consumer durables, a slowing economy, and the absence ofsupply shocks and large corrections in prices should further contribute to lower inflation rates. Without a change in policy, inflation will remain well above the original target through 2013. This is extremely likely considering the current regime sees inflation as a threat and is targeting it specifically. Risks to growth and inflation are now balanced. (International Monetary Fund, 2012)Despite the spike, the economy has been able to maintain a 6.4% average interest rate between 1997-2010, and it has not fallen below that average. (The World Bank, 2011)
Regional Dependencies and Competitiveness
Intraregional trade with Argentina has declined sharply. The automobile sector accounts for 10% of industrial production, automobile exports to Argentina have been hit hard by falling...