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Brazil’s economy strangled by high cost of lending
The term ‘BRIC’ was coined in 2001 and referred to some emerging world economies. The ‘B’ was for Brazil – Russia, India and China made up the rest – and it’s an economy that seems to entice and worry investors in almost equal measure.
Brazil is no backwater in world rankings. It is ninth in the world by GDP measure, and in 2012 edged ahead of the UK’s economy for a brief period.
As is often the case, sharp growth was followed by an equally sharp turnaround.
Last year saw GDP shrink by 3.5%, leading many economists to slash their growth forecasts for 2017 to only 0.5%.
Brazil has had its worst two-year recession in more than 100 years. Adding to this bleak backdrop is the cost of lending.
Interest rates are some of the highest in the world. The effective overnight rate for banks is already in double digit percentages; smaller businesses have to pay rates of 20% or more.
With this sort of cost for borrowing, it is difficult to have great expectations for growth in the short to medium term at least.
The political backdrop has been less than helpful too. Last year saw President Dilma Rousseff removed from office and impeached.
The new regime has attempted to rein in some of the excesses of public spending seen previously, so this could be one reason to start seeing the future of the economy with slightly less pessimism.
The forex market tends to be the quickest to react to economic change. Two years ago one US dollar would buy two and a half reais. The Brazilian currency had weakened considerably by the end of 2015 and the dollar was worth more than four reais.
Cutting interest rates
WEAK DATA PROMPTED the ‘aggressive’ Brazilian central bank in early January 2017 to cut interest rates by a larger than expected 75 basis points, writes Schroders’ emerging markets economist Craig Botham.
He says this move rectifies an earlier mistake where the central bank cut rates at the previous meeting by half the level expected by the market.
Since then the Brazilian currency has clawed back some ground. That presents problems in terms of making the country’s exports more expensive than they were a year ago.
Considering all of this, it is difficult to come up with an immediately positive argument for Brazil’s economy this year.
Interested investors may want to keep an eye on quarterly growth figures, to see if this dire recession is coming to an end. A move lower on interest rates would also start to bolster the bullish case.
The foreign exchange market does seem to think that the outlook is better than a couple of years ago. Sadly economies seldom perform immediate u-turns, so any move back to previous glory days is going to take some time for Brazil.