Brazil: moving in the wrong direction

By Artur Salles Lisboa de Oliveira, writer for Exame

Brazil Flag time bomb

The Brazilian economy benefited significantly from the commodities boom throughout the 2000’s, allowing it to keep a strong inflow of capital which led to rising reserves and currency stability.

Despite these favourable conditions, authorities didn’t succeed in promoting economic growth by addressing crucial issues such as infrastructure bottlenecks, high energy costs and excessive bureaucracy. Instead of tackling these aspects, the government exhibits a strong inclination to replicate the failing policies of Brazil’s South American neighbours.

First of all, there are many reasons for the under-performance of the Brazilian stock market (Bovespa) in comparison to the counterparts in the United States, Europe and Asia. The failure of the billionaire Eike Batista, whose oil company shares dropped from 20 real (approximately 8 dollars) to a couple of cents in the end of 2013 is a reliable portrait of the sentiment of investors in Brazil.

Secondly, the Brazilian government made a political move back in 2012 to use the public banks (Banco do Brasil and Caixa Economica) to reduce interest over loans so that the private ones would be forced to take similar actions. However, it proved a failure as the risk of inflation made the Central Bank raise the interest rate in order to keep prices from rising a couple of months later.

Another key point is the use of the state-owned oil company Petrobras as a tool to stop inflation from getting out of control, especially in such a delicate year in which Brazil will hold the Word Cup and Brazilians are likely to rally on the streets to claim better standards of living. By keeping Petrobras from adjusting internal gas prices to international trends, the government is leading a vast reserve of opportunities – estimated in over 50 billion barrels of oil – to bankruptcy.

The political majority of the government in both chambers of Congress basically relies on favours so that the slightest discontent from other parties ends up causing an upheaval. The outcome of which is likely to have major effects regarding the approval of bills in the Legislative. As a result, millions of people depend on the state to get paid, pushing public indebtedness up to undesirable levels.

As Brazil sets the stage to hold elections in September amid the dissatisfaction of some segments of the population in relation to education, health care and transportation, the opposition parties are gaining political momentum which may topple President Dilma Roussef. Thousands of Brazilians are expected to rally on the streets during the World Cup in order to protest against the huge amounts of money spent on magnificent stadiums while the heart of the country suffers. Icing sugar on an otherwise corrupt cake.

In conclusion, in the face of a historical lack of commitment to cutting public expenditure to allow the interest rate to remain stable and the lack of investment in infrastructure such as ports, roads and airports to make our exports more competitive worldwide, the government seems to be more focused on sending support to the president of Venezuela Nicolas Maduro than move the Brazilian economy forward.

Leave a Reply