Bleak outlook for Brazil

By Alex Iszatt

The political confrontation that is occurring over the presidency of the Brazilian people is small fry for the Latin American country as its economy sinks into recession.

President Dilma Rousseff and challenger Aecio Neves have faced off in their first debate since the opening round ballot – ahead of the October 26 elections.

The two contradictory sides aired their grievances publicly. Neves, a centre-right, business-friendly candidate, attacked Rousseff’s economic record and concentrated on divulging corruption within office. Rousseff counter-attacked with her own list of scandal against Neves, including a 16-year-old allegation of a money-laundering.

As dramatic as the run-up to the elections is likely to be, the one thing that either winner will have to address quickly, and efficiently, is the economy.

Miguel Sanchez-Martinez, research fellow at the National Institute of Economic and Social Research (NIESR) said that if “Rousseff wins the current trend will continue, whereas Neves is believed to be more open-market friendly.”

However the idea of getting the country back on its feet through new business and private investments promised by Neves is “ambitious and questionable in the near term” said Sanchez-Matrinez.

“The problems in Brazil are deep-routed and ultimately unrelated to the election cycle.”

Both NIESR and the International Monetary Fund (IMF) have adjusted their outlook for Brazilian economic growth. The latter has lowered the outlook for Brazil’s economic growth for 2014 to 0.3 percent after a previous cut to 1.3 percent in July whilst NIESR has raised its inflation forecast. Sanchez-Martinez said that low-growth and high inflation needs to be addressed to stop “the bottleneck and lift productivity.”

The Central Bank (CB) is under a lot of pressure as it struggles to gain credibility, which it desperately needs to do in order to manage inflation expectations and realise inflation.

Sanchez-Martinez said: “The CB needs to have an independent stance that sends a clear message that it will keep inflation at its target range of 2.5 – 6.5.” It cannot currently lower rates in an effort to support the economy as this would “further erode their credibility and make them unable to control inflation expectations.”

He concluded: “If the government fails to address the problems, it may not recover and a bleak future might materialise.”

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