Our Opinion: 2015
Brazil : under new management
Not long ago Brazil was a favourite with foreign investors, but now things look bleak. The Financial Times recently reported that Brazil is facing its worst recession for 25 years.
In the first quarter of 2015, the economy contracted by 0.2%, or 1.6% year-on-year. Unemployment is at a four-year high, real incomes are falling and consumption declined on an annual basis for the first time since 2003.
A severe drought has helped boost inflation to an 11-year high of 8.5%, electricity prices have surged since most energy comes from hydro-electricity, now starved of water.
The government’s inflation target is 4.5%, so analysts expect the central bank to tighten monetary policy further, even though the economy is already floundering. The government also overspent in the last few years, notably on wasteful subsidies. A huge corruption scandal at Petrobras, the state-owned oil major, has compounded the crisis.
However, there are signs that the administration is “beginning to restore the economic credibility” it squandered in the past few years, says The Economist. The Brazilian Congress recently voted through cuts to welfare spending, which should save $2.6bn in 2015.
A small primary budget surplus is expected this year, which should placate the credit-rating agencies and enable Brazil to retain its investment-grade rating. According to Marcelo Carvalho of BNP Paribas said “this is Brazil under new management.”
But the new management still has plenty to do. Key problems include an enterprise-crushing tax system… and antiquated labour laws. Brazil also suffers from poor infrastructure following on from years of poor investment. Still, it’s encouraging that policymakers have started to get their act together, while the stock-market remains reasonably valued. That implies plenty of long-term upside if further sensible moves are forthcoming.
Brazil is also a major exporter of agricultural commodities, which MoneyWeek believes are in a structural bull market, and a young population also bodes well for growth; 60% of Brazilians are under 29.
The investment managers we work with are beginning to increase exposure to Brazil as part of overall investments in Latin America and emerging markets.