As a corruption scandal rumbles on, Brazil struggles to emerge from recession. Where's a commodity boom when you need one?by George Magnus / June 6, 2017 / Leave a comment
Read more: Brazil—the trapped country
Where’s a decent commodity price boom when you need one? This question may be on the minds of a number of Brazilian politicians, as well as investors, as the country struggles to emerge from its deepest ever recession, and the deadweight of a long-running corruption scandal hovers over President Michel Temer. You may recall that he took over from Dilma Rousseff last year, after she was suspended, pending impeachment proceedings. When the Brazilian Senate voted overwhelmingly to impeach last summer, she was forced step down, leaving Mr. Temer as President until the next scheduled elections in 2018. So, is Brazil out of the woods, finally?
Last week, the statistical authorities announced that Brazil’s GDP had grown by 1 per cent in the first quarter of 2017, compared with the previous quarter. This was the first positive reading since 2014. In 2015, the economy shrank by 3.8 per cent, and in 2016 by 3.6 were cent. On the face of it, this was indeed a shot in the arm, and it followed a year in which Brazil’s financial markets have been on good form. The Bovespa equity market index rose by 80 per cent from depressed levels in January 2016 until mid-May this year, and the Brazilian Real rose by 22 per cent from January last year until October, before stabilising.
Markets were buoyed by the change in political leadership, in spite of the widespread reach of the corruption scandal’s allegations—including to the new President. Yet, he promised to crack on with budgetary reforms, including a 20-year freeze on inflation-adjusted public spending, and overdue pension system and retirement age reforms. He also vowed to remove business red-tape and bureaucracy, sell off infrastructure assets, revise bankruptcy legislation, and open up Brazil’s oil sector to foreign investors.
You can understand, then, why government ministers and the central bank greeted the first quarter’s GDP report with such enthusiasm, claiming the worst is over for the economy. The governor of the central bank went so far as to opine that by the end of 2017, the economy would be back on a 3 per cent growth path. Unfortunately, this looks hugely optimistic. Brazil’s best hope is…