The Strategist

Brazil: A Long Way to Recovery

09/28/2015 - 15:14

There is a long way to recovery from the recession for the Brazilian economy, and it is not even about the weakening of the currency or other economic problems.

The continuing devaluation of the real, the outflow of capital, falling consumer and business confidence - all this can be forgotten. Much more serious problem will interfere with recovery even against the background of improvement in all of the economic aspects.

It is about doing business in Brazil. Perhaps the entrepreneurial spirit of the Brazilians is not going to be broken, yet now it is very difficult to make dreams come true. The fact is that it takes 83 days to launch a new business in this country - 16 times more than in the US and nearly 3 times greater than in China and India.

Thus, the problem is clear - the strong bureaucracy that discourages all desire to do business. Mind this, we still do not know what additional obstacles for business officials can build – likely, there is more than enough of them as Brazil has been notorious for its corrupt public sector.

We also still have not heard anything about reforms that could really change the current situation, and without them, any positive developments are hardly possible.

In addition, growth in hydrocarbon prices could not help the economic situation: too many problems. Brazil, in addition to raw material prices, is highly dependent on China, which is the country’s largest trading partner. China's economy is now experiencing its own problems, and as a result, demand from China drops.

The weakening of the real does not add anything good to the Brazilian economy too; the rather weak currency only exacerbates the situation. Prices for imported goods are rising, whilst consumption and consumer confidence are falling.

According to a Research Foundation Getulio Vargas, consumer confidence index in Brazil fell to 80.6 points in August from 82.0 points in July.

The real has been falling against the dollar from around the middle of last year, but in 2015, the fall accelerated and at some point became frightening. Last week, quotes of the pair USD/BRL updated regular highs and reached the level of 4.20, but then, by verbal interventions, the Central Bank of Brazil managed to somewhat cool the ardor of speculators.

In fact, experts do not expect a long-term strengthening of the real. For this, the Brazilian monetary authorities have to resort to very serious spending, which will ultimately negatively affect consumers once again.

One can recall the experience of previous years, when the Central Bank of Brazil was trying to stop the decline of the real through intervention, high interest rates and foreign currency repo auctions, but it gave only a temporary effect.

Now analysts are not predicting a rate hike, yet there are experts who believe that the market will still force the authorities to do something.

The only way to provide long-term support of the real is to restore the faith of investors in the government's ability to conduct real effective reform.


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