Brazil’s Economy – Desperation

I have a friend in Brazil who tried to send herself a package with cloths, the value of which was maybe $100 dollars. The Brazilian government tried to levy a tax of $1563 reais ($350 dollars). At both the small scale, personal level, and at the macroeconomic level, I am afraid that Brazil has become a joke. Serious people, my friends from Harvard, Stanford, and Jesuit schools think that Brazil is shorthand for corruption, mismanagement, and outright stupidity, with a population so uneducated that almost every simple job requires 3 or 5 Brazilians, just to make work for the uneducated masses. Here, the President of Brazil shows where the money that the Brazilian government tries to collect is going — to pay for the primary deficit in the budget. Is it any wonder that so many Brazilians with any money are putting it in American banks, or sending their children to America or Europe for extended educations?

Brazil’s economy

Desperate times, desperate moves

Beset by dismal economic data, Dilma Rousseff tosses Congress a challenge

WHEN a president has single-figure approval ratings, faces calls for her impeachment, and has lost control of her political base, is she in a position to play hardball with the country’s legislators? Brazilians will soon find out.

On August 31st Dilma Rousseff, their president, sent Congress a budget for 2016 with a gaping primary deficit (before interest payments) of 30.5 billion reais ($8 billion), or 0.5% of GDP, challenging its members to close the gap. It was a break with the sound-money practices that have underpinned Brazil’s economy. It was, some critics say, illegal. Certainly nothing similar has happened since at least 2000, when Fernando Henrique Cardoso, then the president, transformed public finances.

On a charitable view, Ms Rousseff was shocking legislators into making hard decisions rather than simply blocking her fiscal proposals. A harsher reading is that she does not know how to lead Brazil out of recession. The markets took that view. The day after the budget bombshell, the Ibovespa stock index fell over 2% and the currency closed at 3.7 per dollar, its lowest since December 2002.  On September 2nd, the central bank held steady a key interest rate it had been raising since last year.

Public finances have already deteriorated this year. Having originally planned a primary surplus of 1.1%, in July the government cut that target to just 0.15%, as interest rates rose and tax receipts fell. The total deficit this year will be 8-9% of GDP. In August Moody’s, a rating agency, cut its assessment of Brazil by a notch to just above junk status. It hinted at worse to come by calling the latest news a sign of “the fiscal challenges that Brazil continues to face”.

The risk of a downgrade is one reason for the pessimism which, some pundits think, is now the prevailing mood in the corridors of power. “The government is basically throwing in the towel,” says Alberto Ramos, an economist with Goldman Sachs, an investment bank.

Ms Rousseff is in a tight corner. She issued her budget after scrapping a plan to reinstate a tax on financial transactions that would have brought in 80 billion reais in 2016. She retreated after her vice-president, Michel Temer, rejected the idea and told her Congress would block it. Several opposition figures say that, far from finding a way to make Congress do homework, the president has broken a fiscal-responsibility law enacted in 2000 as part of an effort to mend Brazil’s finances after decades of chaos. They say they may take her to court.

On this point, the president may be right. Mansueto Almeida, an economist who is critical of Ms Rousseff, says that though the law requires the executive to show how its spending will be funded, it allows a rise in debt. Júlio Marcelo de Oliveira, a prosecutor for the Federal Court of Accounts, agreed that the president, whose alleged budgetary misdeeds he has previously investigated, acted legally this time.

Legal or not, the president’s move weakens her American-trained finance minister, Joaquim Levy, who was reported to have lobbied for further spending cuts and was a reassuring figure for markets. Ms Rousseff has consistently failed to hit economic targets since being elected in 2010, but in the early days she dodged the political flak. Many people blamed her then finance minister, Guido Mantega, who was known for over-promising. Replacing him with Mr Levy was supposed to fix that problem; his loss of face bodes ill.

To restore credibility, Mr Ramos argues, the government needs to end up with a primary surplus of 3.0-3.5% of GDP. Simply stabilising the debt-to-GDP radio is not good enough, he says: it is already too high. At a minimum, tough horse-trading with Congress looms. Renan Calheiros, the president of Brazil’s Senate who has had several rows with Ms Rousseff this year, said on September 1st he would not send the budget back to her, as many opposition people want. “It is up to Congress to improve it,” he accepted. And on any fair assessment, Congress shares a lot of blame for Brazil’s economic woes; for example, it neutered many of Mr Levy’s better ideas.

Is there any way out? It looks unlikely that tax rises can be avoided: about 90% of the budget is ring-fenced, leaving little discretion for spending cuts. If the government were strong and confident, it might acknowledge the need for a short-term rise in debt while seeking ways to limit spending on pensions, health and education, and laying out a long-term plan to restore fiscal health. But pushing such reforms through Congress would take political will and capital, and this was not done during Brazil’s boom years when it would have been easier. Now, says Mr Almeida, “We are paying for all of the mistakes [of] the past five years.” The mystery, he adds, is why Brazil has not lost its investment grade already.

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Standard & Poor’s demote Brazil’s debt to junk status; Petrobras, not Investment Grade

The Economist has this piece out, today. I must ask, is it just my impression, or are many wealthy Brazilians actually out of the country, trying as hard as possible to give birth in America, etc.?

“Petrobras, the state-controlled energy firm which is also at the centre of Brazil’s biggest-ever corruption scandal, earned another dubious distinction as the world’s largest company without an investment-grade credit rating.”

Brazil’s sagging economy

Recession’s sharp bite

The shrinking of a once-vibrant economy is shocking ordinary folk as well as number-crunchers

JOB centres are rarely upbeat places. In Brazil, where they are often a last resort for those who lack the personal connections that lubricate much of life in the country, they can be particularly bleak. Francisco, a 54-year-old driver queuing at one in downtown São Paulo, has had no work for over two years. The lines have never been longer, he sighs. “It’s the crisis.”

Brazil’s growth has been anaemic for years. It averaged 2% a year during President Dilma Rousseff’s first term in office from 2011 to 2014—despite booming global demand for the country’s soyabeans, iron ore and oil. Government meddling with the private sector, combined with excessively loose monetary and fiscal policy, sapped confidence; investment dried up and inflation soared. Without the crutch of high commodity prices, GDP has now collapsed (by 1.9% in the second quarter of 2015, compared with the first), pulling the hitherto resilient labour market with it.

Nearly 500,000 jobs have been cut since January. Researchers at Fundação Getulio Vargas, a business school, reckon another 2.5m will be shed before the end of 2016. Unemployment rose to 7.5% in July, from 4.9% a year earlier—the fastest annual rise on record (see chart 1). It is expected to hit roughly 10% at the end of next year, and stay there for some time. Speak to Brazilians and it is hard to find anyone without a friend or family member on the dole.

From flophouses to boardrooms, moods darkened further in the wake of the decision last week by Standard & Poor’s to demote Brazil’s debt to junk status, following Ms Rousseff’s inept efforts to cast onto an unco-operative Congress the responsibility for balancing the budget. The rating agency subsequently downgraded dozens of big Brazilian companies, including several large banks. Petrobras, the state-controlled energy firm which is also at the centre of Brazil’s biggest-ever corruption scandal, earned another dubious distinction as the world’s largest company without an investment-grade credit rating. At the start of the year Petrobras accounted for about one-tenth of total Brazilian investment; now it may need to trim its capital expenditure by even more than the 40% it announced in June.

S&P’s decision mainly reflected pre-existing worries about the Brazilian economy. Neither the stockmarket nor the real—down by 30% against the dollar since January—nosedived in the days after the announcement; this suggested that a return to junk status had largely been priced in. But the news has certainly added to the gloom. Already-high borrowing costs for both the public and private sector will rise, and with them the risk of further downgrades. Pension and mutual funds that can only hold investment-grade assets will offload Brazilian bonds at a brisker pace, in anticipation of similar moves by Moody’s and Fitch. (Typically, two of the big three rating agencies need to slap a “junk” label on a country’s bonds before such funds are obliged to divest.)

This will not cripple the Brazil of today, with its diversified economy and plump foreign-exchange reserves, as it might have in earlier, more chaotic times. Ilan Goldfajn of Itaú, a big Brazilian bank, expects net inflows into Brazil’s capital markets to bottom out at $10 billion in 2016, down from $45 billion in 2014.

But divestment will make it harder for Brazil to shake off its worst recession in decades. This week analysts polled by the Central Bank once again once took an axe to growth forecasts (see chart 2). The OECD, a rich-country club, thinks GDP could shrink by 2.8% this year and 0.7% next. A weaker currency has stoked inflation, which the Central Bank has been trying hard to quench with (contractionary) interest-rate rises. This has failed to boost exporters much—leaving aside Brazil’s hyper-competitive farmers. Few expect growth to rebound before 2018, when the next presidential election is due. Income per person, which peaked in 2011, may take longer to recover.

Since disavowing the interventionist policies of her first term, Ms Rousseff has tried, unsuccessfully, to pick a path between fiscal orthodoxy, championed by her finance chief, and stimulus demanded by her planning minister and many in her left-wing Workers’ Party. To appease the former camp, on September 14th the government presented another set of belt-tightening measures worth 65 billion reais ($17 billion), including a pay freeze for some public servants and a controversial tax on financial transactions.

Just like the government’s earlier efforts, these look half-hearted: insufficient to repair public finances and unleash a spirit of exuberance, but more than enough to enrage Congress, over which the increasingly unpopular president has no control and where a movement to oust her is gaining steam. Ms Rousseff is clinging on to her job for the time being. Many ordinary Brazilians have not been so lucky.

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Brazil’s policymakers have stuck their heads in the sand. -The Economist

Brazil’s disastrous budget

All fall down

Brazil is in an economic hole—and still digging

PLENTY of countries run deficits. And when recessions occur, loosening the public purse strings makes sense for many of them. But Brazil is not most countries. Its economy is in deep trouble and its fiscal credibility is crumbling fast.

The end of the global commodity boom and a confidence-sapping corruption scandal, after years of economic mismanagement, have extinguished growth. Brazil’s GDP is expected to contract by 2.3% this year. Fast-rising joblessness, together with falling real private-sector pay and weak consumption, are squeezing tax receipts. Meanwhile rising inflation, allied to a free-falling currency, means investors demand higher returns on government debt. The result is a budgetary disaster. This year a planned primary surplus (ie, before interest payments) has vanished. Once interest payments are included, the total deficit this year is projected to be 8-9% of GDP.

Faced with the prospect of public finances slipping out of control, Brazil’s policymakers have stuck their heads in the sand. The 2016 draft budget sent to Congress this week by the president, Dilma Rousseff, builds in a primary deficit for the first time in the post-hyperinflation era (see article). The very legality of a budget with a primary deficit has been questioned: a fiscal-responsibility law passed in 2000 has long been interpreted as banning spending that outstrips receipts. But whatever the legal debate, the budget is calamitous.

First, Brazil would have to borrow to cover all its interest payments—a risk for a country with by far the highest real interest rates of any sizeable economy, at a time of recession and wider emerging-market jitters. Second, a primary deficit sends a bleak message about Brazilian economic management. Since the turn of the century Brazil’s government has been guided by three principles: a credible inflation target, a floating currency and primary surpluses, ideally large enough to bring public debt down. This “tripod” allowed it to move away from its hyperinflationary past, convinced ratings agencies to grant it an investment-grade badge and underpinned growth that propelled millions out of poverty. All this is now in jeopardy.

Ms Rousseff is not the only one to blame. She had hoped to run a primary surplus, despite the recession, by resurrecting a tax on financial transactions that was abolished in 2007. But her political weakness put paid to that plan. At just 8%, her public-approval rating has hit depths unplumbed by any previous Brazilian president, undermining her authority in Congress. Lawmakers are also angered by her finance minister’s attempts to rein in pork-barrel spending, and alarmed by a wide-ranging investigation into corruption at the state-controlled oil giant, Petrobras. Knowing that the new tax would be unpopular—and hoping to weaken Ms Rousseff further—they made it clear that they would block it.

Congress, Ms Rousseff’s advisers say, must now find a way to pay for the spending it refuses to cut. But it is stuffed with short-termists who are more concerned with lining their pockets than securing Brazil’s future. Many, both in the opposition and among her supposed allies, are wasting their energy trying to impeach Ms Rousseff, rather than finding a way to fix the budget. Unless this impasse is resolved quickly, business and consumer confidence will fall further and foreign investors will pull out. Brazil will be headed for a multi-year slump and a ratings downgrade.

Heaven can wait

So how might Brazil reach a primary surplus? By far the best solution would be to cut public spending, which accounts for more than 40% of GDP, much more than in other middle-income countries. Ms Rousseff has scaled back some discretionary spending, for example by promising to merge some ministries. But the 2016 budget includes plans to raise the minimum wage and many welfare payments by a whopping 10%. Congressional gridlock and a constitution that is chock-full of unaffordable spending commitments mean that only rarely have Brazilian governments managed to trim outgoings—and only under presidents endowed with remarkable political and leadership skills. Ms Rousseff falls far short of that ideal.

That leaves the sticking-plaster. The proposed financial-transaction tax would be, like so many Brazilian taxes, poorly designed and hard on growth. But it would still be better than ramping up spending with no way to pay for it. If not this tax, then some other is needed—and after that, the business of reforming Brazil’s greedy and profligate government.

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Brazil on the World Economic History Congress (Kyoto 2015)

Economic historians from around the world met in Kyoto from 3 to 7 of August. As a major event, it is a good thermometer on what is driving the attention of the academic community. How did Brazil do?


Openning cerimony

Taking an objective approach, we realize that Brazil leads the interest in Latin America, as it would be expected but is far behind the other BRICs. Let’s see.

Brazil was the subject of 17 papers. Comparing with other countries in Latin America, Brazil was on the top of the list. Mexico came second with 10 papers and Argentina was subject of 9. However when comparing with the BRICs, Brazil falls way behind. As it could be expected, China leads, with 67 papers. India follows with 43 and Russia with 24.

Papers talking about Brazil in comparison with other countries (Latin America and BRICs)

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What period did they talk about

Most papers chose the 20th century but the interest in the 19th century was also remarkable. Subjects of this period were: slavery, sugar, the introduction of statistics science and the impact of German immigration in education.

Where did the papers come from

Another interesting stats is to see who is thinking about Brazilian economy. Of course, locals are number one, and no surprise in having the United States as a second source of articles. Brazil (8), the USA (3) and France (2) were the countries that most contributed with papers about Brazil. The University of São Paulo (4) is the leading source among all institutions, seconded by Paris Sorbonne University (2).

Origin of the papers

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Summary of papers that had Brazil as a subject

Author University Paper
Alexandre Macchione Saes University Sao Paulo (Brazil) Electric power and diplomacy: US-Brazil relations in the Brazilian electric sector, 1945-1954
Daniel Strum University of São Paulo (Brazil) The Coevolution of Various Mechanisms Governing the Expansion of Commercial Agency Relations: Jews and Conversos along the sugar route revisited (Brazil, Portugal and the Netherlands, 1595–1618)
Sigismundo Bialoskorski University of Sao Paulo (Brazil) “Cooperatives organizations in Latin America economic growth: the case of Brazil”
Marly Kamioji University of Sao Paulo (Brazil) Origins of the nuclear program in Brazil
Irineu de Carvalho Filho Universidade de Sao Paolo (Brazil) Education Performance: was it all determined 100 years ago? Evidence from Sao Paolo.
Eustaquio Reis IPEA (Brazil) “Long Run Perspectives on Regional Inequalities in Brazil, 1872-2000”
André Villela Fundaçao Getulio Vargas (Brazil) Half a century of Brazilian ‘general’ economic history textbooks: An appraisal.
Luiz-Carlos Soares Federal University of Rio de Janeiro (Brazil) “Sebastiâo Ferreira Soares and the introduction of statistical science in nineteenth Century Brazil”
Filipa Ribeiro daSilva University of Macau (China) Impact of Slave Trade in the Portuguese and Brazilian Economies: an assessment
Hildete de Moraes Vodopives Université Paris-Sorbonne (Paris IV) (France) Contemporary challenges of the Brazilian dairy industry.
Hildete de Moraes Vodopives Université Paris-Sorbonne (Paris IV) (France) FDI in Brazil in the 1990s and 2000s; macro factors impacting the internationalization of Vale
Bruno Gabriel Witzel de Souza Georg-August-Universität (Germany) “Immigration and the Path-Dependence of Education: German-Speaking Immigrants, On-the-Job Skills, and Ethnic Schools in São Paulo, Brazil (1840-1920)”
Hiromi Shioji Kyoto University (Japan) The Luxury Vehicle Market in Brazil: Different Types of Development
Lee Alston University of Colorado, Boulder (Sweden) Economic Backwardness and Catching Up: Brazilian Agriculture, 1964–2014
Gail Triner Rutgers University (United States of America) Regulatory regimes for petroleum in Brazil
Anne Hanley Northern Illinois University (United States of America) “Public finance and social investment in Brazil’s first century of independence, 1822-1930”
Aldo MUSACCHIO Brandeis University – Brandeis International Business School (United States of America) The top-management of State-owned enterprises: the case of Brazil.

The papers can be downloaded from the website of WEHC until de end of the month.

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Business Newswires Analysis: Petrobras overhaul calls for much more than corruption clean-up

The Petrobras scandal: are we facing a complex case of corruption with politics prying associated with lousy management? What will it take to get Petrobras on track? This Business Newswire analysis makes good points.

Petrobras’ decision to take a massive $17 billion (11.20 billion pound) write-down to account for overvalued assets and corruption-related costs is only the start of a broad overhaul needed to revive Brazil’s troubled state-owned oil company.

While many have focussed on the $2.1 billion, or 12 percent of the write-down, related to money siphoned off in a price-fixing, bribery and political-kickback scheme – Brazil’s biggest-ever corruption scandal – it is the remaining $15 billion that calls for greater attention.

Those write-offs reflect bad investment decisions, flawed execution, political interference and falling oil prices, Petroleo Brasileiro SA <PETR4.SA> acknowledged when it released audited 2014 results on Wednesday.

Business Newswires : euronews : the latest international news as video on demand.

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Ricardo Amorim’s point of view on doing business in Brazil

For those who want a brief introduction to doing business in Brazil I recommend this  4 minutes video in English. Ricardo Amorim is one of Brazil´s most influential economist according to Forbes magazine and

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The Economist on Brazilian Protests

Protests in Brazil

The wisdom of crowds

After massive demonstrations against her, Dilma Rousseff will struggle to relaunch her presidency

DILMA ROUSSEFF, Brazil’s president, expected the anti-government protests on March 15th to be big. She convened a meeting of a crisis group at her official residence to monitor them. But nobody, including the organisers, imagined they would be as massive as they turned out to be. Police in São Paulo put the size of the crowd on Avenida Paulista, the preferred venue for such gatherings, at more than 1m; Datafolha, a pollster, counted 210,000. Either way, it was the biggest political demonstration in the country’s biggest city since the diretas já (“elections now”) movement that helped end military rule in 1985. Overall, police estimated that 2.2m people turned out in dozens of cities across all 27 states. That dwarfs the number who took to the streets on any single day in June 2013, the most recent occasion when Brazilians vented their anger at politicians en masse.

Trade unions, which had organised (much smaller) pro-Dilma demonstrations two days earlier, dismissed the protesters as privileged white people. Many were not. “I am black, poor and want Dilma out,” declared a demonstrator from one of the nine mobile stages along Avenida Paulista. Many wore the national football team’s yellow-and-green jerseys. Opposition politicians wisely stayed away. They realised that their presence would obscure the bottom-up message and reinforce the government’s claim that behind the protests were sore losers of last October’s elections, won by Ms Rousseff and her left-wing Workers’ Party (PT).

The grievances of 2013 were diffuse. Today’s are directed squarely at Ms Rousseff and the PT. Some protesters—about a quarter on Avenida Paulista, according to one poll—want her to be impeached over a multi-billion-dollar bribery scandal at Petrobras, the state-controlled oil giant. Most others simply want to show that they are fed up with sleaze and economic mismanagement, which has pushed up inflation and is likely to trigger a recession this year. A vocal fringe called for military intervention—but was shouted down.

Impeachment is unlikely. A serving president can be removed only for misdeeds committed during his or her current term of office. The focus of the Petrobras investigations is alleged bribery that took place well before Ms Rousseff began her second term, on January 1st. Besides, she has not been personally implicated.

The president’s real worry is that public anger plus parliamentary obstruction will thwart her plans for her second term, the most important of which is a correction of the economic course that she set in her first. Her working-class supporters hate the austerity needed to trim the budget deficit—a scary 6.75% of GDP—and avoid a downgrade of Brazil’s credit rating. Pro-Rousseff demonstrators railed against cuts in entitlements and condemned her finance minister, Joaquim Levy, as a “liberal infiltrator”. In February lorry drivers blocked roads in protest against rising fuel prices and other costs. The government caved in to many of their demands.

Pro-government parties command majorities in both houses of Congress. But many of Ms Rousseff’s allies are opportunistic at the best of times. The Petrobras scandal and the president’s plummeting popularity—just 13% of voters think she is doing a good job—make them even more prone to defect. The Supreme Court has approved criminal investigations of 34 sitting congressmen, all but one of whom belong to the ruling coalition. They include the speakers of the lower house and Senate, both members of the Party of the Brazilian Democratic Movement (PMDB). All deny wrongdoing.

The more they worry about clearing their names, the less likely they are to vote for unpopular economic measures. Renan Calheiros, the Senate president, formerly a loyal backer of Ms Rousseff, recently threw out of the chamber a presidential decree that would have ended some payroll-tax breaks. That forced her to resubmit it as a fast-track bill. Last week Congress came close to overturning presidential vetoes of two potentially budget-busting bills. One concerned adjustments to income-tax brackets, the other social-security charges for domestic workers. Majorities voted against the president, but they were not large enough to force the bills through.

After a long delay, Congress approved this year’s budget on March 17th. This will help Mr Levy to keep his promise to achieve a primary surplus (before interest payments) of 1.2% of GDP. But the string of near-defeats means he will need to tread carefully. He will have to consult the legislature extensively on economic decisions. As a result, the fiscal adjustment will take longer than he hopes. With luck, that will not trigger a downgrade.

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