The Brazilians haven't been able to catch a break lately. The markets have been rattled by slowing economic growth in the country and both the Fédération Internationale de Football Association (FIFA) and the International Olympic Committee have been complaining about slow progress in preparing for their upcoming events.
FIFA has been particularly vocal as it has become clear that Brazil doesn't have a laboratory which is properly certified for handing drug testing, forcing the World Anti-Doping Agency to fly specimens from World Cup players to Switzerland for screening.
The biggest blow came on Monday when S&P downgraded the country's credit rating to BBB-, just a single notch above junk and on par with Spain and Russia. The one saving grace is that S&P now calls its outlook stable rather than negative, which means further cuts aren’t likely over the near term.
That's cold comfort for President Dilma Rousseff, who along with her government has been desperately trying to stimulate the Brazilian economy ahead of her October reelection bid. Over the past two years they have implemented a number of tax cuts and aggressive social spending programs in attempt get the country's growth rate closer to 2008's 17.8 percent than this year's forecast of just 1.7 percent. They've subsidized credit to families in the country's low-income housing program, eliminated the tax on foreign investors buying Brazilian bonds, eased reserve requirements on banks, reduced a host of income taxes, and invested in the nation's ports and dozens of other programs, with most of these initiatives financed through state-owned banks.
Those measures have spawned a boom in inflation and a deteriorating fiscal position, but they have yet to produce much growth. While you could argue that growth could be even worse in the absence of those measures, what growth there is hardly offsets the fact tha! t Brazil has failed to meet its own primary surplus goals, experienced a surge in debt levels and dug into external accounts as the country's deficit has widened. Government debt is likely to rise to 45 percent of gross domestic product in the near term, according to S&P.
The downgrade is a serious blow to Rousseff, who won office campaigning against what she called the weak fiscal management of her predecessor. After casting herself as the good steward of the country's resources, many of her economic policies have stymied rather than create growth. So while Fitch and Moody's have said that they don't plan downgrades of their own ahead of the Brazilian elections, S&P's move alone will give her opponents more ammunition, as if they didn't already have enough.
So far, though, public opinion polls still show Rousseff well ahead of her challengers, Aécio Neves of the Social Democratic Party and Eduardo Campos of the Socialist Party, but the slates aren't yet set in stone. Under Brazilian election law, candidates are chosen internally in a closed primary system. Neves and Campos have been "pre-selected," but challengers could emerge in party conventions to be held in June. That isn't likely, but even so the conventions will galvanize the parties and the election will begin to really heat up.
Despite these economic troubles, Rousseff will point to the fact that plenty of foreign companies are investing in the country. Volkswagen AG (Frankfurt: VOW) has announced that it will invest more than $4 billion in developing new vehicles and technologies in its local market operations over the next four years, while Bain Capital has agreed to buy a leading Brazilian health insurer for about $4.3 billion. In all, foreigners have invested more than $65 billion over the trailing year.
But that hasn't resulted in a huge benefit for many Brazilians. While those investments have created jobs and incomes for urbanites, about 19 percent of Brazil's population lives ! in rural ! areas largely unaffected by that foreign investment. That block of voters could radically alter the course of the election and they're likely to emerge as a powerful force. That's especially true since many urbanites are increasingly discontent, as evidenced by continued, though sporadic, street protests throughout the country.
This year's elections will prove much more competitive than they appear now, giving Brazil a chance to change economic direction and perhaps implement badly needed reforms. The question is, will Brazil’s leaders seize this opportunity? If they do, investors will find new avenues to profit in this vast country.
No comments:
Post a Comment