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Brazil’s Economic Crisis and the Future of BRICS Countries

August 10, 2017

In hosting the World Cup in 2014 and the Olympic games in 2016, the Brazilian economy may appear to be on the up-and-up. Once the booming center of Latin America, Goldman Sachs economist Jim O’Neill thought Brazil worthy of the now-famous “BRICS” moniker in 2001, placing it among economic powerhouses Russia, China, India, and South Africa. [1] As of late, however, Brazil has suffered a fall from grace; 0.1% GDP growth in 2014 followed by 3.8% and 3.3% declines in 2015 and 2016 respectively. [2]

The combination of falling commodity prices and detrimental government policies are to blame for this downturn. Government deficits have ballooned largely due to increased spending on pensions and tax breaks for choice industries. The growth of public debt has only been accelerated by high interest rates, leaving the Brazilian central bank in a quagmire; that is, lowering rates will likely exacerbate the nation’s existing high inflation. [3]

Image: A time-series of the inflation rate in Brazil. Source: FRED.

Image: A time-series of the inflation rate in Brazil. Source: FRED.

A plausible shot at recovery involves export promotion. Though Brazil’s export prospects fell when commodity prices declined in 2014, the weakening Brazilian peso has allowed Brazilian manufacturing to become more competitive – an unintentional benefit of persistently high inflation. [4] The International Monetary Fund found Brazil’s real effective exchange rate declined by 18.7 percent between December 2013 and April 2016, resulting in year-over-year Brazilian export growth. [5] However, the rebound of Brazilian manufacturing has been antagonized by one of the most complicated tax codes in Latin America as well as strong labor protections and a nation-wide 90% increase in the real minimum wage since 2006. [2] Brazil’s ranking of 123rd in the World Bank’s ease of doing business index puts it at a distinct disadvantage in global markets, especially compared to another manufacturing giant in Latin America, Mexico, which is ranks 47th. [6]

Even if Brazil wins in its up-hill battle of promoting manufacturing exports, it is unclear if it will be enough to offset other economic shortcomings. For example, rising unemployment from around 6 percent in late 2013 to above 13 percent as of February 2017 has beleaguered the growth of private consumption, which noticeably began to slow down in late 2014. [7] In addition, high inflation and credit downgrades from Moody’s and Fitch have also contributed to stagnating foreign direct investment. [8][9]

Image: A time series of private consumption in Brazil. Source: FRED.

Image: A time series of private consumption in Brazil. Source: FRED.

At the center of this crisis is for President Dilma Rousseff. Aside from bearing the blame for Brazil’s fiscal mishaps, she has also been accused of concealing the alarming state of the deficit from the public and taking place in a bribery scandal involving a state-owned oil company. Brazilian voters, enraged by a landscape of wide-spread political corruption, sought revenge. Impeachment petitions resulted in the Senate finding Rousseff guilty of breaking budget laws in August of 2016. Consequently, Vice President Michel Temer assumed the presidency and has remained there since. [10]

To some, Brazil’s economic crisis and political upheaval signal the fall of Brazil as one of the vanguards of economic growth in the early 21st century. When viewed with slowed growth in China and recessions in Russia and South Africa, one might see Brazil as just another BRICS in the wall of disappointing growth among emerging economies. [11] Though most do not dispute Brazil’s state of affairs as disappointing, it is unclear if it is indicative Brazil’s future long-run potential. After all, it does appear that Brazil is positioned make a successful recovery as 2017 GDP is expected to be above zero as Brazilian exports have continued to increase. [12]

Recently, investors seemed to have regained faith in BRICS countries as Brazil has begun to rebound, Russian oil prices have stabilized, India has led a series of economic reforms, and China’s currency has strengthened. [13] After all, the growth of emerging economies has continued to outpace developed nations, which is the very reason for the unique “BRICS” classification. The time since 2015 marked the first significant divergence in the growth rate trends between developing and developed countries; since 2015, emerging economy growth rates increased from 4 to about 4.8 percent, while developed nations have declined from 2 to about 1.7 percent. [13] Not only does this appear to be a return to BRICS countries norms, it also signals increasing investment opportunities compared to developed nations.

Image: Year-over-year Real GDP growth of emerging versus developed nations. Source: Bloomberg.

Image: Year-over-year Real GDP growth of emerging versus developed nations. Source: Bloomberg.

Despite tough times in recent years for BRICS nations – and Brazil in particular – it does not appear that their long-run growth potential has been stifled. With perhaps the exception of an increasingly politicized Russia, large emerging economies appear to be in an opportunistic position to capture the preponderance of global economic growth in the near future, especially as they continue to pursue free trade efforts. [14] If O’Neill was correct in noticing their long-run growth potential, it appears that recent events may have been but a pothole in the BRICS nations’ race to the top.

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  [1] “Brics ‘grew more than I thought’, says Jim O’Neill,” BBC. http://www.bbc.com/news/business-37655987

  [2] “Regional Economic Outlook: Western Hemisphere,” International Monetary Fund, May 19, 2017. http://data.imf.org/?sk=3E40CD07-7BD1-404F-BFCE-24018D2D85D2

  [3] “Brazil’s fall,” The Economist, January 2, 2017. https://www.economist.com/news/leaders/21684779-disaster-looms-latin-americas-biggest-economy-brazils-fall

  [4] Akrur Barua, “Brazil: Yearning for the good times,” Deloitte University Press, April 26, 2016. https://dupress.deloitte.com/dup-us-en/economy/global-economic-outlook/2016/q2-brazil.html#endnote-6

  [5] “International Finance Statistics (IFS),” International Monetary Fund, June 26, 2017 http://data.imf.org/?sk=5DABAFF2-C5AD-4D27-A175-1253419C02D1

  [6] “Ease of doing business index (1=most business-friendly regulations),” The World Bank, July 16, 2017. http://data.worldbank.org/indicator/IC.BUS.EASE.XQ

  [7] “Private Final Consumption Expenditure in Brazil,” Federal Reserve Economic Data, April 20, 2017. https://fred.stlouisfed.org/series/BRAPFCEADSMEI

  [8] Alonso Soto and Alusisio Alves, “Fitch downgrades Brazil, Meirelles calls for credible targets,” Reuters, May 5, 2016. http://www.reuters.com/article/us-brazil-ratings-fitch-idUSKCN0XW2DL

  [9] “Foreign direct investment, net inflows (BoP, current US$)”, The World Bank, July 16, 2017. http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?locations=BR

  [10] Simon Romero, “Dilma Rousseff Is Ousted as Brazil’s President in Impeachment Vote,” The New York Times, August 31, 2016. https://www.nytimes.com/2016/09/01/world/americas/brazil-dilma-rousseff-impeached-removed-president.html

  [11] Rana Foroohar, “Why the Mighty BRIC Nations Have Finally Broken,” Time, November 10, 2015. http://time.com/4106094/goldman-sachs-brics/

  [12] “Exports: Value Goods for Brazil”, Federal Reserve Economic Data, July 1, 2017. https://fred.stlouisfed.org/series/XTEXVA01BRQ664S

  [13] Ben Bartenstein and Aline Oyamada, “Emerging Market Investors Think The BRICs Are Back,” Bloomberg, June 18, 2017. https://www.bloomberg.com/news/articles/2017-06-19/jim-o-neill-s-moniker-is-back-as-investors-pile-money-into-brics

  [14] Jayshree Sengupta, “Future of the BRICS,” Observer Research Foundation, April 27, 2016. http://www.orfonline.org/research/future-of-the-brics/


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