Synthesis of the Brazilian Economy

BRAZIL ECONOMICS - Report 06 Oct 2015 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

By sending a deficitary budget bill for 2016 to Congress, the government signaled it has thrown in the towel regarding even a modicum of fiscal responsibility, and at the start of September S&P lowered the country’s rating from investment grade. The consequent reduction of external credit will depress the investment rate even more, accentuating the recession, intensifying the political crisis and raising the chance of impeachment over the short term. The country risk is climbing and the exchange rate weakening, reaching R$ 4.25/US$ in a moment that recalled panic situations, with longer term interest rates rising above 17%. Even after a partial retreat from these levels, forces were released both to aggravate inflation and worsen the economy even more.

Avoiding a downgrade by another rating agency was seen as a necessity, and Dilma’s reaction was to announce short reaching spending cuts alongside an increase in revenues – especially via a new CPMF and/or CIDE. The aim is to send to Congress a revised budget for 2016 showing at least some surplus. This movement wound up producing an ample ministerial reform, with the elimination of eight ministries, along with some measures whose apparent objective is to give a sensation of austerity, such as reducing by 10% the ministers’ and the president’s salary, but whose real objective is to allay the risk of losing her mandate. This rearrangement will bring some temporary relief, but it will not restore the governability necessary to face the hard times ahead.

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