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Column by Natixis IM

No More Samba in Brazil

Photo: Nicolas de Camaret / CC-BY-SA-2.0, Flickr
By Philippe Waechter

Jair Bolsonaro has come out in the lead in the Brazilian presidential elections with 46%. Looking beyond his very divisive views on certain issues in Brazilian society (status for women, LGBT), on the Paris Agreement and the corruption of previous governments, along with his aim to end Brazil’s endemic violence by allowing Brazilians to take up arms, are there any economic foundations for his likely victory? (see here the Brazilian context of these elections) This victory has very clear economic explanations. The Brazilian economy has been suffering since 2014 and the collapse in commodities prices. The recession over 2014-2015 and 2016 lasted a very long time, and was followed by a lackluster recovery, which was more of a stabilization than a real rebound. GDP in the second quarter of 2018 still fell 6% short of the 1Q 2014 figure.

This drastic situation can be attributed to two factors. The first is the country’s high dependency on commodities. Brazil enjoyed a very comfortable situation at the start of the current decade when China became its primary trading partner. Opportunities increased and commodities prices soared, so revenues were buoyant and did not encourage investment, creating a phenomenon known as Dutch disease, whereby commodities revenues were such that there was no incentive to invest in alternative businesses. But when Chinese growth began to slow and commodities prices took a nosedive, the Brazilian economy was unable to adapt, so it seized up and plunged into a severe recession.

The other factor is that Brazil devoted hefty financial resources to financing the football World Cup in 2014 and then the Olympic Games in 2016, so in a country with a massive current account deficit, this put a lot of pressure on financing. Funding for public infrastructure replaced investment in production, thereby making the country’s Dutch disease even worse.
The Brazilian population has paid a high price for the country’s brief moment of glory.

Were jobs and purchasing power hit?

Yes – the job market contracted and inflation stepped up, and if we look at the Markit survey indicator, employment has not returned to 2015 levels, especially in for services, while jobs have
stabilized in the manufacturing sector over the past year, albeit at a low level. So Brazilians are still paying for the recession

What can we expect for the Brazilian economy in the short term?

The Brazilian economy is still very shaky and the latest surveys suggest that recessionary risk remains high. More broadly speaking, the slowdown in the world economy will not help drive economic momentum, while in the commodities sector, only oil prices are on an upward trend. The new president has a tough job ahead as the country has very high expectations, but Brazil is not the US: it is no longer a powerful economy and must first rebuild, which will be a long drawn-out process. There is a risk that change will not be fast enough to keep Brazilian voters happy at a time when the authorities are also taking a tougher line to maintain law and order.

Column by Natixis IM written by Philippe Waechter

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