The Shifting Sands Of Brazil

The Shifting Sands Of Brazil

July 16, 2016 in Economics by Rob Power
Written For Incasso Partners

The Shifting Sands of Brazil’s Economy

Today Brazil has the tenth largest economy in the world but this is a relatively new situation by global economic standards. Between the years 2000 and 2012, Brazil ranked high amongst the fastest growing major economies in the world, achieving this through an average annual GDP growth surpassing 5%. This success was largely driven by measures taken by the government to liberalize the economy creating a much more fertile environment for private sector investment. Additionally, while Brazil always benefitted from its richness in natural resources, its growing trade with China throughout this period proved hugely beneficial to the nation as a whole. This growth culminated in 2012 when Brazil surpassed the UK in terms of economy as well as achieving 5th in the world ranking of US dollar billionaires. However, in 2013 the tide turned for Brazil with a major deceleration of growth which has escalated to the point where all forecasts predict a contraction of around 1% this year.

The Roots of Brazil’s Downturn

Certainly it would be fair to say that some of the causes of Brazil’s economic woes are external and as such, outside of their control. The deceleration of the Chinese economy for example has a considerable knock on effect, being the number one trading partner of the nation. Furthermore, belt tightening in the US, which stifles the flow of dollars into the country, has considerable consequences for the flagging economy. There are also domestic factors at play here; with the Petrobras corruption having a sizeable ripple effect throughout the economy. Petrobas, the state oil company, is being investigated for massive scale corruption, a case which has all but paralysed the hugely important oil industry. Compounding these factors is the rate of inflation, which seems to be currently stuck at the entirely inappropriate rate of 8%. Consumer confidence is falling, unemployment is rising, and the outlook seems bleak for the Latin American giant.

Moves to Improve

In a report published by the International Monetary Fund (IMF) in early May of this year, the recommendations boil down to a word that citizens of many EU countries have become all too familiar with in recent years – austerity. This would include, but not be limited to, higher taxes and spending cuts in a country that has suffered quite a bit of civil unrest in recent history. This puts the Brazilian government in a very difficult position with the task of developing public confidence in the necessity for such austere measures.

Should You Invest in Brazil?

As much as times are currently bad in Brazil, the news is not all bad. The Chinese, for example, have recently pledged $250m to Latin America over the next 10 years. It seems likely much of this will land in Brazil as work is about to commence on a China funded railway line to run from Brazil’s Atlantic coast all the way to the Pacific coast of Peru. This investment is part of what has been dubbed the Chinese “economic colonisation” of Brazil. While there have been criticisms that China is benefitting more from the relationship than Brazil, China’s history of a pragmatic approach to business relations would suggest that the scales may be balanced in the coming years. Luiz Eugenio Figueiredo, vice-president of Brazil’s private equity and venture capital association ABVCAP, suggests that the current downturn might signal opportunity for foreign investment saying “It’s a good moment for investments because the sources of funding for non-listed companies are very restricted”. Of course, like all new markets, there are differing ways of doing business than you are likely used to, and it can take time and research to understand how to best work with your potential partners in Brazil. It might be prudent to align yourself with an international debt recovery organisation in order to ensure you minimize fiscal exposure and garner advice on how best to enter into contracts. An international debt collection expert can help to clarify the muddy waters of what is still a market of substantial potential.

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