Pain, No Gain for Brazil

Richard (Jichen) Huang

Brazil has been a member of the BRICs (Brazil Russia India China) countries since Jim O'neill invented the phrase at Goldman Sachs in 2001. These countries were perceived as emerging markets, with large workforces that would power the global economy to new heights in the 21st century and beyond. Unfortunately, things have not turned out as planned. A number of these countries have faced economic and political crises, and Brazil is the most recent to fall into chaos.

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Brazil’s outlook has been gloomy for a long time. It suffered two consecutive years of economic recession, unseen since the Great Depression of the 1930’s. The country's currency, the Rael, has depreciated against the dollar more than 33%. The annual inflation rate is 0.67%, far more than the government’s target.

The International Monetary Fund [IMF], an association that aims to promote global economic stability, just downgraded its economic forecast for Brazil even more than the previous year’s downgrade. Worse, the report predicts that Brazil’s economy will stagnate next year. 

Much of Brazil’s instability stems from the current state of the world economy. Brazil is the 12th largest exporter of oil, and is hurting from oil’s recent price crash. Meanwhile, the economic slowdown in China (one of Brazil’s largest trade partners) has further lowered demand for Brazilian commodities. This one-two punch is bringing the pain to Brazil, and has all but halted Brazilian exports to the rest of the world. 

Exports are the heart of the Brazilian economy. The nation’s development has been subject to the “resource curse” in which its economy depends too heavily on what’s in the ground. This means that a few key commodities - sugar cane, gold, coffee, iron ore, oil, and soybeans, and others - have driven the country's economic growth. This reliance on commodities means that Brazil did not develop enough industry or technological innovation to be economically independent. Commodities have a cyclical nature, fluctuating in price over long and short periods of time, which means that Brazil’s economy is vulnerable to these fluctuations. In short, commodities are tanking, and so is Brazil. 

Another crucial factor to Brazil’s crisis is its politics. Brazil’s government has been involved in scandals in the oil & gas industry, and its congress is attempting to impeach President Dilma Rousseff. The IMF specifically mentioned these issues as sources for their downgrade of Brazil’s economic forecast. Fitch and Standard & Poor's forecasts of Brazil have also fallen due to similar reasons. 

Impeachment of the President - justified or not - will have negative consequences for the economy. Brazil impeachment proceedings will derail its financial and economic agenda for several months, dealing a fatal blow to investor confidence. It also indicates that Brazilian politicians are more concerned with combatting each other, instead of helping their country find a way out of its present difficulties. 

From an outsider’s perspective, it seems that the Brazilian economy is on the verge of collapse, but brazil has survived crises in the past; in the early 1990s, Brazil's inflation rate reached more than 1,000%, but rebounded. Brazil has a history of resiliency - let’s hope their reputation precedes them.