Will Brazil Crash?

Brazilian President Dilma Rousseff and her finance minister Guido Mantega. (Photo: Seplan)

Can Brazil handle a World Cup loss and economic slowdown this year?


The recent reprimand from the Brazilian Minister of Finance to Standard and Poor’s for downgrading the country’s debt to quasi-junk status is yet another sign of the Rousseff’s Administration’s increasing frustration with the country’s economic performance.

But this frustration is  self-inflicted given the lack of response by the economic authorities to changes in the world economy that partially dried stimuli for growth. Among these changes perhaps the most notable was the decision by Chinese authorities to promote a new growth model nurtured by internal aggregate demand as opposed to the export-led model that had prevailed for the last three decades.

On the domestic front. Brazil’s economic policy -- once upon-a-time the model to follow in the region --failed to address the two most salient economic weaknesses: lack of infrastructure and a tax system that promotes evasion.

Instead both the da Silva and Rousseff administrations pursued a policy of promotion of aggregate demand that has built an inflationary impetus that is proving difficult to tame. Add to this faux pas the policy tightening in 2011; the binding of supply-side growth constraints, especially full employment; the negative impact on business confidence and the intervention in the electricity sector that destroyed billions in shareholder value and you can ascertain the magnitude of the growth cul-de-sac into which the country is.

Imbalances tend to be like gremlins. You let them sleep over at home and they reproduce themselves exponentially. And for the country’s chagrin current imbalances will be invited to sleep over while the presidential elections and the World Cup take place.  By then it might difficult to correct course and a moderate crash could be the outcome.

Should Brazil become the Soccer World Champion for the sixth time, economic misfortunes can be affectively handled next year. The trouble would be if a soccer loss and an economic downturn shake hands this year. This would be a real test to Ms Rousseff’s leadership and to that of her party.

Beatrice Rangel is CEO of AMLA Consulting Group, a business development advisory firm in Miami. She wrote this column for Latinvex.  

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