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Brazil economy

4 March 2016

Brazil coffee

When the going gets tough, the tough go drinking… Brazilian coffee. Pic/Shukor Yusof

While many of Brazil’s multi-millionaire footballers live it up in Europe and China (Alex Teixeira recently moved to Jiangsu Suning for EUR50 million), their country is moving down a very slippery slope.

Here’s what Teixeira had to say on his former club Shakhtar Donetsk’s website: “It all happened very quickly, in just a twinkling. I was at the airport, going to the Pitmen’s training camp venue. And my agent phoned me up. He said that Shakhtar had received a 50 million offer. I immediately wondered whether it would be good for me, my family, the club, and took the appropriate decision…

There are currently some 25 top Brazilian footballers in China alone, not forgetting several ex-Brazil national coaches – Luiz Felipe Scolari, Vanderlei Luxembergo and Mano Menezes. Chelsea’s Brazilian star Oscar in January reportedly rejected a GBP57 million offer from Jiangsu Suning. Unlike Teixeira, maybe he’s still deliberating if such a move would be good for him and his family…

Indeed, it isn’t just on the soccer field that China is investing in Brazilian exports. Brazil’s annual trade with China went from a mere USD2 billion in 2000 to an astonishing USD83 billion at the end of 2013! China has replaced the U.S. as Brazil’s biggest trading partner.

So it would be appropriate that China should now perhaps come to Brazil’s rescue. Brazil is in serious trouble. Government figures on 3 March 2016 showed the economy shrank 3.8% in 2015, the largest annual fall in 25 years. Its budget deficit is almost 11% of GDP while inflation is also close to 11%.

What ails Brazil?

The country’s economy has been in the doldrums since 2011. The decade before that, Brazil was a star; GDP growth averaged 5% annually between 1Q04 and 3Q08, while consumer inflation averaged just above 5%. Between 4Q09 and 2Q11, GDP growth averaged 6.5% year-on-year and inflation again just over 5%.

Problems started to emerge from 3Q11 onwards. There are two schools of thought on what contributed to the current stagflation: (1) Poor policies and sheer bad luck after Dilma Rousseff became president and (2) a flip-flopping mixture of macroeconomic policies.

A quick look at what happened prior to 2011 would indicate the decline started some 11 years ago when the government under president Lula de Silva introduced high real interest rates on short-term domestic liquid assets, cut investment and manufacturing exports and aggressive minimum wage adjustments that all resulted in the Brazilian currency, the real (BRL), becoming overvalued.

Between mid-July 2011 and June 2015 the BRL lost 50% of its value versus the USD. However, because inflation in Brazil was higher than its trading partners, compounded by a firming USD, the decline was about half, or 25%, in real terms. Today, the BRL is trading about 3.82 to the greenback.

Can China help?

Last year Chinese premier Li Keqiang visited Brazil and announced deals worth USD50 billion in Latin America’s largest economy. These included USD7 billion finance and cooperation projects with state oil company Petrobras and a USD1.3 billion deal with aircraft manufacturer Embraer to sell 22 planes to Tianjin Airlines.

But Brazil’s over-dependence on the Chinese seems to be hurting its economy. When China devalued its currency, the yuan (CNY) in August 2015, the BRL and Brazil’s stock market Bovespa both plunged over fears that Chinese demand for soybean, chicken and iron ore would also decline.

On 24 February 2016 ratings agency Moody’s downgraded Brazil to junk status. Standard & Poor’s had cut Brazil’s rating to junk in September 2015. This is causing some alarm to many investors, of a possible default, and that public finances could be out of control. Most of government debt, however, is domestic and so in our view, a debt default is unlikely.

Still, Asian investors in Brazil are keeping a very close watch. For example, there are some 55 Singapore companies present in Brazil, mostly in commodities and infrastructure services. Among Singapore GLCs operating in Brazil are Keppel Corp and Sembcorp. Singapore’s direct investment in Brazil at end-2013 was USD625 million.

Brazil needs to grow to get out of its current mess. This literally means it must invest and export (but surely, not footballers) more. And the central bank (BCB) will likely have to reevaluate its postures vis-à-vis the BRL and high interest rates.

There will be a lot of pain in the coming months and years, and bitter medication will need to be taken to compensate for the economy’s structural weaknesses. It’s not looking to be a good 2016 for Brazil as it hosts the summer Olympics under such a dire economic climate, along with the spread of the Zika disease.

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