Brazil: Festive season blues

Brazil: Festive season blues

Brazil: Festive season blues

Global Economic Outlook, Q1 2014

Deteriorating fiscal balances, an increasing external deficit, high inflation, poor business investment, and currency troubles continue to hamper Brazil’s economy.

iStock_000025438073MediumBrazil is making a gloomy entry into the festive season after a dispirited third quarter, and a significant uptick in growth is unlikely for the rest of 2013 and 2014. While weak external demand continues to weigh on exports, inflation and policy hurdles are hampering consumption and investments. Deteriorating public finances are adding to the country’s woes. Meanwhile, disruptive street protests triggered by issues ranging from foreign investments to public spending have become somewhat common. In October 2013, Moody’s cut its outlook on Brazil’s sovereign rating from positive to stable, reflecting the country’s cloudy prospects and global image.1

Growth weakens and will likely remain subdued

The third quarter saw Brazil’s economy wane, and GDP declined 0.5 percent compared to the previous quarter—the worst performance since Q1 2009. On a year-over-year basis, GDP growth slowed to 2.2 percent in Q3 2013, compared to 3.3 percent in the second quarter. Not only have stimulus measures of easy credit and tax cuts lost their thrust, demand for the country’s exports have also cooled. As a result, growth in industrial output slowed, manufacturing performance deteriorated, and mining remained lackluster. In addition, services lost pace, even as agricultural output contracted. The disappointing state of affairs has significantly dented consumer and investor sentiments in Brazil; consumer and business confidence indices in Q3 2013 reached their lowest levels in seven quarters (see figure 1).


Worryingly, the economy is likely to remain sluggish in the coming fiscal year due to subdued consumption and investments. The International Monetary Fund recently cut its 2014 outlook to 2.5 percent from previous projections of 3.2 percent, and it continues to forecast a moderate 2.5 percent GDP expansion for 2013. Growth prospects are expected to be constrained by high levels of inflation that limit real earnings and consumption, even as policy challenges could dissuade business investments.

Internal and external balances deteriorate

Unfavorable news continues to pile up for Brazil, which is experiencing slower growth and worsening current account and fiscal balances. As exports fall in the face of weak international demand, the country’s current account deficit from January to October of 2013 deteriorated to 3.6 percent of GDP compared to 2.4 percent for 2012. At the same time, Brazil’s fiscal deficit for the 12 months ending September 2013 stood at 3.3 percent of GDP, the highest in nearly four years.

To shore up public finances, the government will wind down some tax breaks, bring changes to unemployment benefits and minimum wage payments, and shrink lending by the state-owned Brazilian Development Bank. However, with elections coming up in 2014, spending is unlikely to be sharply curbed. As a result, despite some fiscal improvements in October, Brazil’s projected budget deficit—3 percent of GDP for the whole of 2013—is still expected to exceed last year’s deficit of 2.4 percent.

Unfavorable fiscal conditions are stoking investors’ fears of a credit rating downgrade for Brazil, which along with other international factors, are weighing on the Brazilian real. The weak real, in turn, has been partially responsible for keeping the country’s inflation rate stubbornly above the central bank’s target of 4.5 percent. To beat a price rise and strengthen the currency, the central bank hiked the benchmark interest rate seven times this year by a total of 275 basis points from 7.3 percent in January to 10 percent in November. However, at the end of November 2013, the real was still 12.4 percent weaker than in January, and inflation averaged 6.3 percent through the first 10 months of the year (see figure 2).


Investment environment discouraging

Of late, the government has taken a few measures to attract private, foreign investments into important sectors of the economy. For instance, the government recently increased the foreign investment cap in state-controlled Banco do Brazil from 20 percent to 30 percent. In October and November, the government also sold stakes in a large oil field and two airports to international consortiums.

However, these successes hide investors’ overall wariness. In 2012, total real fixed investment for Brazil fell to 18.8 percent of GDP from 19.8 percent in the previous year. Foreign direct investments for the first 10 months of 2013 also fell 11.2 percent year over year to $49.1 billion. Investor sentiment has been dampened by the marked slowdown in growth as well as delays in policy decisions due to political wrangling, protectionist stances, and unfavorable public reactions. Brazil recently experienced violent demonstrations against the oil field auctions; protesters viewed the move as a handing over of national resources to foreigners.

Weak government investments have adversely impacted infrastructure development in the country, affecting growth prospects.

Meanwhile, investments by the government—already limited by a greater focus on social spending—declined from 2.0 percent in 2011 to 1.9 percent of GDP in 2012. Weak government investments have adversely impacted infrastructure development in the country, affecting growth prospects. Congested ports and roads are hitting trade, while delays in the construction of several major hydroelectric power plants are hampering the expansion of electricity capacity. In addition, the government is struggling to get infrastructure ready for the upcoming football World Cup, which is likely to trigger more street protests by citizens who object to the use of public money for a sporting event instead of health care or education.


View all endnotes
  1. Global Credit Research, Rating action: Moody’s changes the outlook on Brazil’s Baa2 sovereign rating to stable from positive, Moody’s Investors Service, October 2, 2013,–PR_283438.


Navya Kumar

Navya Kumar is an economist and an assistant manager at Deloitte Research, Deloitte Services LP.

Global Economic Outlook, Q1 2014: Brazil
Cover Image by Jessica McCourt