Monday, January 20, 2014

Brazil’s Future

article from September 28, 2011
By Jamie Douglas

Brazil in the last few years has shaped itself into an economic powerhouse, becoming South America’s own “Wirtschaftwunder.” But there are troubling signs on the horizon: The nation’s currency, the real, has appreciated to such an extent that Brazilian tourists in Uruguay and Argentina are spending like drunken sailors or Americans in 1950’s and 60’s Europe. With their powerful currency, their buying power is nearly double in those countries than it is at home.

In the real world, the rise in the value of the real has created some very unpleasant side effects, such as the loss of exports, inflation and lately, a minimizing of isolation from the shrinking world economy. Since the beginning of 2011, the Brazilian share market, Bovespa, has lost 22%. In other words, the value of traded entities has fallen by over a fifth, which is a staggering loss of wealth.

Brazil’s former president, Luis Ignacio Lula da Silva, AKA Lula, a very popular socialist who reduced abject poverty by about 25 million people, was widely thought to be planning a run for office again when Dilma Rousseff’s first term is up. But he has recently announced that he will stand down and let her run for a second term. He is a sly fox, that Lula. Realizing that, three years down the road, things will be very different that now, he can just play the role of elder statesman without having to take the blame for the possible collapse of the nation’s economy.

Brazil is confronted with several major obstacles in the future, not the least of which are the triple money-guzzling sporting events coming their way. In 2013, Brazil is to host the Confederation Games, then there will be the 2014 FIFA Soccer World Championship and finally, in 2016, the Olympic Games as well as the Para-Olympics. All told, the drain on the nation’s finances will amount to over one trillion US dollars. The improvements to the infrastructure will be permanent, while the influx of foreign currency will be fleeting. On the upside, thousands of jobs will be created in construction and the service industry; on the downside, most of these jobs will vaporize once the festivities are over. Then comes the long hangover of repaying the debt that was accumulated to hold these prestigious events.

Brazil had been a beneficiary of record-high commodities prices in the last few years, from minerals to grains. But in the current downturn, which may last several years, the prices of most of their commodities have slipped, as the consuming nations have cut back on their requirements due to reduced productivity. While some analysts are not worried about Brazil’s economic future, I am not so optimistic. But then again, I am not an analyst; I am just an opinionated observer who is good at math.

Brazil is currently carrying a debt burden of US$1.75 trillion, which may not seem like much compared to the USA’s approaching $15 trillion debt, but Brazil is under the rule of the IMF and is not allowed to recklessly print billions in worthless paper currency like the USA is currently doing.

An additional problem plaguing the Brazilian treasury is that fully half of all collected taxes go toward paying pensions. Economist are advising Dilma to reduce these pensions and reduce interest rates, which currently are at a reduced, but still staggering 12%. The easiest way to create social unrest in Brazil would be to mess with the holiest of sacred cows: the pension system. Should the presidenta decide not to run for that second term, then she may try for that. However, it is very unlikely that she will succeed, as the coalition holding the government together is comprised of 27 parties and a bunch of politicians who do want to get reelected again.

Jamie Douglas
San Rafael, Mendoza
Where that Malbec Wine is Always Fine!

I encourage you to write me at cruzansailor [at] gmail [dot] com with any questions or suggestions you may have. Disclaimer: I am not in any travel-related business. My advice is based on my own experiences and is free of charge (Donations welcome). It is always my pleasure to act as a beneficial counselor to those who are seekers of the next adventure.