Brazil’s terrible fall from economic grace

Financial Times, 9/13/2015

If Brazil was a hospital patient, emergency room doctors would diagnose it as being in terminal decline. The kidneys have packed up; the heart will go soon. That, at any rate, is the damming opinion of a senator from the Workers’ party, which has governed Brazil for 13 years, overseeing both its rise on the global stage and now its terrible fall.

The economy is in a mess. Brazil’s worst recession since the Great Depression will see the economy shrink by as much as 3 per cent this year, and 2 per cent in 2016. Public finances are in disarray: this month, the government, for the first time since the onset of democracy, forecast it would post a primary fiscal deficit, the budget balance before interest payments. The actual budget deficit is already a yawning 9 per cent of output. As a result, debt levels are growing again.

That is the immediate reason behind last week’s surprise decision by Standard & Poor’s to downgrade Brazilian debt to “junk”. If another rating agency follows, many overseas investors will have to sell their Brazilian holdings, making matters worse; around a fifth of Brazil’s debt is foreign-owned. Given the tough external environment — China’s slowing economy, the collapse in commodity prices, and higher US interest rates — Brazil is suffering the beginnings of extreme economic stress.

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