Don’t bank on Brazil voting for growth over lower prices

//Don’t bank on Brazil voting for growth over lower prices

Don’t bank on Brazil voting for growth over lower prices

By | 2014-10-04T17:30:46+00:00 October 4th, 2014|Business|0 Comments

It didn’t happen. Investment actually fell as a share of economic output and
the savings rate slumped. Business confidence deteriorated and growth
tumbled. Real GDP growth of 7.5pc in 2010 has evaporated. The forecast for
2014 is just 0.3pc, with a tepid recovery to around 1pc next year. Far from
stagnation easing price pressures, inflation is actually on an upward tack
to more than 6pc a year.

Even this does not tell the whole story because the government has kept prices
lower by forcing state-owned oil giant Petrobras to limit petrol price rises
on the forecourts. There have been sales tax reductions on food, and the bus
fare increases that triggered street protests in 2013 were quickly shelved.

Although the markets have already voted with their feet, whoever wins the
election faces a long to-do list, top of which is addressing Brazil’s
dwindling fiscal surplus. The country is already close to losing investment
grade status for its sovereign debt. Doing so would be very bad news for
hard-pressed Brazilian companies.

Second, inflation must be tamed. The Silva opposition has promised to
formalise central bank independence, but getting such changes through
Congress may not be easy. A coalition administration will involve building
bridges to parties that currently support Rousseff’s government.

What makes the outlook for Brazil so uncertain as it goes to the polls today
is the fact that for most Brazilians, fiscal prudence and a return to growth
are less important than immediate living standards, benefits and jobs. The
measures taken by Rousseff to maintain unemployment at just 5pc alongside
affordable food, fuel and transport may not be sustainable, but for most
voters that is a problem for tomorrow.

For investors, the incentive to invest in Brazil is further reduced by its
equity market’s domination by a handful of big companies. An investment in
Brazil looks like a bet on the government resisting populist measures at the
expense of shareholders and China regaining its appetite for South American
resources.

The risks look greater than the potential rewards.