DIY Investor Magazine
| Oct 2017
36
POSTCARD FROM BRAZIL
Alasdair McKinnon looks for signs of turnaround in
Brazil following his trip to São Paulo and Brasilia.
Ten years ago, Brazil was the darling of global investors
and a major destination for international investment
flows. Much was made of its emerging middle class
and booming resources sector. What could possibly go
wrong?
Too much cheap money, as it turned out. Brazil was
a good fundamental story, but a credit bubble soon
began to grow. The rot set in, with rampant corruption
and spendthrift populist governments. Then, not only did
the credit bubble burst, but global conditions meant that
demand for Brazilian resources collapsed, and credit
dried up altogether. The economy experienced an 8%
real-term decline, and inflation rose as high as 11%.
So what’s happening now? The most obvious
development is political change. Following Dilma
Rousseff’s impeachment last year, Michel Temer’s
administration is pursuing a reform agenda. Temer’s
government has defended the currency and refrained
from simply putting up wages – too often the response
to past economic crises.
Corruption casts a huge shadow, of course. The
Petrobras ‘car wash’ scandal has threatened to engulf
just about every Brazilian politician – with Temer no
exception. He’s currently mired in graft allegations,
putting the future of his presidency in doubt.
But there’s also a clear desire for corruption to be rooted
out. All the bureaucrats we met were adamant about
this, and the judiciary appears to agree – as the reach of
the ‘car wash’ case shows.
Meanwhile, Temer’s government is pressing ahead with
labour reforms. Laws from the 1980s and 1990s are
being repealed, and bizarre practices, such as paying
workers for an eight-hour day but having them work only
six hours, are being rolled back. Much-needed pension
reform is also on the agenda.
Brazil also now has a relatively stable currency. The real
is weaker than in the boom days but hasn’t collapsed
despite all the economic turmoil. And its modest recent
weakness is making exports more competitive.
Meanwhile, there are clear signs of economic
improvement. Growth has returned, and inflation is
falling. From over 11% at the start of 2016, the consumer
price index has reached an 18-year low of 2.46%.
