There are just three days left before 2017, and Brazil’s economy is looking at yet another tough year. The Central Bank’s last Focus Report of the year, published this Monday, showed the worst projections yet. Let us walk you through it.
The latest inflation projections for this year are lower than ever, at 6.36 percent. However, this rate is still above the roof set by Brazil’s national price index (IPCA) of 6 percent. The inflation projections for 2017 also fell to 4.85 percent. Again, this rate is still above the Central Bank’s ultimate goal of 4.5 percent.
The inflation projections for 2017 also fell to 4.85 percent. Again, this rate is still above the Central Bank’s ultimate goal of 4.5 percent.
The Focus Report shows a market estimate of 0.5 percent growth for next year. This marks the 10th consecutive time that the report has decreased its growth estimation. Just last week, that same estimate was at 0.58 percent. And a month ago, it was 0.98 percent. Meanwhile, the Finance Ministry is working off a 1 percent growth estimate.
Furthermore, this Monday’s report projected a 3.49 percent retraction in GDP. Last year, Brazil recorded the largest retraction in the country’s history at 3.8 percent. 2016 will be the first time the country’s GDP has shrunk two years in a row.
On the other hand, the latest projections indicate that industrial production might not be shrinking quite so fast. The expected retraction for this year went down from 6.72 percent to 6.68 percent. In 2017, the projected rise in industrial production went up from 0.75 to 0.88 percent. These numbers are still worse than those of last month, which were down at 6.23 percent retraction and up to a 1.21 percent rise respectively.
Public Debt & Interest Rates
Finally, the report indicates an increase in public debt-to-GDP ratio in 2017. While this year’s final indicator came in at 45.2 percent, 2017 is looking at a public debt-to-GDP ratio of 50.74 percent. Excluding government assets, Brazil’s debt-to-GDP ratio climbs to 70.5 percent in 2016, increasing to 76.9 percent in 2017.
This ratio may not seem that high in comparison with other countries. For example, the U.S. reports more than double Brazil’s public debt-to-GDP ratio. However, Brazil’s North American neighbor also benefits from near-zero interest loan rates. Meanwhile, Brazil pays over 15 percent interest on its debt. That gives Brazil the fourth-highest interest burden in the world. Indeed, Brazil’s interest payments on public debt have taken up an increasing portion of its GDP since 2012. The government’s projected budget deficit sits at 10.4 percent of GDP at this year’s end.
Brazil’s high interest rates are a result of policy choices, not other risk factors such as civil conflict or international warfare experienced by other countries with elevated rates. In fact, Brazil’s real policy interest rate (set by the Central Bank’s Selic rate) is the fifth-highest in the world. Brazil’s high interest rates follow its policy of inflation targeting, which raises the value of the Brazilian Real and lowers the prices of tradable goods. In turn, this policy adds to unemployment and damages growth.
Dollar vs. Real
The report showed the American dollar closing out 2016 at an average of 3.37 BRL, up two cents from last month’s report. As for next year’s average exchange rate, the report hiked it up to the most recent estimate of 3.42 BRL.
The median price of the dollar in 2016 remained at 3.46 BRL. In 2017, that median will go up by four cents.
Some good news
On a different note, surplus estimates (of more exports than imports) did increase from 47 billion BRL to 47.1 billion BRL. For next year, the estimates went up from 45 billion BRL to 46.85 billion BRL.
Meanwhile, this year’s projections for direct foreign investment went up from 67.16 billion BRL to 68 billion BRL. The estimates for 2017 stayed at 70 billion BRL.
As of last week’s decision in Congress, the federal government will inject 11 billion BRL to alleviate state debts by this year’s end. From the look of things, the federal government will likely need to put up even more money within the first months of 2017.
As the 2016 fiscal year comes to a close, 12 Brazilian states are in the red. States had counted on an economic upturn in 2017 to get them out of debt, but the projections continue to worsen. Even states projecting surpluses in 2017 will have to re-evaluate their budgets according to next year’s grim economic projections.
Rio de Janeiro finds itself in the worst debt situation, 19.3 billion BRL in the red. Its largest expenditure is the public pension system; Rio reports practically the same number of retired civil servants on its payroll as active working employees. Minas Gerais reports a debt of 8.06 billion BRL for 2017, and Paraná 4.1 billion BRL. Rio Grande do Sul reports a 1.2 billion BRL surplus for 2017, although 2.9 billion BRL in “extraordinary income” was thrown into its budget by state accountants to cover up its actual debt. In fact, the state’s finance ministry admits that if all of this year’s debt transfers into 2017, they’ll be looking at a deficit of over 5 billion BRL.
Rather than lowering interest rates and opening up fiscal space for economic stimulus, Temer’s government took the opposite route with its 20-year federal spending cap. The constitutional amendment limits increasing the public budget beyond the rate of inflation, which some economists argue places Draconian restrictions on the government when the vulnerable economy needs flexibility most. Others argue that the austerity plan will inspire greater confidence from foreign investors.
However, everyone seems to agree that the outcome will depend on the actual implementation of the plan. If the government makes exceptions for the rich – the wealthiest segment being the politicians themselves – then it will only serve to deepen income inequality.
Finally, the government needs to focus its energy on pairing fiscal reform with stimulating productivity. The World Bank estimates that Brazil needs to implement an infrastructure investment rate of at minimum 3 percent to offset depreciation. However, Brazil’s total investment in infrastructure so far has accounted for less than 2.5 percent of its GDP since 2000.
Temer’s government is looking at a new year of balancing fiscal policies, political rifts, and pulling the world’s 8th-largest economy out of the ditch.