Brazil's moment of possibility
John Authers reports from Brazil, the most popular market in the world over the last year, on the chances for reforms, and the continuing problems facing a country that is still in recession
Produced filmed and edited by Gregory Bobillot. Additional material: Getty, Reuters
Is this Brazil's moment? It hosted the Olympics and the World Cup. And it's a great and beautiful country. And it's been scarred by an epic political crisis that last year saw the president impeached.
Public anger and a huge and spreading corruption scandal is intense and it's suffering its deepest recession in decades. Somehow could this yet be the perfect opportunity for the caretaker government of Michel Temer to make the structural reforms that will attract back investors?
Brazil is in all likelihood coming out of a very deep crisis. It's a year when we anticipate growth. The stock market is up. The currency has stabilised. Brazil is an enormous country with huge natural resources, very highly qualified population. And it's a country that no investor can ignore.
Now what is the state of the Brazilian economy? Well, if you take a look at the markets, they turned. The Brazilian stock market has done better than any other emerging market over the last year, while the Brazilian real, its currency has also rallied very impressively against the dollar.
If you take a look at inflation, longer problem here in Brazil, it is improving very rapidly. And that means that interest rates among the highest in the world are also falling and should fall further. That's all good news.
But if you take a look at the actual GDP numbers, you can see that it's still shrinking. The recession has not ended yet. Similarly, if you look at unemployment, the unemployment rate is still rising, even if it's predicted that it should turn by the end of this year.
If you look at the impact that the government and it's spending has on the economy, again, it looks quite unsustainable. That makes structural reform all the more important. But if you take a look at the president's approval ratings, they are falling badly and could scarcely be any worse. That's a problem if he wants to pass structural reform.
The biggest breakthrough so far has been to change the Constitution to require a steady reduction in government spending as a proportion of the GDP. But the next big issue being steered by finance minister Henrique Meirelles is to reform pensions.
Brazil's system is very generous with an effective retirement age of about 53, according to the World Bank. And the country can't afford it, but making people work long there will be unpopular. And it could get divide public and the private sectors against each other.
How to explain that to people and make sure that everyone understands that, number one, it's very important role that reform approved for the growth rate and the GDP to come down, to be sustainable over time, and for Brazil to be able to create jobs, increase the level of income, and the per capita income of the people. And for that to happen, it's important to improve the social security reform.
All this will be difficult. People are angry and corruption scandals have drained their trust in officials. The situation is worse than the state of Rio de Janeiro, which overextended to pay for last year's Olympics.
Now there's one more reason for optimism. The markets themselves could create a virtuous circle, as the markets have risen of late. So it's become much cheaper and easier for Brazilian companies to access capital.
The market has certainly granted the benefit of the doubt in relation to Brazil lately. It's a long way towards full recovery, but we've been slowly regaining lost credibility. So that has eventually led to the resumption of capital markets activities.
We have stayed in Brazil without a single Brazilian corporate issuing for 11 months. This market has fully resumed. And we have had $26 billion dollars of issuance ever since May last year.
Is this Brazil's moment? Well, yes, it very possibly could be. But with so many people still sleeping rough, even here in the business centre Sao Paulo, nobody should be under any illusions about the scale of Brazil's problems. The window of opportunity to make changes is open, but it may not stay open for much longer.