Brazil, it’s Time to Face Reality

Yesterday, the Olympic torch was extinguished. The ‘marvellous’ games are over.

The fears that Zika, disorganisation or violence would ruin the games were unfounded. It’s true there were a few glitches, like green pools and Ryan Lochte’s fake robbery. But Brazil averted major disasters.

Rio did a good job in fitting the spirit of the city into the Olympics. Athletes and spectators had to coexist with the glamour of the games and poverty. Giving a glimpse into Cariocas — Rio’s inhabitants — everyday life.

As the President of the Olympic Committee said, ‘These were Games in the middle of reality.

And the games ended with a bang. Brazil won the gold medal they desired most: football. The win against Germany redeemed their embarrassing 7–1 defeat during the World Cup. And gave Brazil hope that they can still recover from a bad situation.

After all, Brazilians are eternal optimists when looking into the future.

Now countries are reflecting on their Olympic performances. Yet Brazil needs to face its economic and political crisis. President Dilma Rousseff’s impeachment trial starts in just two days.

Brazil’s economy was booming in 2009. Fuelled by household expenditure and rising commodity prices — Brazil is the second largest iron ore exporter to China.

But expenditure raised household debt to record levels. And commodity prices have decreased. The growth model that was so successful in 2009 is not working anymore.

And as inflation crept up, the government tried to increase growth with fiscal spending.

Yet this only increased government deficit to record highs.

And the budget deficit is not the only problem. Brazil is facing stagflation, which is slow growth, rising inflation and high unemployment.

Corruption is also running rife. 40% of federal legislators are under investigation for a range of crimes.

And politicians are not the only ones in trouble. Executives from major companies like Oderbrecht, Petrobras and Andrade Gutierres are behind bars. These companies used to make large infrastructure investments, but have recently cut spending.

Plus there is the ageing population debate.

You see, Brazil does not have a set retirement age. Brazilians retire at an average age of 54. And even once the pensioner passes, family can keep on receiving the pension for years. That increases the social security spending hole.

A large part of the population will be retiring in the next few years. The National Security System, Brazil’s social security system, will reach a 3.2% of GDP deficit by 2020. Dilma brought this issue to congress at the beginning of the year. Yet congress defied her and voted to expand the pension benefits. Dilma was able to veto the legislation.

Interim president Michel Temer has committed to reforming the pension system. And to define a retirement age to make the pension plan system more sustainable. Yet he doesn’t have the power for these reforms.

But there is some good news.

Brazil has been running trade surpluses since 2015. It has one of the highest interest rates in the world, at 15.40%. And with interest rates at record lows in Europe, Brazil wants to take advantage of Europe’s bad investment conditions to bring investors in.

It looks like the global low interest rate trend is here to stay. And this is increasing the attractiveness of emerging countries like Brazil.

There have been a recent increase in confidence in Brazil’s economy. And Brazil will need to make smart decisions to keep that confidence going.


Selva Freigedo,
For Markets and Money

Markets and Money’s Vern Gowdie believes we’re already at the beginning of the next major crisis.

Vern is the Founder of The Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s top financial planners, Vern says the coming crisis is already in motion.

Australia has gone through two credit bubbles in its history. The third, and latest, has built up over the past 65 years. When it pops, the impact will leave a lasting mark. One that makes the 2008 financial crisis look like child’s play.

The fallout of this crash could damage your wealth. But you can safeguard your wealth from the worst effects of the coming crisis, provided you act now.

Vern will show you how to do this, and more, in his latest report, ‘Global Financial Crisis 2016: 3 Crisis Scenarios, and How They’ll Impact Australia’. To get your free copy today,click here.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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