Game of Thrones in Brazil

Brazil, until recently the darling of foreign investors and the rising star among developing countries, has spent the last two years in an increasingly deep recession and an enormous debt crisis. The causes include falling commodity and oil prices, the irresponsible conduct of the Workers’ Party led by Dilma Rousseff, and corruption scandals involving numerous politicians and businesspeople.
About a month ago, the Senate approved opening an investigation into incumbent President Dilma Rousseff on suspicion of violating budget laws through “creative accounting” intended to conceal the country’s enormous deficit. That decision automatically suspends the president for 180 days. She will apparently be convicted and forced to leave office.
Dilma’s deputy, Michel Temer, was appointed interim president and is expected to serve until the next elections in late 2018. Stabilizing the economy is far from simple: he must win market confidence and cut government spending while maintaining coalition unity. Opposition parties are attempting to undermine his government’s legitimacy, arguing that the impeachment process is undemocratic and effectively an attempted coup.
Brazil’s macroeconomic figures are far from encouraging. The economic crisis has severely damaged government tax revenues, and Temer’s government expects a deficit of 170.5 billion reais (approximately $50 billion) in 2016. The debt/GNP ratio stood at 66.2% in 2015 and is expected to rise in 2017. Brazilian GNP is expected to shrink by 3.88% in 2016 and return to modest growth of approximately 0.3% only in 2017. Despite the deep recession, inflation continues to rise. Prices increased by 9.8% over the past twelve months, well above the central bank’s target. The percentage of unemployed jobseekers is also rising and has already exceeded 10%.
The Olympic Games scheduled for Rio de Janeiro this coming August are not lifting Brazilians’ spirits either. The feeling is that the Games will bring little, if any, change to the economy. Corruption scandals surround the huge contracts for facilities and infrastructure, casting a shadow over the festivities.
Temer, known for his conservative views, has taken several confidence-building steps. He appointed Henrique Meirelles as finance minister and Israeli economist Ilan Goldfajn as central bank governor, both highly experienced economists known for their skills and ability to stabilize the economy. Temer has begun an urgent social-security reform, with planned measures including a higher retirement age for women and men. The interim government has also decided to limit spending. Judging by the dollar exchange rate, which has fallen to its lowest level in ten months and trades at around 3.4 reais per dollar, these measures have been welcomed and are expected to support a slow return to growth.
Those seeking to diversify their investment portfolio should consider investments in funds specializing in Bovespa shares (the São Paulo stock exchange) very carefully: share prices are highly volatile and a bull market is not expected in the short or medium term. However, funds specializing in bonds and fixed-interest investments may be interesting, since Brazilian interest rates are among the highest in the world. The interbank interest rate currently stands at 14.25% annually. Here too, risk must be examined, as Brazil is closer than ever to default.
Brazilians are excellent hosts, and the Olympic Games will undoubtedly proceed as planned. But immediately after the final whistle, tens of thousands currently employed on Olympic projects will become unemployed, giving the government another problem to address. We can only hope Temer succeeds in passing the proposed reforms and limiting government spending, thereby stabilizing the economy until the 2018 elections. If he fails, Brazil faces many more years of economic instability and worsening stagflation (recession accompanied by rising prices).