Brazilian Politics Hamper Economic Recovery Attempts

Political uncertainty in Brazil in the wake of a widespread corruption scandal and presidential impeachment proceedings that suspended Dilma Rousseff for six months and temporarily put Michel Temer at the helm will keep Brazil in negative outlook territory by Fitch Ratings. The rating is a continuation of the firm’s downgrade of Brazil in May to BB.

Temer’s administration has declared its plans to introduce a constitutional amendment in the country to control spending growth. The government also is calling for pension reform and has begun a sort of fiscal stimulus by having Banco Nacional de Desenvolvimento Economico (BNDES) repay Brazil’s treasury $30 billion over three years—a noted contrast to loans the treasury provided to BNDES in prior years, Fitch Ratings said.

These factors would appear to lead to more controlled spending in the struggling country, but support in Brazil for Temer’s interim administration is still fairly poor. When combined with severe economic contraction and growing unemployment, it may serve to blunt the positive effects these policies may have on the Brazilian economy, the ratings firm cautioned. Projections from Fitch Ratings assume Brazil’s debt burden will rise to about 80% of GDP by 2017, while GDP could grow as little as 0.5% next year.

“Recent increases in business and consumer confidence and a reopening of domestic and international capital markets to some Brazilian corporates are positive signs,” wrote Shelly Shetty, senior director of sovereigns for Fitch Ratings. “But a sustained rise in confidence and the pace of the recovery will be influenced by political developments and the credibility of fiscal adjustment.”

- Nicholas Stern, editorial associate

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