Sunnier Skies May Be in the Offing for Brazil

Though it has yet to emerge from a recession that is now two years in the running, Brazil’s economy might be set to enter positive territory this year, with both private consumption and investment driving growth.

It’s doubtful that the rebound in production will be vigorous, however. According to a report from Euler Hermes, investment has plunged by over 10% and has been the worst-performing component in 2016. Imports have contracted and private and public consumption have decreased. But the fall in GDP has moderated, and indicators for confidence and production that dropped heavily last year are now evening out.

A quick fall in consumer prices enabled Brazil’s Central Bank to cut its key policy interest rate for the first time in four years. More cuts are expected throughout this year to prompt growth in the economy.

Businesses and households have accumulated debt below that of other emerging economies. Public debt continued to rally and escalated to about 74% of GDP compared to an average of 47.5% of GDP for emerging economies. Brazil is allowed to hold this level of indebtedness because it is a one of the best in regards to reserve adequacy, the credit insurer said.

Some domestic banks and local governments in the country may see some negative effects from the “Carne Fraca” (Weak Meat) investigation into corrupt practices in Brazil’s protein industry, according to Fitch Ratings. Long-term risks from the investigation are expected to be limited as long the investigation does not spread from those plants already implicated. If the meat sector were to undergo a wider risk scenario, public sector banks would likely be more exposed, the ratings agency said.

– Adam Fusco, associate editor

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