Brazil in the last few years has spent a lot of money, but this, unfortunately, did not help to achieve a significant GDP growth and led to negative economic consequences.
In addition to the lavish spending in preparation for the world Cup this summer and Olympics in 2016, the national oil company of Brazil is spending billions of dollars on costly research to develop shale oil and energy development.
The head of Templeton Emerging Markets Group mark Mobius went to Brazil and, while acknowledging a large number of economically issues, still believes that the country is too early to write off.
Mark Mobius on the beach in Brazil
Resources also end at the other huge projects they are not enough on social programs to support the population with low income.
The situation in Brazil has become so critical that ratings Agency S&P recently downgraded the country’s credit rating from “BBB” to “BBB -” and this is the lowest investment level that reflects the deteriorating financial situation of the government and lack of confidence in the stability of the economy.
Rating actions may increase the pressure on the government to bring public finances in order.
In February, the Minister of Finance of Brazil Guido Mantega has promised to cut government spending by $18 billion, but many analysts believe that this would be difficult in the short term due to the upcoming presidential elections in October.
Brazil’s GDP in 2013 grew by 2.3%, and this year it is expected the same growth. This is clearly insufficient to generate funds that could be spent on infrastructure projects and social security, wrote Mobius in his blog.
Banks controlled by the state, increasing lending, but it may lead to a sharp increase in “bad” loans. Perhaps the government will have to increase the capital of banks, and this may lead to an increase in public debt relative to GDP.
Political decision-making process requires a lot of time, therefore the necessary reforms are delayed. Some reforms will require consideration in both houses of Parliament, and their approval to not so easy, given the different interests of different groups.
A bad economy is not the reason for the change of power
In 2013 in several cities there were demonstrations against the increase of fares in buses, corruption and poor infrastructure. Until that time, the Brazilian government has enjoyed high popularity due to low unemployment and a number of populist programs.
In early 2013 the approval rating of the President was at 70%, but by the end of the year decreased to 30%. However, Dilma Rousseff has a chance to be re-elected in October.
Given the growth of the national debt, money for infrastructure development urgently need to be attracted from the private sector. The new plans foresee a large package of incentives for private sector investments in roads, Railways and airports. And the upcoming Olympic games forced the government to act more actively.
Problems that are solved
Rio de Janeiro attracts millions of people during the great carnival. While many residents leave the city, escaping from traffic jams and noise, come even more, and the streets become clogged from a huge number of those who wish to see the festival with my own eyes.
Of course, that employees of city services at this time are working almost around the clock, and they realize that this is the best time to demand higher wages. Local authorities quickly enough to resolve such disagreements, understanding the responsibility before tourists.
Another problem is the huge blocks of slums, called favelas. But here, the authorities began to do what was necessary to do for a long time. More than 100 thousand households of favelas, which is about 23% of the total number, are in the process of obtaining the right of ownership. This should unlock the ability to raise capital to improve the condition of homes and entire neighborhoods.
Of course, such procedures are very complicated bureaucratic point of view, but the locals at least had the hope of becoming the legal owners. This will not only make this “house” asset, but also allow them to have a real address, but it should help to get a loan.
In Rio there is a program “My house, my life”, started in 2009, the programme was expected to build 1 million new homes by 2016, These goals have been achieved, and the program expanded.
There is even a special construction company who work within the program, and their pricing is aimed at families with low income. The demand for various building materials is very high, and experts believe that Brazilian companies produced much less than the market needs.
In General housing, including medium and high price segment is growing at a very fast pace.
Buying or building a home requires financing. There is concern that some families will not be able to pay the mortgage. Household debt now amounts to more than 40% of their income, the mortgage is about a third of this debt, but this proportion increases due to the preferential financing programs.
Investors should look at consumer
The long-term prospects of Brazil should not be regarded from a political point of view, but from a consumer. A large number of companies focused on the consumer, can contribute to the economic revival.
But while the country has serious problems. There is a danger of recession, and it will jeopardize recovering consumer spending and capital investment. The government will have to balance between the need to replenish the Treasury and economic growth. And the biggest hope for the coming sports events that should give a start to reform and increase investment spending.