Brazil is in crisis. The economy is expected to have shrunk by almost 4% last year and by another 3% this; if this pans out, it would be the worst recession on record. Both business and consumer confidence have hit record lows. Public debt is rising fast and credit-ratings agencies Fitch and Standard & Poor’s downgraded Brazilian government paper to junk last year.
What’s gone wrong? Everything. The downturn in commodities that Brazil specialises in, such as oil, iron ore and soya, has hit exports hard. Brazil’s structural problems, notably “poor productivity and unaffordable, misdirected public spending”, only made things worse, says The Economist.
The government under President Dilma Rousseff did nothing to rectify these in its first term (2011-2014), which saw “incessant microeconomic meddling and fickle policy-making” – such as tax breaks for favoured industries – that “bloated the budget [and] stoked inflation”.
Inflation has hit a 12-year high of more than 10%, so there is little scope for the central bank to boost growth with lower interest rates. A fragmented political system, now bogged down in impeachment proceedings against Rousseff, also suggests any turnaround will be some time coming.
It’s not a pretty picture. But bold long-term investors could be rewarded. There are glimmers of hope, with politicians now openly discussing privatisation, reform of the expensive pension system and constitutional change. Brazil’s young population and plentiful supply of soft commodities are also advantages. There also comes a point when all the bad news is in the price – on a cyclically adjusted price/earnings ratio of just seven, the potential upside if Brazil gets its act together is substantial.
Investors can get exposure via the iShares MSCI Brazil UCITS ETF (LSE: IBZL) and the JP Morgan Brazil Investment Trust (LSE: JPB).