Brazilian Economic Downturn

The rapid devaluation of the Brazilian Real over the course of 2015 is the result of several factors.

by Radek Janowski, MBA ’16, EMI Fellow

The Brazilian Real recently reached a historic low against major currency pairs, touching over 4.20 Brazilian Reals to the U.S. Dollar. The currency has declined almost 50% this year. The rapid devaluation of the Brazilian Real over the course of 2015 is the result of several factors, namely: high inflation, government corruption scandals, rising unemployment, high debt load, credit risk downgrades, and contraction of overall economic output. The Brazilian Real continues to have a negative outlook based on analyst ratings. An analyst from Societe Generale even predicts a fall to 4.40 Brazilian Reals to the U.S. Dollar by the end of the year.[1]

Inflation has continued to rise at a rate of almost 10% per year given the financial headwinds facing the currency.[2] Rising inflation has made everyday life difficult for many Brazilians. As the value of wages has not substantially increased, people are scaling back on purchases as their buying power declines. The GDP per capita was reduced from US$15,984 in 2011 to US $7,856 in 2015.[3] There has been a strong decline in purchasing power due to unemployment and banks have been imposing cuts on loans issued to families and individuals. According to the Brazilian consulting firm TendÊncias, rising unemployment, higher salaries being replaced by lower ones, and tightening credit have led to a decline in purchasing power of 8% this year for families.

The Petrobras corruption scandal that has engulfed President Dilma Roussef’s government has resulted in a decline in overall business confidence in the Brazilian market. Several members of Dilma Roussef’s government have been put on trial for corruption charges and the President’s approval rating has fallen to a record low of 8% recently, with many oppositions parties and protesters calling for her impeachment.[4] Many observers wonder whether Petrobras can pay back its debt load given the company’s declining credit rating and amount of debt. The low approval rating of the current administration has raised doubts among many observers as to whether crucial economic financial reforms can be passed by the government.

Unemployment is growing quickly, reaching 7.6% in August 2015.[5] Rising unemployment and dissatisfaction with the current government has led to widespread protests in large cities. Recently, an anti-government protest in Sao Paolo drew 350,000 protestors, the largest such protest in recent history.[6] Industrial output has declined for six straight months this year and layoffs from declining industrial output are further increasing unemployment.[7]

Recent analyst downgrades at S&P and Moody’s have lowered Brazil’s credit rating to junk.1 Lowering of the credit rating has further exacerbated the decline of the currency, leading to a emergency measures of $65 billion in budget cuts and tax increases in September by the Brazilian government to prop up the Brazilian Real.[8] However, further financial reforms are necessary to balance Brazil’s budget as the financial outlook continues to be revised down by the Brazilian Finance Minister.

The GDP is expected to contract 2.5% this year as a result of mounting economic difficulties facing the Brazilian government.[9] As the economic environment worsens, foreign investors are pulling out capital from Brazil at a rate of $48 billion in the first six months of 2015.[10] Without swift government intervention, the Brazilian Real is likely to continue its decline for the foreseeable future.

[1] “Brazilian Real sinks fast after S&P junk move.” http://www.ft.com/fastft/389991/brazilian-real-sinks-3.3-after-sandp-junk-move

[2] “Brazil Inflation Rate.” http://www.tradingeconomics.com/brazil/inflation-cpi

[3] “Rise of Dollar Accelerates Brazil’s Impoverishment.” http://www1.folha.uol.com.br/internacional/en/business/2015/09/1687370-rise-of-dollar-accelerates-brazils-impoverishment.shtml

[4] Dilma Rousseff: Brazilian President’s approval rating drops to just 8%.” http://www.independent.co.uk/news/world/americas/dilma-rousseff-brazilian-presidents-approval-rating-drops-to-just-8-per-cent-10445536.html

[5] “Brazil Unemployment Rate.” http://www.tradingeconomics.com/brazil/unemployment-rate

[6] “Anti government protestors take to streets across Brazil.” http://www.seattletimes.com/nation-world/anti-government-protesters-take-to-streets-across-brazil/

[7] “Brazil’s industrial output drops 1.2% pct in August.” http://www.reuters.com/article/2015/10/02/brazil-economy-industry-idUSL1N1220JL20151002

[8] Brazilian real: Heading south again.” http://www.ft.com/fastft/392051/brazilian-real-4

[9] “Petrobras shares untouchable after Brazil debt downgrade.” http://www.thestreet.com/story/13287478/1/petrobras-shares-untouchable-after-brazil-debt-downgrade.html

[10] “Investors pull $1 trillion from emerging markets in a year.” http://money.cnn.com/2015/08/24/investing/emerging-markets-capital-outflows/