The Brazilian Financial Crisis

By Tulio Konstantinovitch, a Brazilian second year student reading BA International Relations at the War Studies Department of King’s College London.
brazil crisis

Even though Brazil some years ago was showing a prospect of economic growth that would surpass Britain and France, this year it sank into a crisis that was not evident in the eyes of the population. Inflation rose and prices went up in the last months; interest rates grew in two years from 7% to 14%, a 100% increase, and the currency depreciated 40% from 2014 to 2015. Millions of people became unemployed and the industrial production shrank.

This made the country run deficits and get indebted internationally. Domestically, people are more and more in default with national and commercial banks. However, these catastrophic events did not happen out of nowhere, yet they are the consequence of a bad public administration that started to spend more than it should, creating false promises to the population. The embezzlement in the biggest Brazilian company, the oil-producer Petrobras, intensified this problematic scenario.

The Labour party, which has remained in power for 14 years, sold a false dream to the population. After Lula entered the public administration in 2002, he increased public spending in social programmes to boost demand of goods in order to develop the industrial and retail sector. He also increased the minimum wage and decreased the interest rates by 15%. This strategy worked well in the beginning, but led to complicated consequences for his successor, Dilma Rousseff.

A year ago, with the objective of re-winning the elections, the president Dilma Rousseff used public funds in order not to raise the prices of oil and electric energy. This led to public deficit since prices were controlled artificially, but the truth came out this year. In the last few months, the oil and electric energy prices had to be increased, but the problem was that the increment was too high for the population, especially the poor, causing a downfall in the overall economy.

With the fall of the Chinese economy, Brazil was also harmed. In the last years, the relationship between China and Brazil strengthened and now that China reduced the imports of Brazilian commodities, especially soil, the economy suffered. As if this was not enough, the political scandal involving the Brazilian national biggest company, Petrobras, made many investors take their assets out of Brazil, worsening the economy and depreciating the currency. With a decaying internal market, even with more interest rates and a low currency, investors are choosing to invest in countries that can offer a more extended market, such as China and India. At the same time, imports became more expensive and the international market has not developed the expected attractiveness to Brazilian goods, even with the low currency. In the long term, however, international speculators might invest more in Brazil and other countries may buy more goods due to the weak currency.

At the moment, as a solution to the crisis, the CEO of Siemens Brazil Paulo Stark, believes that “one focus should be public-private partnerships, which will largely depend on government policy, rules, and the concessions program. A revised concessions program that is more open to private capital could dismantle many of the hindrances we have today and attract a lot of foreign investment in infrastructure, which is critical for the country’s growth, in areas like energy, logistics, and water supply.” The problem is that Brazil is still a restricted country to investment due to the lack of trust in the current government. Before any major investment takes place, those in the government who were involved in crimes have to be held accountable and charged and the public machine has to be organised in a way to hinder embezzlement. In regard of mistrust in the country, this will only change in the presidential elections of 2018 if the Social Party wins. Before that, Brazil will not show a good prospect of growth.

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