“Brazil Just Getting Worse and Worse”

The “B” in the falling BRICS…

Brazil is in a tough spot. Led by weak investment and plummeting confidence, growth, after slowing markedly since mid-2013, came to a virtual halt in 2014. This largely reflects the impact of diminished competitiveness, the erosion of policy credibility, owing to a persistent deterioration of fiscal outcomes and above-target inflation, and a worsening of external conditions for the country.

Risks to the outlook are significantly to the downside, and include adverse ramifications from the ongoing corruption probe concerning Petrobras, the possibility that fiscal policy goals may not be fully met, and energy and water rationing.

External downside risks emanate from a tightening of global financial conditions, geo-political tensions, and contagion from adverse developments in other emerging economies.

These risks could conflate if they were to combine with domestic policy shortfalls, and would threaten macro and financial stability.

The phrase, “threaten macro and financial stability,” is official-speak and central-banker jargon for a resounding economic and financial crash. It’s Brazil’s doomsday scenario.

This was written not by some doom-and-gloomer, but by the IMF. It’s how its report on Brazil starts out.

The report never mentioned “austerity,” the classic IMF prescription to make sure the teetering country’s sacred bondholders – mostly financial institutions – don’t end up holding the bag. “Austerity” has become object of derision. So the report bandies about the exact synonym, “fiscal consolidation,” after initiating it promisingly:

Fiscal consolidation should proceed without delay along the announced lines, while monetary policy should remain tight to bring inflation to target.

State-owned Petrobras, the country’s largest company, the once shining knight and in the once most promising industry, has been torn apart by corruption allegations that go all the way up the political ladder. And things have essentially ground to a halt.

Financing is already tough in the energy sector. But for Petrobras, it has gotten even tougher. If it cannot access the markets, it will have to go begging to the government. But the government doesn’t have the money and is undergoing “fiscal consolidation.”

The report adds a flair for the economic domino theory:

Adverse spillovers from the corruption probe could be large. The probe involves several of the largest construction companies in Brazil. At present, 27 such companies have been banned from engaging in new contracts with Petrobras. As already seen in one case (OAS), these companies may face difficulties securing financing, possibly impacting their suppliers and creditors.

The World Cup didn’t change anything other than making Brazil’s fiscal problems worse by digging a deeper hole that now requires “fiscal consolidation.” But the media has a field day discussing the “white elephant stadiums and unfinished infrastructure projects”:

The most expensive World Cup stadium – located in the capital, Brasilia, and with a price tag of $550 million – is being used as a parking lot for buses.

The stadium in Cuiaba – which cost some $215 million to build – has made news repeatedly: first for being closed down because of faulty construction, and then recently for the homeless people squatting in its unused locker rooms.

That’s the curse of these kinds of glory events. The Olympics had been the final kick that pushed Greece over the cliff. Oh wait. Next year, the Summer Olympics will be held in … Rio de Janeiro.

And then there’s the water shortage. Not like in California, where we have a drought that is difficult to deal with, but for urban residents at least, water still comes out of the tap. That’s not assured on a daily basis in Brazil.

Instead of blowing money on grandiose stadiums and corruption, Brazil should have invested it in water infrastructure projects.

So the new Finance Minister Joaquim Levy, in order to fill the gaping hole left behind by the World Cup and years of stimulus and decades of corruption, is trying to cut the budget and extract higher taxes – “fiscal consolidation.” It’s not going to work. But he’s trying bravely.

Inflation is running loose, and the central bank is raising rates to tamp down on it. The economy shrank in the Q3 2013 and has since gone nowhere. The IMF predicts that GDP in 2015 will contract only 1%. That’s the optimistic scenario.

At the same time, Brazil faces external risk: China, its crucial trading partner, is slowing down and imports into China are plunging [read… Global Demand for Chinese Goods Sinks, Chinese Leaders ‘Caught Off Guard by Sharpness of Downturn’].

In the US, the Fed has stopped QE and has kicked off a cacophony about raising rates. When these rate increases kick in, capital flows will reverse, and “hot money” will evaporate from Brazil, perhaps overnight, triggering a liquidity crisis, unless Brazil gives this “hot money” reason to stay. And that may be tough.

Those are among the things the IMF is fretting about.

Here are two charts that the IMF didn’t include in its report – true doom-and-gloom charts of industrial production, which has been shriveling for seven quarters in a row, and of industrial and consumer confidence, which have collapsed. Note that industrial confidence has reached the lows of the Financial Crisis:

And Brazil’s most crucial trading partner is running into trouble. When the People’s Bank of China spoke of “big downward pressure,” it wasn’t kidding. Read…  China Downturn Hits US Automakers

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  20 comments for ““Brazil Just Getting Worse and Worse”

  1. Great article Wolf! There is one more chart that would have been good to include that depicts the deteriorating condition of Brazil’s economy – the price of gold in Brazilian Real (http://goldprice.org/spot-gold.html). Gold is up almost 30% in BRL since last July and recently made an all-time new high of R$3874 at the end of April.

  2. VegasBob says:

    No government anywhere has addressed even one of the issues that nearly brought down the financial system in 2008-2009.

    Instead, governments, corporations, and individuals have borrowed to the hilt thanks to zero interest rates. There’s no chance all that borrowing will ever be repaid.

    A Russian economist, Mikhail Khazin, has predicted that the next financial collapse has the potential to be 2.5x worse than the Great Depression.

    The real question at this point is what triggers the next downturn. Brazil? Japanese economic implosion? China recession? Europe depression? Greece? One of the other PIIGS? US recession?

    • VegasBob says:

      I have a correction to make.

      I should have started off my comment with: No government anywhere, except for tiny Iceland, …

      Only Iceland had the courage to extend a middle finger to the world’s banksters and put their own banksters in prison.

      • Joana says:

        Yeah right, tiny Iceland that took an IMF programme like the others and ended up electing again the same politicians that ran them to the ground.

        • Icelander says:

          You are delusional, educate yourself before you speak up. VegasBob is right

      • Ray says:


        What are the facts? Why send bankers to jail for non-violent crimes? For manipulating markets when governments all over the world do this as a matter of course? Why praise the curbs on individual freedom (capital controls)? Why praise the “more efficient tax” regimes (increased looting from citizens. Who are the real criminals here?

  3. d says:

    Since 08 the US fed has sought to defy the classic double dip recession for the world with QE.

    I dont believe this is in fact possible.

    We may be at, or nearing the top of a very large and ugly second dip.

    This high has been stocked by QE, so the accompanying fall must be: longer, harder, faster, and lower to balance it.

    It would be nice to be wrong, but deep inside I believe the double dip must be allowed before real markets can truly make a real recovery.


    The BRICS are trying to destroy the power of the US $ with their own basket of worthless paper. The AIIB is simply another attempt by them to do so. Yet they are all slowly imploding even as they attempt to offer something hollower and more corrupt than the US $ as the new way.

    The indicators are none of this ends well for the BRIC’s in particular, look at what is going on in some of them it makes the US manipulations look angelic. The real numbers in China make the US number look small.

    The only other option may be a major WAR, which may explain china’s ridiculous aggression, insistence on the nine dash line, and its behaviors in Philippine territory. As any nation that wants long term peace with its neighbours, does not behave as china is, unless it intends to militarily force that peace on its terms.

    • NY Geezer says:

      I agree with you. Your disbelief of the QE remedy is correct.

      Since 2008 all ( or virtually all) governments have bailed out their banks and favored oligarchs by exchanging the toxic assets of those privileged few for all of the governments’ existing and future sovereign assets. They have all incurred so much debt that whatever future cash and assets they will receive from their populations will be encumbered for the indefinite future.

      As a result, I can not think of any government that remains solvent under this burden. The world economy is now reduced to a situation in which a few insolvent countries pretend that they are capable of paying their accumulated massive debts as well as the accumulated massive debts of all the other insolvent countries. The markets pretend to believe the lie not because they expect this debt to be paid but because each clever market player believes he/she can trade out of debt or other assets that he/she purchases and book capital gains before the collapse.

      The sustainability of the governmental pretenses and lies has always been in jeopardy. Although the markets cheer, much of the populations of the world have now come to fully understand that this is a policy that consumes their private assets to serve the greed and corruption needs of a few. That they personally have been and will continue to pay the full price for it such greed and corruption through the loss of their pensions, savings and various governmental benefits that they justifiably expect not to lose.

      These governmental policies that serve the few are not compatible with the democratic form of government that relies on the will and consent of the governed. These policies are adopted and implemented by non-elected officials to whom vast power has been delegated. Most developed countries have constitutions that guarantee a democratic form of government answerable to the people. Thus people rightly expect their governments to respect their will and they shall soon remedy the situation, hopefully at the ballot box.

  4. Alexandre says:

    Im brazilian and that is all true.
    Like I havê said. This blog is the best.

  5. Dan Romig says:

    Brazil is following the path of Greece and Athens in many ways. Athens hosted the Summer Olympics in 2004, and the debt accumulated in constructing the venues was a factor that led to where they are now.

    Even though Brazil is a football crazed nation, the masses were against hosting the World Cup as they saw the corruption that went along with the preparations.

  6. Michael Gorback says:

    Greece was recently invited to join the BRICS Bank. Perfect fit. Throw another anvil in the boat. Of course, they’ll have to lend Greece the $10 billion membership fee.

    • Mark says:

      If Greece (or Brazil) can prevent their gold reserves from being looted by the bankers, they can rebuild their economies after the coming collapse of the current fiat money printing madness. Of course, that’s a big “if”.

  7. NotSoSure says:

    The Fed will lend Brazil dollars, you can bet on it. Heck, there are so many economies close to collapsing but always managing to hold on to dear life, I suspect the Fed is already holding them up.

  8. Julian the Apostate says:

    Sigh. Coming soon to a theater near you.

  9. Peter says:


    I am very glad you published this article, which I will archive.

    Based the sentiments expressed, I think the Bottom is in for Brazil.

    How many persons authoring missives have ever been to Brazil. If yes, how long ago.

    I have business in Brazil and travel there at least once a year. And simultaneously visit Argentina on each trip, which lasts three weeks. I have been going to South America for 20 years. The demise of Argentina has been reiterated to death. You ought to visit there sometime – go not just to BA but down south to Tierra del Fuego; and to Bariloche and San Martín in the Andes. Life ain’t so bad there.

    Brazil is a huge nation. A famous German-speaking author from the 1920’s, Stefan Zweig, relocated to Brazil in the 1930s. He wrote a travelogue about everything to see and do in Brazil – kind of a propaganda piece for tourism – possibly repayment for alien resident status. In any event, the title of the monograph says this:


    Land of the Future”

    I have been going to Brazil since the 90’s. I can tell you this:

    Brazil was a land of the future when SZ wrote his piece – was a land of the future when I first visited in 1995 – and was a land of the future when I departed Sao Paulo on March 5, 2015.

    Hope springs eternal as far as Brazil is concerned.

    The problem for all investors is that there is too much “potential” to ignore. Too many possibilities to write off.

    Brazil is one big family. Without trustworthy local partners, you have no chance in Brazil. I have seen fortunes made and lost there. Foreigners, with good products and business acumen have lost everything, due to rotten local managers and advisors.

    Foreigners will continue to pour money into Brazil. After all, it is still a Land of the Future.

    I am looking forward to my return in about 6 months.

    • Wolf Richter says:

      Peter, I’ve been to Brazil and loved it. Seen a lot of it. Even places like Manaus. I’ve been to Argentina, crisscrossed the country up and down, from Ushuaia to the catamaran ferry that took me to Uruguay… I’ve been to every Latin American country. And I loved them all, in their diversity and complexity.

      OK, I don’t speak Portuguese, which was a problem in Brazil. They understood my Spanish, but I didn’t understand them…. Would I go back for the right reason? Sure.

      But the article is about what the IMF said concerning the deep economic and financial problems Brazil has. And they won’t blow over that quickly.

      • Alexandre says:

        Hi Wolf,

        Next time u get back, you are invited to visit our company and havê lunch with US.

      • Peter says:


        when you make your next trip to NYC, call me for a free lunch too.

        My point is that Brazil is what it is: a handful of powerful and rich people controlling everything. Nothing has changed much in the last 20 years, except for the amounts of money foreigners have invested in Brazil.

        The successful investors understand from day one what is going on there – at least everyone is up-front about corruption – and bureaucracy. More importantly, nothing gets done in Brazil, until your manager’s cousin’s best friend in government clears the obstacles.

        At, least Brazil is a land of the future. Without mentioning names or places, I am close to a native Brazilian, who has multiplied his net worth by at least 50 fold in the past 8 years. His business and market share doubled in the past two years. He imports, installs, services and finances products, sold through a private dealer network throughout Brazil.

        Can you write an article about the USA: America – the land of the future. No you can’t. America is the land of yesteryear.

        I grew up in the halcyon days of America – from 1950 through the date JFK died in 1962. Thereafter, American began its downhill descent.

        You were not in the USA back then. I could give an account of how neighbors of ours, entrepreneurs in a back-water of Buffalo, NY started businesses in their garages and built them up into large businesses and made fortunes. People, who invented real things, like the helicopter, the inflatable building, the synthetic sponge and the jukebox. I knew these people – they had an idea, which they converted into reality, without government or wall street.

        What was doable back then, is not doable today, mostly because of the stranglehold that big corporations and banks and big government have on US commerce and what’s left of industry.

        That was not the case in the 1950’s. Can you imagine a helicopter test pilot – Floyd Carlson – landing his prototype in his backyard every night. I can – he was our neighbor. He was revered by everyone – he was re-inventing the helicopter. No problems with the police, government, neighbors – no one.

        Best Regards,


        • Wolf Richter says:

          Peter, I’ll take you up on that lunch. We’ll have lots of good stuff to discuss :-)

          BTW, here in SF and in Silicon Valle,y people are certain they’re inventing the future.

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