May 25, 2015 12:40 pm
Brazil’s economy is expected to contract by nearly one-quarter this year in dollar terms due to a depreciating currency and a deepening recession, according to government figures.
Brazil’s planning ministry revealed in a budget presentation that gross domestic product was expected to be $1,812bn this year, down 23 per cent from $2,353bn a year earlier, as President Dilma Rousseff tries to unwind a multiyear stimulus programme that has left government finances bleeding red.
“We know that in a populist model you have a fake sense of prosperity in the short term,” said Alberto Ramos, economist with Goldman Sachs. “So after populism comes the adjustment and the adjustment is basically just giving back all these fake gains.”
Brazil’s economy is facing a hangover with the end of the commodities supercycle and government efforts to prolong a consumption and credit-led boom.
Much of the expected fall in Brazil’s economy in dollar terms this year is due to a projected depreciation of about 21 per cent in the real against the dollar from R$2.66 at the end of 2014 to an estimated R$3.22 by the end of 2015, according to the planning ministry.
But the extent of the depreciation shows the challenges facing Brazil as it seeks to stabilise its contracting economy.
Brazil`s real was the worst performing significant emerging market currency after Turkey’s lira against the dollar so far this year with a 10.7 per cent decline against the dollar, according to an index compiled by JPMorgan.
The planning ministry estimated Brazil’s economy would contract 1.2 per cent this year in local currency terms compared with a year earlier, which would be its worst performance in 25 years.
Brazil lost jobs in April for the first time for that month since records began in 1992, according to data from the labour ministry on Friday. The country shed almost 98,000 formal job posts last month, surprising analysts who had forecast the creation of close to 50,000 positions.
The figures came a day after data from Brazil’s national statistics office (IBGE) showed the country’s unemployment rate reached 6.4 per cent during April, its highest level in four years.
The central bank, meanwhile, is increasing interest rates to try to quell inflation, which has breached the top of its range of 4.5 per cent, plus or minus 2 percentage points. The planning ministry estimates inflation will end the year at 8.26 per cent.
To try to restore sinking investor confidence, the government has announced an austerity or “adjustment” plan to return its finances to an even footing after Brazil last year reported its first primary budget deficit – the balance before interest payments — in more than a decade.
It said on Friday it would freeze R$69.9bn in discretionary expenditures – administrative and investment costs – and raise taxes on banks and brokerages among other measures. It is seeking a primary fiscal surplus of 1.2 per cent of GDP while many economists believe it will manage less than 1 per cent.
“This is part of a big fiscal effort by the government to meet its primary target,” said Nelson Barbosa, planning minister.
But economists worry that even if the government`s efforts to generate a primary fiscal surplus this year are successful, economic growth will not bounce back strongly enough in 2016 to ease the impact of the austerity drive.
Brazil will need to deliver reforms to encourage investment if it is to return to higher growth, they said.
“It is a big challenge to deliver better fiscal numbers under such a weak economic environment,” said David Beker, economist with Bank of America Merrill Lynch.
Additional reporting by Samantha Pearson in São Paulo