Brazils economy

The deterioration
Slow growth, stubborn inflation and mounting deficits

Dec 7th 2013 | SO PAULO | From the print edition

A SINGLE economic figure can boost or batter a politicians standing. That makes it tempting to offer sneak peeks of the most flattering ones, as ra!ils president, "ilma #ousseff, did recentl$ %hen she told El Pas, a Spanish ne%spaper, that a forthcoming statistical re&ision %ould raise economic gro%th in '()' from (.*+ to a less %eak ).,+. Nemesis is rarel$ so s%ift- on "ecember .rd the national statistics institute said that it had indeed re&ised the '()' figure

up, but onl$ to )+. And it announced that G"/ shrank b$ (.,+ in the third 0uarter compared %ith the pre&ious three months. 1arket anal$sts rushed to trim alread$ anaemic forecasts for gro%th this $ear and ne2t 3see chart4. The fourth 0uarter might also see a contraction, said Nomura, an in&estment bank, %hich %ould put ra!il in technical recession. E&en if that is a&oided, %ith a $ear to go the economic &erdict on 1s #ousseffs presidenc$ alread$ looks clear. Gro%th %ill ha&e a&eraged around '+ and inflation 5+. Go&ernment finances %ill ha&e deteriorated sharpl$. A s%ollen current6account deficit completes a dispiriting picture. 1s #ousseff %ill almost certainl$ run for a second term at a presidential election ne2t 7ctober. The needed ad8ustments to curb inflation and repair the public finances %ould hurt gro%th before the$ started to help, and so the$ are being put off. ut the longer the go&ernment dela$s, the sharper the e&entual correction %ill ha&e to be9and the greater the risk that its attempt simultaneousl$ to 8uggle inflation, public spending and the e2change rate %ill see it drop a ball. 7fficials point out, rightl$, that most emerging economies ha&e slo%ed this $ear, and that ra!il gre% at a health$ clip of ).:+ in the second 0uarter compared %ith the first. E&en so, it is lagging behind others. ;/1organ, another bank, brackets ra!il %ith India, Indonesia, South Africa and Turke$ as a countr$ %hose currenc$ is &ulnerable %hen Americas <ederal #eser&e finall$ =tapers> 3ie, reduces mone$ printing4 in the coming months. ra!ils current6account deficit stands at ..?+ of G"/, up from '.@+ in '()'. In the $ear to date it has run a trade deficit9its first since '(((9and seen the real, its currenc$, fall against the dollar b$ )@+. ra!il is %ell6placed to %ithstand currenc$ turmoil- international reser&es stand at A.?, billion and foreign direct in&estment remains strong. A %eaker real %ould help reduce the current6account deficit, but it %ould feed inflation. "espite the %eak econom$, at ,.:+ this is abo&e the Bentral anks target of @.,+ e&en though the go&ernment has tried to keep prices do%n b$ subsidising electricit$ and public transport, and b$ forcing /etrobras, ra!ils state6 controlled oil firm, to hold do%n the price of petrol. 7n No&ember .(th the go&ernment allo%ed /etrobras to raise the petrol price, but onl$ b$ @+, a decision %hich knocked *+ off the compan$s share price 3though it later reco&ered a bit4. The stubbornness of inflation, combined %ith relati&el$ loose fiscal polic$, has forced the Bentral ank to tighten monetar$ polic$ fast- ha&ing slashed its polic$ interest rate to a record lo% of ?.',+ last $ear, it has raised it si2 times in se&en months, to )(+. That is another blo% for 1s #ousseff, %ho trumpeted single6 figure rates as one of her go&ernments main achie&ements.

"isappearing gro%th, and se&eral failed attempts to kick6start the econom$ %ith ta2 cuts, ha&e hit go&ernment re&enues. The result is that the primar$ fiscal surplus 3ie, before debt pa$ments4 is d%indling. An initial target of ..)+ of G"/ has been %hittled do%n b$ accounting changes 3including one that means the federal go&ernment no longer has to make up for o&erspending b$ states and municipalities4. The de facto target of around ).?+ of G"/ %ill not stop net public debt from rising. E&en this %ill be met onl$ %ith help from one6off items, including pa$ments for oil concessions. Ceft$ financing costs mean that ra!il is no% running an o&erall budget deficit of ..,+ of G"/. #ating agencies ha&e said that %ithout a change of course the countr$ risks being do%ngraded from its current position, a notch abo&e the lo%est in&estment grade. 1arcelo Bar&alho of N/ /aribas, a <rench bank, sa$s the go&ernment seems to think that it has some breathing space, that a slipping credit rating %ould not be disastrous as long as it retains in&estment grade and that sensiti&e consumer prices can be held do%n until '(),. Inflation, though high, is not out of control. A long6dela$ed infrastructure programme is finall$ under %a$. Dnemplo$ment is close to historic lo%s. #eal incomes are rising, if not as fast as before. And the presidents popularit$, hit hard b$ protests in ;une, has reco&ered some%hat, %ith none of her challengers $et sho%ing an$ sign of taking off. 1s #ousseffs team ma$ be right in their political 8udgment. ut the$ ha&e left themsel&es little room for manoeu&re.

From the print edition: The Americas