Brazil is falling short of its status as a BRIC economy. Its 2011 GDP growth of 2.7 per cent suggests it’s no longer a real emerging market. The government is largely to blame. Populist mandates have bloated state spending while restrictions and meddling have increased risk.
“Brazil is the country of the future – and always will be,” investors used to joke. Then Goldman Sachs’ Jim O’Neill included the South American nation in his collection of big, emerging economies in 2001 when he coined the acronym BRIC for Brazil, Russia, India and China. And under Luiz Inacio Lula da Silva from 2003, the country’s growth accelerated, fuelled by rising commodity prices.
Nevertheless a traditionally overblown government sector remained, and Brazil’s historical tendency toward budgetary indiscipline seems to have been only temporarily suppressed. A transition to developed-world demographics is also becoming cripplingly expensive. Fitch Ratings recently examined the pension systems of Brazilian states and municipalities, where employees can retire at any time after accumulating 30 years service. Fitch found that pension costs had more than doubled as a proportion of those states’ and municipalities’ total spending to 33.2 per cent between 2005 and 2010.
The overall economic growth figure for last year translates to only 1.6 per cent per capita, barely improving living standards. Further, even after several years of rapid growth, the public sector is still running a deficit of 2.6 per cent of GDP, according to data from The Economist. Meanwhile consumer prices rose 6.2 per cent in the year to January. That makes the central bank’s sharp 0.75 percentage point cut in interest rates to 9.75 per cent on Wednesday potentially inflationary. Politicians’ talk of further stimulus spending is more so.
Brazil’s GDP growth in 2011 was enough to push the size of its economy above sclerotic Britain’s. However, it appears unlikely to return to true emerging market rates of expansion – around 6 per cent on average last year, the International Monetary Fund reckons – without substantial public-sector reform.
There are also plenty of signs of misdirected government influence in industry, including in the important energy sector. That, too, doesn’t bode well for a return to faster growth. Maybe investors should downgrade Brazil from BRIC to brick.
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