Brazil`s performance over the last three years has been disappointing. Misleading federal economic policies have led to high inflation, reduced economic growth and delayed infrastructure construction.In 2014, Brazil`s GDP growth is expected to be less than 1%, inflation is over 6.5% and interest rates are over 12%. Assuming the blame and adjusting her economic strategy seems to be the only alternative President Dilma has to turn the economy around. Her administration's measures may mean a difficult 2015, but over the long run it should be very beneficial for Brazil's economy.
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The poor performance in economy management negatively affected the income distribution, a primary focus for Dilma.The reduction of interest rates without economic fundamentals and excessive stimulus for consumption caused inflation and higher debt for the consumers. Sudden changes in the contracts of energy concession, as an attempt to reduce the bills, led to a decrease in investors. Less investors meant less resources for building infrastructure. In order to avoid blackouts, it was necessary to use fast energy alternatives, like coal thermoelectric, which resulted in more expensive energy costs to everybody. "Duck-tape fixes" like these led to bigger problems, not least of all negatively affecting low-income classes.
The inflation is a ghost for Brazilians. The risk of return of the hyperinflation indexes woke political opposition up. Even after a very expensive campaign, Dilma almost lost the election. It was a clear signal that changes were necessary.
Short-term pain, long-term gain
After four years of controversial economic measures, President Dilma decided to change her finance team. The new Finance Minister inherited a situation that included high inflation, an out-of-control budget, accounting issues and low GDP growth.The first step is to recover investors trust. Some unpopular measures are required that will probably cause a year of recession in Brazil. This short term downswing should lead to a more fundamentally sound economy. Here are some of the issues.
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Brazil needs to fix its current account deficit. Several years of tax exemptions led to this problem and its probably going to take more taxes to resolve it. Of course it would be better to reduce bureaucracy and bring more competitiveness for the companies, but given Brazil's current status, that's probably not feasible in the short-term.
Adjustments in social programs also are necessary. The benefit called "Unemployment Insurance is a good example. When workers lose their jobs, they can access an insurance and receive a monthly payment during 4 months or until find a new job. During the recent period of almost full employment, many workers stillstayed home and took advantage of the the system. This put more financial pressure on the government. Despite a huge resistance to change social programs, the new finance team made the hard decision and approved the adjustments.
People must also receive less generous salaries. The current method to readjust the minimum wage turned into a ticking bomb. Based in the percentage of growth of GDP, as a strategy to distribute wealth, it caused a discrepancy between even higher salaries but it did not lead to higher productivity. As a consequence, it brought more inflation in services and negatively affected low-income classes directly. The finance minister declared that it would change.
The good news is that it appears the government will try to fix the problems now before the situation spins out of control. 2015 is a crucial moment, a time for Brazil to choose a better future than the what has happened to its neighbors Argentina, Venezuela and Bolivia.
After replacing the Finance Minister, Dilma decided to follow the same management strategy proposed by Aecio Neves the losing presidential candidate in the last election during the campaign. This disappointed many in her own party, especially radicals, which preferred the old and failed strategy.
Results from the new way
The enormous optimism in previous years and the current pessimism seems exaggerated. Brazil has structural problems and the government keeps working to solve it. The most reasonable behavior is prudence.
Even after the protests in 2013 and the fierce election, new mobilizations seem unlikely. During the events two years ago, people went up without any specific reason, just to claim against the current political situation. Even after the huge efforts from not followers of Dilma, the president was re-elected focusing in electors from the Northeast of Brazil. However, political opposition has increased and the government will face difficulties implementing its policies without listening to other parties.
Why recession is not a big deal?
It is necessary to be realistic. Actually, Brazil's economy was not too good in the past and is not too bad now. The current economic problems have a solution, but hard measures during 2015 are necessary to fix the recent mistakes. This is the best way to find a healthy growing path in the next years.
A recession should not persist for a long term but the current price of assets, especially for industrial companies, incorrectly appears to be an irrecoverable situation. After being coherent between speech and behavior, the new finance team should be able to rebuild the credibility in the political economics. It will encourage new investments from private sector, avoid the downgrade from rating agencies and bring the growth back to Brazilian economy. Then, a recovery of the stock market should be a natural consequence.
The article Brazil May Be In A Recession In 2015. Here's Why That's Not A Big Deal. originally appeared on Fool.com.
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