2010: Brazil faces serious problems no matter who wins the election

We said:

Don't believe the hype - serious problems lie ahead no matter who wins. Although the markets are expecting a soft landing next year there are compelling reasons to think it will not be smooth sailing for the Brazilian economy in 2011. Ingredients for a post-election letdown are:


1) Markets are wrong in interpreting recent low rates of inflation and slower growth as being sustainable. Those rates reflect special factors, such as falling food prices and the end of temporary government tax breaks. The economy is actually running close to full capacity with little or no economic slack. Even if global prices are in deflation strong domestic demand will fuel inflation of non-tradables and accelerate the deterioration of the current account.
2) Although an independent central bank is an indispensable asset in the economic outlook, most of the challenges Brazil faces today lie outside the monetary policy area. These include major structural bottlenecks in infrastructure, shortages of skilled labour, an overgrown and inefficient government bureaucracy and excessive government interference in markets.


Perhaps the biggest risk of all is that the next president will believe the market's bullish scenario and defer tackling the countrry's underlying structrual problems. This would frustrate Brazil's move onto a higher growth trajectory in the medium term. (Brazil 23 July 2010)

Outcome:

GDP falls from 7.5% in 2010 to 4% in 2011, 1.9% in 2012, 3% in 2013, 0.5% in 2014, -3.8% in 2015 and -3.6% in 2016 during which year Dilma Rousseff was impeached and removed as President.

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