This section relates to the observations of the OECD (Organisation for Economic Cooperation and Development) - complimented by those of the IMF (International Monetary Fund) - regards the current issues faced by President Michel Temer and his administration.
The most recent
Economic Forecast by the OECD released in November 2016 is recounted here; an update expected soon.
OECD Report Summary -
- Emerging from a
severe and protracted (4 year) recession
- Political uncertainty
diminished
- Business confidence
rising
- Consumer confidence
rising
- Investment sentiment
and cases strengthening
- Unemployment a
mid-term challenge
- Inflation expected to
gradually return to target range
- Fiscal conditions
still fragile
- Need to to re-balance
the Fiscal and Monetary by:
- 1. Consolidate public
finances
- 2. Underpin
macro-economic stability
- 3. Loosen monetary
policy
- 4. To create the
investment climate
- Raise productivity
by:
- A. Strengthen
competition
- B. Reduce
administrative 'red tape'
- C. Continue
infrastructure improvements
- Need to manage
expected rising inequality
Pulling Out of
Recession -
By November 2016 Brazil
had experienced 6 quarters of technical recession, with accordant
rising unemployment, business bankruptcies likewise and corporate
debt higher.
But after heavy falls
of business and consumer confidence sentiment appears to be
increasing, albeit from lowly bases. Whilst industrial production
figures have been mixed, tending to negative, investment growth has
become positive. The replacement of Rousseff by Temer has tempered
the previous political uncertainty, with next elections in October
2018 and the next government installed on new year's day 2019.
With that increased
certainty the sovereign debt (bond) rate has fallen by a third back
to 10%, but the period since 2013 has seen the fiscal balance decline
to -11% by early 2016, now sitting at -9%, so showing improvement.
Although down dramatically since its 2015 EoY high of nearly 11%,
inflation now sits at 8%, so well above the 4.5% target and the
6.5%-2.5% 'tolerance band'.
Rebalancing Fragile
Fiscal Conditions via Monetary Policy -
- 1. Consolidate public
finances
- 2. Underpin
macro-economic stability
- 3. Loosen monetary
policy
A New Fiscal Rule
imposed to reduce the fiscal deficit from its 9% of GDP, whilst the
primary deficit of 3% hampers the need to create primary surpluses to
keep public debt on a firm and sustainable declining path. Weakness
obviously lies with the cyclical nature of reduced revenues during a
recession, but critics cite poor taxation policy regards exemptions
which are yet to be discontinued. This 'slack' backdrop means that
the fiscal stance is expected to be only mildly contractionary; yet
still part of necessary process to correct past excesses and
strengthen the fiscal future; in essence the avenue chosen to try and
strike an appropriate balance.
But rising current
expenditures, plus projected increases in pensions costs, is an
argument that undermines fiscal health over the mid/long-term. The
reaction has been a new expenditure rule, which matches the
recommendations of previous OECD economic surveys. This new rule
limits real increases in expenditures whilst simultaneously lessening
the rigidity of the budgeting process; except for pensions and
benefits which amounts to almost half of government spending.
Separate pensions
reform is noted as required to ensure the created fiscal adjustment
is able to be successful. That reform though necessarily seeking
ensure adequate continued decline in inequality and poverty by
improving the targeted social benefits. Better spending efficiency is
believed to exist across many areas, and it is believed that the new
fiscal rule provides sufficient room to attain a balance of
objectives regards overall spending and social cohesion.
The commitment regards
public expenditure will provide for further monetary easing going
forward, which should in-turn give rise to stronger investment (as
public investment projects are followed by private investment
interest).
A raft of structural
reforms have the potential to boost growth significantly and make it
more inclusive.
Reducing what are
viewed as high compliance costs which relate to a complex state-based
and fragmented indirect taxation regime is viewed as immediately
advantageous to firms, an effort to consolidate the varied
'mini-taxes' into a singular VAT that encompasses import and export
measures so as to strengthen international trade. The idea is that a
full deductibility for imports would provide greater (price-based)
competition for domestic producers/providers, so enhancing overall
productivity.
Improved infrastructure
would reduce transport costs, especially so for exporters, (so
providing an effective efficiency boost regards price and speed to
markets.
Stronger trade
integration would benefit low-income earners specifically as the
export sector would have a larger impact on the demand for unskilled
and low-skilled workers.
Further educational
attainment would raise productivity and allow more low-income
households to join Brazil's middle-class.
These very broad policy
avenues enabling the country...
- 4. To create the
investment climate
Expected Slow and
Gradual Recovery -
2017 should see
progressive growth thanks to rising investment sentiment, but the
pace of this recovery will inevitably be impacted by the size of
corporate debt and the over-capacity/spare-capacity in various
sectors.
Speedy implementation
of structural reforms should see greater immediate momentum compared
to historic re-growth periods....but....the measures highlighted are
not adequate compared to the ambitious agenda needed.
Slow earnings growth
and continuing contraction in private credit will initially limit
consumption, this environment much assisted by the achievement of
lower interest rates, which if attainable and properly entrenched
would provide for improved recovery.
But critically, the
background of low international trade growth and ongoing
competitiveness challenges, the external sector will not be able to
provide as much support as in past years. Inflation will continue to
ease because of this weaker activity and reduced administrative
costs, expected to return to the tolerance band by end 2017.
Unemployment expected to rise until mid 2017 before falling as the
economy gains new stride in 2018.
'Upside Risks' could be
seen with a stronger momentum from Brasilia regards structural
reforms could create better conditions and so more sooner, domestic
demand boosted by lower spreads (regards government bond prices),
less currency devaluation, and lower real interest rates.
'Downside Risks' could
arrive from the corporate sector if a protracted recession results in
rising corporate defaults as a consequence of high debt levels, which
would weaken various parts of the financial sector.
And lastly, although
political risk appears much diminished, it still remains under the
surface with respect to the final implementation of the New Fiscal
Rule.
Summary -
The OECD's remarks
effectively parallel those of the IMF (International Monetary Fund)
in as much that (to quote the IMF's November 2018 report)...
“Whilst capital
markets have responded positively to the new political stability
introduced, so bolstering asset prices and confidence, and helping
the country ride a positive wave of sentiment regards emerging
economies – and some high frequency indicators suggest the
recession may be nearing its end – the implementation of much
needed reforms to durably restore policy credibility is subject to
risks”
This presently appears
'all to true' with the likelihood that such reforms – especially
pensions and benefits - will be harder to implement than academically
perceived given the social tensions that exist amongst the lower
middle and poor regards the aftermath effects of the public
indebtedness created by World Cup and Olympics projects (such as
rising public transport costs) and now the fear of impacted
state-provided incomes for OAPs and the increased number of
marginalised people.
It is for these reasons
– and especially the fragility of the inter-connected EM economies,
much reliant on China - that investment-auto-motives previously
implicitly and explicitly highlighted the need for Brazil (and the
Latin American region en mass) to encourage greater trade with the
USA , Europe and the UK.
