World Economy

Economic Crisis Rattles Brazil

Economic Crisis Rattles BrazilEconomic Crisis Rattles Brazil

Brazil hoped to start 2016 making itself pretty for its turn on the world stage when its hosts the summer Olympics. Instead attention has turned to its deepening economic crisis.

The world’s seventh largest economy tipped into recession last year–official figures show that 1.5 million jobs were destroyed. The downturn is due to last throughout this year, the International Monetary Fund said recently, AFP reported.

Brazilian President Dilma Rousseff said Friday that she was “appalled” by the pessimistic projections the IMF made about her country earlier this week.

The IMF said in its latest report that Brazil’s “critical situation” will continue and its economy will not resume growing until 2017, predicting that the state of the Brazilian economy would negatively affect the global economy as a whole.

“I was appalled by a phrase I read in the latest IMF report. We all know the IMF talks a lot,” the president said, referring to “Brazil’s critical situation,” which the institution has considered as one of the relevant factors in the current world economic scenario.

Rousseff said Brazil will overcome the political instability and manage to resume its economic growth.

Manuel Enriquez an economist at Sao Paulo University said: That would be the first two-year recession since the 1930s in Latin America’s economic powerhouse. “This year started with very bad news,” he said. “The economic outlook for Brazil is very bad for 2016 and also for the year after.”

The IMF said it expected Brazil’s economy to contract 3.5% this year and remain stagnant in 2017. It shrank by 3.8% in 2015 according to the fund.

A finance scandal that sparked impeachment proceedings against leftist President Dilma Rousseff has aggravated the crisis. “There is no confidence in the government. Businesses are mistrustful and people are afraid of losing their jobs” said Enriquez.

“The banks are afraid that loans won’t be paid back. All this is creating a negative atmosphere in which there is no way to stimulate demand.”

Ratings agencies Fitch and Standard & Poor’s have downgraded Brazil criticizing its failure to clean up its public finances.

Aside from the political chaos swirling around the president, the state oil firm Petrobras was engulfed in a corruption scandal last year. That and the plunging oil price battered the giant company which has dragged down the Sao Paulo stock market. “Petrobras shares are cheaper than a cup of coffee” said Enriquez.

 Interest Dilemma

When commodity prices were high, Brazil shined for a decade as an emerging star. The glow however faded last year as the price of oil and other raw materials that Brazil exports plunged.

Foreign investors have rolled out of the country and over 2015 the real currency lost a third of its value against the dollar. On Thursday the real hit its weakest point ever at 4.16 reals to the dollar after Brazil’s central bank held off from raising interest rates.

Inflation is running at more than 10% which had raised expectations of a rate rise to rein it in. The conflicting pressures of inflation and high interest rates put the government and central bankers in a bind.

Analysts said the government feared a rate hike would squeeze the domestic economy at a painful time.

During the bank’s deliberations the IMF released its dire economic forecast–and the bank soon after held off on raising rates.

“By setting the market up for a hike in interest rates but then failing to follow through the Central Bank of Brazil has shot itself in the foot,” wrote Neil Shearing an analyst with financial consultancy Capital Economics.

“The obvious conclusion is that policymakers have bowed to government pressure not to increase rates in the face of rising inflation.”

Meanwhile, as Brazil is feeling the pinch from a deepening economic crisis, at least 48 towns across the country have decided to cancel carnival festivities due to lack of resources.

Local governments are citing tightened budgets, with lower tax revenues and more important projects in need of funding. Almost all have said that funding needed to be moved to different areas.