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Brazil Turmoil Conceals Signs of Faint Growth
World Economy

Brazil Turmoil Conceals Signs of Faint Growth

Brazil’s President Dilma Rousseff is battling impeachment proceedings in the senate for manipulating public accounts.

Most analysts however believe that her real crime, in the eyes of markets, industry and voters, was the murder of one of the world’s most promising economic growth stories, Yahoo reported.

The irony then is that, even as the senate prepares for a vote on May 11 that is expected to open formally the impeachment trial and trigger her suspension as president, a faint pulse can be detected in her supposed victim: Brazil’s economy.

This will probably not be enough to save Rousseff. But it could help her likely successor, Michel Temer, the vice-president who is expected to take charge of Latin America’s biggest economy if Rousseff is impeached, with promises of policies to quickly return it to health.

Under Rousseff’s watch, gross domestic product in Brazil sank from a growth of 7.5% in 2010, the year before she took office, to a contraction of 3.8% last year—a total downward swing of more than 11 percentage points.

The crash was wrought by the end of the commodities supercycle combined with policy errors, say analysts. These included trying to control prices and interest rates and attempting to stimulate the economy through ad hoc tax breaks and pumping up state bank credit.

Temer will inherit an economy in its worst recession in more than a century, with growth expected to be negative 3.8% again this year, according to the International Monetary Fund. But some indicators, such as inflation expectations, are beginning to flash green again.

Rousseff last year appointed a hawkish finance minister, Joaquim Levy, to try to undo some of her errors. He removed price controls, leading to a one-off rise in inflation. The central bank countered by maintaining the benchmark Selic interest rate at a high of 14.25%.

While prices remain high, inflation expectations in a weekly survey of economists conducted by the central bank for the coming 12 months at 6.2% have begun to fall back within the official target range of 4.5% plus or minus 2 percentage points.

Other key adjustments in the economy include a fall in the cost of labor.

The real, meanwhile, has depreciated from its highs of about R$1.60 to the dollar during the boom years of 2010-11 to more than R$4 at the height of the political crisis. While the currency has since strengthened slightly, the depreciation is helping to lower Brazil’s current account deficit and lift confidence in the country’s battered export sector.

This and Brazil’s still strong foreign exchange reserves have helped maintain foreign direct investor interest, with external fund inflows in the first quarter of this year rising to $16.9 billion, from $13.1 billion a year earlier. Much of this interest is from multinationals and private equity either looking to increase market share or scouting for bargains, say analysts.

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