Brazil Improves But Political Uncertainty Keeps Fiscal Deficit High

The worst might be over, yet there are still notable concerns surrounding one of the world’s largest emerging markets.  

Brazil’s risk score has slightly improved this year, sending the borrower three places higher in Euromoney’s global risk rankings, to 61st out of 186 countries, contrasting with the fate of South Africa, which is still declining, Euromoney reported.

This is largely down to ameliorating economic statistics. Economic growth indicators have shown considerable improvement, the current account has moved back into balance and annual inflation has fallen to around 2% to 3% from a 12-year high of almost 11% in early 2016, thanks to falling utility, transport and food bills.

This is enabling the central bank to reduce the cost of borrowing, reinforcing economic growth, which rose in real terms by 0.2% in the second quarter–and 0.3% year on year–supported by agricultural production and private consumption.

GDP, after steep declines of 3.8% in 2015 and 3.6% in 2016–causing unemployment to top 12%–is predicted to grow by 0.7% this year and 1.6% in 2018, according to the OECD.

It might be higher, as some private estimates are factoring in stronger domestic demand. This is showing up in the improvement to the economic gross national product outlook indicator in the survey.

With the government trying to push through reforms, and benefiting from stronger revenue growth as the economy rebounds, a slowly improving government finances indicator is also helping to lift Brazil’s country risk score.

Despite this, Brazil remains a low-ranking, tier-three sovereign, according to Euromoney, more than one point–and four places–below India in the global rankings, still short of investment grade with its prospects held back by political risk.

“There are elections next year, with uncertainty still hovering over the political situation,” says Bruno Vasconcelos, a Sao Paulo-based economist with CEIC Data, who also has doubts about the sustainability of the economic recovery.

On politics, Vasconcelos believes the way the government chose to conduct the implementation of its reforms and the corruption scandals allegedly involving President Michel Temer and business tycoons have made the government weaker.

This is holding up the passage of laws in congress, meaning policy implementation is failing to keep pace, and that will keep the fiscal deficit high, which declined, but only to 9% of GDP last year.