The Brazilian economy: From boom to bust

Brazilian economy

At the turn of the last decade, Brazil was one of the world's fastest-growing economies, justifying it as being named the 'B' in the BRICs countries by the economist Jim O’Neill.  However, it has since had a long struggle with corruption, political turmoil and economic mismanagement; causing the country to slip into its longest ever recession. RFi Group aims to delve into the factors that caused this nation to boom and bust, and look at the impacts it has had on the present day financial sector.

From 2000 to 2012, Brazil had one of the fastest growing major economies in the world1. However, the foundations for this growth were first laid down in 1994 with the Real Plan, which successfully curbed hyperinflation in the country through the creation of a new currency (the real), the deindexation of the economy, the tightening of monetary policy and the floating of its currency2. The Real Plan managed to reduce monthly inflation rates of around 50% in January 1994 to 1.71% per month by the end of 19943. Brazil’s economic boom owes much to the commodity super-cycle of the mid-2000s, a wave that Brazil continued to ride until the end of 2012. Brazil was able to utilise its large reserves of raw materials coupled with lower labour and production costs5 to profit from a high demand of raw materials from the growing economies of China and India3. Furthermore, after the 2008 financial crisis, global liquidity entered emerging markets like Brazil and further boosted the country’s economy 4.

However, after a decade of growth, the Brazilian economy began to falter and entered its longest recession with the economy shrinking by 3.8 % and 3.6% in 2015 and 2016, respectively. Moreover, a decrease in prices of non-energy commodity prices in 2011 has revealed the fragility of the country’s economy, which had long been hidden by high global demand 6. Under the now impeached former-President Rousseff, inflation began to soar along with interest rates and Brazil entered a budget deficit, whilst the economy continued to shrink. Political turmoil caused by scandal and corruption has left the nation disillusioned with country’s leaders 7, thus delaying economic recovery.

After a decade of growth, the Brazilian economy began to falter and entered its longest recession with the economy shrinking by 3.8 % and 3.6% in 2015 and 2016, respectively. Moreover, a decrease in prices of non-energy commodity prices in 2011 has revealed the fragility of the country’s economy, which had long been hidden by high global demand.

However there appears to be light at the end of the tunnel for Brazil. Whilst the country has declined across most economical sectors, the financial sector has managed to perform remarkably well during the crisis with only 25 of the 180 financial institutions, monitored by the Brazilian Central Bank, recording any losses during 2015. In addition, the whole sector has documented net profits of 88bn reals for the year, up from 66bn reals the year before. Although these performance indicators are impressive considering the backdrop, the banks are not hitting the heights they experienced in the mid-2000s during the commodity boom where average returns on equity were more than 20%.9 However, this strong performance can be attributed to high competition within the market, which is causing banks to service their customers better. Currently the five biggest banks account for 75% of all loans9, further emphasising the competitive environment of the sector. As a result, banks have heavily invested in technology to out compete their rivals, with 22bn reals being invested in 2014, which equates to third of the sector’s net profit that year. Subsequently, this investment in technology has since seen over half of transactions move online. Moreover, banks like Banco Original, whos loan book grew by two thirds in 2015 9, have entered the market as digital-only banks.

Although the Brazilian economy appears to be in a delicate state, reeling from political scandals and mooted growth, the banking sector could become a beacon of light in the backdrop of this economic gloom.


 

1 http://www.economywatch.com/world_economy/brazil/
2 https://www.imf.org/external/pubs/ft/fandd/1997/09/pdf/clements.pdf
3 http://thebrazilbusiness.com/article/plano-real-today
4 http://foreignpolicy.com/2014/10/11/how-to-bring-brazils-economy-back-to-life/
5 http://www.investopedia.com/terms/b/bric.asp
6 https://www.ecb.europa.eu/pub/pdf/other/eb201601_focus01.en.pdf
7 https://www.ft.com/content/9880f2d8-1941-11e7-9c35-0dd2cb31823a
8 https://www.ft.com/content/0dfbeff6-0333-11e7-ace0-1ce02ef0def9
9 https://www.economist.com/news/finance-and-economics/21696547-brazils-banks-have-shrugged-countrys-recessionfor-now-defying-gravity