Brazil: Inflation hits almost twelve-year high in March

Hi there,

I’m also Brazilian, living in São Paulo, and yes I believe we are in a very messy situation. This is why I think this is the case:

Let’s start after the 2008 crisis. After that recession took place in all the developed world it completely ruined the financial markets in these countries, including the United States. After the debt crisis in Europe, money started pouring in the developing markets, mainly know as the BRICS.

The Brazilian economy, barely affected by the impacts of the 2008 crisis, started thriving. In 2010 we saw a GDP growth of 7,5%. Inflation was under control, productivity was high, unemployment low. We were even chosen to be the next country hosting the World Cup. Those were good times, the best in years actually.

In 2012-13 things started to get complicated. We were in desperately need to reform our political and fiscal system, and when we had the chance to do so we blew it. Corruption, heavy taxation and government spending (or lack of, mainly in infrastructure) were some of the main problems we needed to fix, but we didn’t want to look ahead.

In 2012 we started seeing the signs of troubled times. That’s is mainly because the emerging countries started to push the breaks. Recovery in United Stated started to gain pace, with the dollar slowly increasing its value against the real, the QE program (a big source of foreign capital) being gradually pulled of, and China, our main partner in exports, started landing its economy to a slower pace of economic growth.

Remember the protests in June, 2013? Initially against the increase in the public transportation fare, escalating to a shout against the high inflation and dissatisfaction with Dilma’s government. Remember those problems I mentioned the need of urgent fix ? In 2014 they started bitting our asses. Hard.

Our two main exports, iron ore and soy beans, started devaluating in the global market. The interest rate was high, with signs of further increase. Inflation was in no way being contained, and the lack of energy water security in the main areas of Brazil, were just helping put the prices higher.

Then the Petrobras scandal came, only to scary foreign capital even more. The United States were in a pretty good recovery, which caused a massive devaluation in the Real, although good to our exports, but with the lack of investment and decrease in Chinese and Argentinean demand, it made us uncompetitive in the global markets. In Mato Grosso a soy bean farmer was spending 5% of the value of his product getting it to a port; the proportion in Iowa is 9%.

Now we are facing those problems head on. Public debt has become and aggravating concern, since they correspond to 60-70% of our GDP, and we spent 6% of it only to pay for interests. They are currently trying to fix our books but that will require a huge sacrifice in growth.

Where we are heading? Difficult to say, but my bet is this year is going to be a complicated one. China is becoming increasingly difficult to ignore, with its real state market tumbling down and debt proportions reaching unsustainable levels. Europe is fucked, and US is meh. Either way, looking back in history, this scenario is bad for us. This is how the Latin American debt crisis of the 1980s, the Mexican Tequila crisis of 1994, the Asian debt crisis of 1997, and the Russian crisis of 1998 unfolded. A lot of borrowing goes on, dollar-denominated debt – debt that pundits consider perfectly sustainable, as long as the local currency is strong. And once this is not the case, plus with the increase in the Fed’s interest rate the debt burden becomes to higher. (VELASCO, 2015)

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