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AB 2000 studies

Alain Boublil Blog

 

Brazil : things are improving

After two gloomy years, Brazil should experience an economic revival in 2017. For the first time since 2013 and the going down to hell of a country which had seen itself becoming among the top six economies in the world and whose GDP had surpassed UK one, signals of an improvement of its economy are now appearing. The deep recession which occurred in 2015 and 2016 with, both years, a GDP fall of 3,7%, could come to an end and leave the place to a modest growth in 2017 at around 1,5%. Political situation has been clarified and president Temer who replaced Dilma Rousseff after her destitution has succeeded in reestablishing a certain confidence in economic circles. He set as an objective a reduction of public deficits and his first decisions are favorably received. So, he restored, at least partly, the state credibility, hardly affected during the previous two years and thanks to his action, he turned down the threats which weighted on the country foreign debt.

The first tangible signal of this new context is the significant rebound of the Brazilian currency, the real. It fell around 4.20 against the euro at the beginning of the year and its value, today is 3.56. It was also necessary not to underestimate the political and economic risk carried by the Olympic Games which get off without any hitch, during August. The excessive expenditures, according to Brazilian people opinion, had generated many demonstrations. It was dreaded they intensify throughout competitions. It has not been the case. Serious doubts were  also rosen about the quality of the installations and of the infrastructures which could have affected the international opinion about the country health and its ability to go through a new phase of its development. In these issues also, everything was O.K. Sao Paulo stock market Index, the Bovespa, has enjoyed a very strong rebound and has rosen by 45% since the beginning of the year, as a signal of the regained investors appetite, especially when during that period, developed countries financial markets had difficulties to resist to downward pressures.

Brazil has profited, during its high growth years from the increase of its raw materials exports and from price rises coming, partly, from Chinese demand. Their slowing has weighted on the country economy and the pessimistic forecasts, now invalidated by facts, about Beijing capacity to reorienting its economy, have contributed to aggravate an already difficult situation. The oil sector, which has become strategic, due to the discovery of the pre-salt deposits was also supposed to contribute to the activity with the huge investments needed to put them into production. But oil price fall has generated a slowing of Petrobras activity and has weighted on its sub-contractors. Atop of that was the corruption scandal which has affected the most important company of the country and the departure of some of its top managers. Production forecasts which had been announced, with, for instance a level of 2.5 million barrels per day in 2016, have not been attained. This year, production will be around 2 millions. But the appointment of a new chief executive officer, Mr. Parente, and the conditions he put before accepting the position, if they are met by the state, can let hope a return of the company toward a normal development can be expected. And it is well known that when Petrobras is going better, Brazil is going much better. Its debt is one the highest in the world among oil companies, with more than 120 billion dollars and a high foreign exchange exposure since it is denominated, for a large portion in dollars. Mr. Parente has insisted to stop any political interference in the choice of the company managers and, on this specific point, current government commitment would be fulfilled, since the opprobrium, which was the characteristic of Dilma Rousseff era, is still present. On the opposite, Mr. Parente will to get the end of state interventionism on oil prices will come up against people pressure which will not accept the necessary prices increases to restore Petrobras profitability. Their alignment with international levels will be in opposition with government policy which is confronted with a high inflation, almost 10% for at least the previous three years, and quite atypical, in a world where prices are stagnant.

The possibility, offered to foreign companies by the brazilian government, to participate to oil deposits development is, on the contrary, a very positive signal. Along with an invading bureaucratic presence, Brazil has a protectionist tradition incompatible with globalization challenges the country is confronted with, if it wants to launch a new phase of its development. The presence, at the top of the majority which supports Mr Temer action, of a political party the business community appreciates, the PSDB, is also a good point. Henrique Cardoso was its leader when he restored Brazil economy in the eighties. Next elections shouldn’t occur before two years but in Brazilia, it is considered that Aecio Neves who is a member of PSDB, and was defeated by a small margin by Dilma Rousseff, has good chances to win It would guarantee  political stability which is essential to achieve the economic reform the country needs.

The world economy, at the end of 2016, is affected by many risks, which are weighting on growth worldwide. The Chinese risk, generally overestimated, is losing, continuously, its importance. Currency management by monetary authorities is becoming more professional, day after day. Shanghai stock exchange has stabilized above 3000 pts. The reorientation of the economy toward internal demand is, slowly, put in place. Overcapacities in heavy industries are winding down. Internal debts are too high but, thanks to the accumulation of foreign currencies by the state, that they don’t represent the same threat as in western countries. American election seems a done deal and the fear of a Trump victory, whose economic choices are unknown, and whose character is a threat for some and a motive of  revolt for the others, is declining day after day. The risk of a default  by a large emerging country, like Brazil, is also moving away with the coming back of political stability and the slow but real rebound of raw material prices, including, atop of them, oil.

At the end, it remains “Brexit”. It is necessary not to underestimate it because the uncertainties regarding the calendar and the nature of the breaking with Europe are growing and the threat it put on one of the major economies in the world, with its strategic and even systemic financial center, are substantial. A major recession in the United Kingdom and a lasting depreciation of the pound will definitely have consequences outside of the borders of the country. 

 

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