While emerging economies like Brazil have become synonyms to stable economic growth over the last decade, the recent analysis of economic macroclimate in the country rings the bell of possible recession. This means contraction of a business cycle assuming overall slowdown of economic activity given the worsening of one of the core macroeconomic indicators that is investment spending.
Political shifts and infrastructure bottlenecks have changed the investment landscape of the country recently.
The thing is that the lead Brazilian state-owned oil giant Petrobras has recently shocked the country’s political establishment and undermined Brazil’s investment climate. Even though Brazil is a rather diverse economy whose domestic players are leading various sectors, the role of Petrobras is eminent and decisive in many respects. The company virtually disappointed Brazil’s investors by having decided to cut down its investments on exploration to a minimum that means 30% reduction in capital expenditure in 2015. Following this dramatic decision, the country’s GDP forecast has become negative. This indicates the tremendous role of the company for the domestic economic development and growth. Over the years, this state-run energy giant successfully attracted foreign direct investment into the national economy, while the recent decision on the investment reduction will ultimately cause a decline in economic output.
Petrobras holds 10% of the Brazil’s domestic corporate investment. This means that the forthcoming reduction will adversely affect such macroeconomic indicators as GDP growth, business profits, inflation, unemployment, supply chain, and capacity utilization. Subsequently the reduction will cause further turn off foreign direct investment from the country on the background of falling oil prices as well as the current investigation of corruption and financial fraud at Petrobras (DeFotis 1).
Because of the ongoing “Operation Car Wash” investigation, Petrobras has decided to reduce investments meaning that Brazil’s real GDP growth in 2015 will lack 0.5 per cent. Given the risks of energy rationing a 15% rationing program will reduce the country’s GDP growth by 1.2 per cent. Given these accounts, there are all odds that the ongoing corruption investigation against the company will have adverse economic consequences for the rest of the country. As a result, lead experts and institutions have already lowered their real GDP growth expectations for 2015. Current risks associated with political uncertainty, energy problems, and shaking status of Petrobras due to the corruption investigation do not light a beam of optimism. On February 25, the company’s shares went down by 8.5% because Moody’s Investors Service recently downsized Petrobras debt into the ‘junk’ rate.
Macroeconomic problems in Brazil are more apparent on the background of political crisis in the country signaling the lack of unity between the President-led government and Congress that is likely to end up in a political deadlock. The country is in the face of recession because of real GDP contraction of 1.1%. 2014 forecasts were more positive and indicated 0.8% growth. In addition to this, Brazil’s recession will intensify due to the lack of structural reforms containing fiscal expenditures.
Consequently, this will intensify tax burden in Brazil and deteriorate the growth of productive sector given the conditions of vague domestic demand. The preconditions of economic recession make experts forecast the real GDP growth for 2016 at mere 0.5% (DeFotis 2).
- DeFotis Dimitra. Expect Brazil Recession, Not Rousseff Impeachment, Barclays Says. 2015. Web.