Brazil ‘A Perfect Political Storm’

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Keith Mahon, Managing Director of Apex Uruguay, talks about the political economic situation in Brazil as it undergoes a “perfect storm” of political instability and economic weakness:

 

“Brazil was for years the first letter of the BRICS´, a symbol for the massive growth of the developing world in the previous decade. Now, however, the situation has changed dramatically; capital flows out of the country with the US recovery, the price of commodities has fallen, there is decreasing global demand for Brazilian produced products and there is expectation of an interest rate hike in the US.

 

What makes the Brazilian situation quite combustible is the political instability arising from the Petrobras corruption scandal. In addition, since Rousseff’s re-election in October last year the government has tried to implement budget and economic cutbacks that have been widely unpopular. These situations combined have significantly weakened the executive branch of government and its capacity to get the necessary laws approved in Congress. Rousseff’s leverage has diminished due to the government’s fall from grace and Finance Minister Levy’s austerity program is likely to see both a further weakening of the Real and additional increases in interest rates to curb inflation.”

 

Apex Uruguay, Keith Mahon

 

“Investors are now waiting for a clarification of the situation as to whether the Brazilian government can pull through the spending cutbacks it needs to pass in order to recover economic credibility abroad and the consequences of the Petrobras scandal (which threatens to throw Brazil into wider political disarray).

 

Brazil still offers great opportunities for investors but from the investor perspective the country needs to put its economic and political houses in order to get out of the current stagflation situation. This new horizon of a weakening Real and higher interest rates at home is leading to a recessionary domestic market, less foreign investment and increased interest in protecting capital offshore. Consequently, the offshore market offers a refuge for assets filtering out of the country looking for alpha, stability and low complexity of capital flow movements. Apex’s access and experience within the international arena can help clients looking for alternatives outside Brazil, as well as assist them in operating effectively internationally to attract capital to Brazil.”

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