Brazil is at the cusp of a turnaround. Bolstered by the launch of a slew of economic reforms under the new market-friendly government of President Michel Temer, business and consumer confidence are at their highest levels for over two years, while Brazilian equities and the real have risen sharply amid signs that the economy might be bottoming out from the deepest recession since the 1930s. M&A activity is also up, as some state companies offload assets amid continuing corruption investigations. Meanwhile, inflation is finally slowing, which has given the central bank room to lower its benchmark interest rate from a high of 14.25 per cent.
The first key reform, a 20-year cap on public spending, was approved by Congress in late 2016, and the government has also pushed through a series of measures aimed at helping companies and consumers burdened by debt. Investors are now looking for momentum to continue with social security and labor reforms, as well as sector-specific changes such as the opening of ultra-deepwater oil exploration blocks to operators other than state-owned Petrobras.
Uncertainties remain, not least the potential opposition to pension and labor reforms, and the government and central bank must still find a way to put the economy on a sustainable growth path in an environment of extreme fiscal and monetary discipline. Meanwhile, a de-globalization cycle expected to be spurred by the new administration in the United States could hit Brazil’s exports, with negative effects on the currency.
This critical juncture in Brazil’s development, and its impact on business growth and financing, will be the focus of the fourth in a series of strategic forums being organized around the world by the Financial Times and Paul Hastings, looking at Tomorrow’s Global Business.