Question

QUE// VIVDLY DISCUSS IN A LENGTHY THE MAJOR MACROECONOMIC INDICATORS AND ITS IMPACT ON THE DEVELOPMENT OF BRAZIL ECONOMY.

Answer 1

Brazil Major Macroeconomic Indicators and Its Impact:

Brazil has undergone profound socioeconomic changes since the Great Depression of the 1930s, especially since World War II. Its economy, which for centuries had been geared to the exportation of a small number of primary products, has become dominated by a large and diversified industrial sector in a relatively short period of time. At the same time, Brazilian society, which had been predominantly rural, has become increasingly urbanized.

Macroeconomic Indicators and Its Impact:

Social achievements: The social achievements in the last two decades have been remarkable from both historical and international perspectives. Historically, Brazil has been one of the most unequal societies in contemporary world. From 1970 to 2000 (period for which Census micro data are available), the Gini coefficients of household income per capita remained practically constant at 0.6, one of the highest levels recorded at national level in modern times. In the last decade, however, inclusive growth policies made possible to bring down Gini figures to below 0.53.1 The inclusive growth process of last decade benefited all classes but income gains were systematically larger for lower income classes. Taking the extreme deciles, from 2001 to 2011, annual average growth rates of income per capita went from 6.5% for the bottom 10.0% compared to 1.5% p.a. for the top 10.0%. In international terms, the 20 million Brazilians in the bottom 10% had income per capita growth close to those of China and India, while per capita growth rates of the 20 million Brazilians in the top 10% were close to those of Sweden. Thus, the speed of income per capita convergence between poor and rich citizens of Brazil was similar to the one between Chinese and Swedish Cash transfer programs were the main tool used to combat poverty. Since the midseventies they were implemented as security assistance to old aged and disabled persons. In the mid-nineties, multiple programs targeting minimum income, health, and education were created. Their unification under the Bolsa-Familia program in 2003 brought fundamental changes in terms of scale, organization, and performance. Moreover, political organizations at municipal level were a crucial for its implementation ​​​​​​

With increasing concentration on childhood protection, Bolsa-Familia now reaches out to 13.8 million households making average cash transfers of 60 dollar per month, which on average represents approximately 20% of the beneficiary’s income. In macroeconomic terms, the cost amounts to 0.5 % of Brazilian GDP to which another 0.5% of GDP of the social security assistance programs should be added.

Financial crisis and the recent slowdown in the economy.

The Brazilian financial sector was not exposed to subprime equities. Major financial reforms and safeguards were implanted since the Plano Real stabilization program in the mid-nineties. Thus, before the crisis, the Brazilian banking system was in a quite strong financial position compared to the other economies, displaying one of the lowest leverage ratios in terms of both assets and credit ratios. Furthermore, it was relatively insulated from the international financial system, with a relative small share of foreign-owned banks in the value assets, and foreign exchange denominated liabilities represented only 11% of the total value of liabilities.

The Brazilian corporate sector, however, was heavily exposed in dollars and was badly hurt. The trigger mechanism was the drastic contraction of foreign credit lines which dropped more than 50% in the aftermath of the Lehman Brothers collapse. The credit crunch resulted in a significant exchange rate devaluation and the late attempt to hedge themselves was self defeating, making the dollar skyrocket from 1.6 to 2.4 Brazilian reals in the first half of October 2008. The vicious cycle was completed by the massive outflows of foreign capital and the huge drop in prices of primary commodity exports which combined to give the final blow to the stock market. In the aftermath of the crisis, countercyclical policies—a big novelty in Brazilian crisis management history—were promptly implemented. The Central Bank reduced required reserves and made massive injection of liquidity to the banks and the corporate sector. With some delay, the Monetary Policy Committee slashed interest rate by 500 basis points to historical record lows. To cover up for the drastic reduction in external credit lines, special credit line to agriculture, housing and machinery investments were sustained by state-owned banks.

Thus, in 2010 the National Development Bank (BNDES) responded for 53% of total credit disbursement for industry and infrastructure in the country, compared to 31% in 2008. Fiscal stimuli came through tax rebates on domestic sales of investment goods and durable consumer—automobiles, in particular—and credit subsidies to investment on machinery and housing. From 2007 to 2012, special credit lines from BNDES went from 5.8% to 10.8% of GDP, while mortgages, mainly from the Federal Saving Bank (CEF) went up from 1.8% to 6.8% of GDP. Most of the funding of BNDES came form federal government loans which went up from 7 to 370 billion Brazilian reais, in the same period (Appy 2013).

On the expenditure side, the government granted generous increases to civil servants payroll and to the social program (Bolsa Familia) benefits. To a large extent that resulted from the indexation rule for the minimum wage introduced in 2007 which is based upon lagged inflation rate plus the two years lagged growth rate of GDP.4 From 2007 to 2012, the minimum wage increase was 30%, in real terms, and was directly transmitted to the payroll of states and municipal governments, as well as of the social security benefits, which, since 2008, were linked to it by a legislation approved by the Congress. Indirectly, they affected the private sector wage payroll. Indexation of minimum wages produced a substantial increase in the permanent income of lower wage echelons and pension beneficiaries, which combined with the tax rebates and credit incentives to boost the demand of consumer durables and investment expenditure, particularly in housing.

Prospect and challenges for sustainable development

Growth prospects for the next few years are lukewarm. GDP is projected to grow 2.5% this year and to stay around 3.0% for the coming years. Approaching full employment, the labor market is under stress and it is no wonder that there were wage strikes along with political protests all over the country, last year. Overheated labor market and exchange rate devaluation put pressure on inflation. Despite repressed public tariffs and regulated prices of energy and transportation, consumer inflation rate was just below 6% p.a. in 2013. To bring inflation down, at the beginning of 2013, the Central Bank started to raise interest rates bringing it to levels above 10% per annum by the end of the year, hence, restricting investment and growth prospects for 2014.

Growing fiscal imbalances raise credibility problems among analysts and investors. During 2013, the stock market dropped by 15.5% while the dollar went up by 15%. Fingers are pointed to the fiscal situation (Tourinho, Mercês et al. 2013). The PSBR primary surplus was close to 1.8% of GDP, coming down from 3.1% in 2011. The net debt of the public sector is kept well under control at less than 35% of GDP but debt figures are under suspicion. Accounting makeups attempt to conceal huge off-budget transfers to state and municipal governments as well as to back up National Development Bank (BNDES) loans of dubious quality.

Some hope for investment recovery coming from the government concessions in infrastructure—pre-salt oil and transportation—which started last November with the successful auctions of the Libra oil fields; followed by the auction for the construction and operation of paved roads in the agricultural frontier of the Northwest region; and for the expansion and modernization of the airports of Confins and Galeão. Though concessions are still hampered by regulatory and incentive problems, the National Development Bank (BNDES)—with mandatory optimism—projects US$ 1.75 trillion of investments for the period 2014-2017. Petrobras alone is expected to invest some US$ 230 billion during this period. Government concessions in infrastructure are expected to add 1.8% of GDP to investment rates that are projected to reach 22.2% of GDP in 2018 compared to 18.0% in 2012. The largest recipients will be the oil and gas sectors, and transportation infrastructure with respective shares of 10.0% and 2.5% approximately (S.A. 2013).

In the long run, there are plenty of reasons for optimism in relation to the Brazilian economy. The country is particularly well endowed with natural resources in mining, energy and agriculture and thus prospects of international trade are encouraging. The emerging middle class provides a promising basis for expansion of the domestic market, human capital accumulation, and for the consolidation of both social and political democracy.

The challenges are how to assure the investments required for viable exploration of natural resources and how to sustain the increases of productivity levels, thus reducing vulnerability of the emerging middle class and increasing welfare levels for society as a whole. In addition, the country will have to confront the environmental problems that afflict large segments of her population, particularly those living in the urban congested areas.