2014 will be a pivotal year for Brazil

Multinationals are struggling to assess whether and when Brazil will return to high-growth after three years of disappointing economic performance, and more specifically, they want to understand how 2014 – a pivotal year with the World Cup and the October presidential elections – will affect their businesses in the near future.

FSG recently published a report specifically addressing most of these questions. The report is intended to equip senior executives with the knowledge to:

  • Understand Brazil’s new economic reality: Over the last decade, Brazil’s ability to grow beyond 2–3% was driven by internal and external growth accelerators, which began to subside in 2011. These accelerators were: workforce growth; a massive credit expansion; a commodity super cycle driven by China’s demand for commodities; and high levels of capital flows into the country. A return to higher growth will depend on the government’s ability to pass key structural reforms, and implement effective policies that lift gross fixed investment and productivity levels in the economy. Unfortunately, 2014’s calendar will not be conducive to any major reforms or investments, and the likelihood of significant reforms emerging over the medium term will depend heavily on which candidate wins the elections in October.

Brazil Outlook and long range scenarios

  • Set expectations for 2014’s economic performance: Brazil is set to muddle through 2014 with the help of government spending and decent private consumption. However, investment will remain muted due to higher uncertainty about where the economy is headed. While FSG believes that Brazil is likely to grow around 2% in 2014, there are two major downside risks to our forecast: 1) persistent high inflation that forces the central bank to continue raising interest rates and limit credit growth; and 2) a rapid deterioration of fiscal accounts that prompts the government to reduce spending, raise taxes, and delay infrastructure investments, in order to avoid a sovereign risk downgrade by credit agencies.
  • Monitor signposts for the October presidential elections: Although FSG believes Rousseff remains the favorite to win in October’s elections, economic turmoil and social unrest during the World Cup could rapidly erode her popularity down to July 2013 levels, when Brazilians took the streets to protest against widespread corruption and the poor quality of public services. If momentum for change were to build, we could see Rousseff as more vulnerable to the Eduardo Campos-Marina Silva alliance (PSB-Rede) than to Aecio Neves (PSDB), despite Neves’s current strength in the polls.
  • Assess economic growth prospects for 2015 and beyond: Regardless of who wins the elections, 2015 will be a tough year of adjustment, as Brazil tries to regain credibility in its macroeconomic framework by restoring its fiscal balance and reducing transfers from the treasury to public banks. Over the long term, a return to high growth is less likely with Rousseff than with Campos, as we see Rousseff’s PT as less prone to undertake the reforms and policies that the country needs to unlock investment growth and produce productivity gains.

In the report we provide a detailed analysis of the key signposts to monitor ahead of the October presidential elections, as well as a comparison of the policy agendas of Rouseff and Campos, and their likely impact to multinationals in different sectors. FSG clients can access the full report here.

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