Brazilian Economy: Bottom Out?

Date:01-06-2017

Eight months after the Vice President of Brazil took office; the signs of economy recovery are still shy. Since May last year, six ministers have resigned. Unemployment at highest level ever since it reached 11.9%. For the second consecutive year, the GDP growth was negative and the last estimative in December was -3.49%. Currency exchange rate versus dollar has dropped by 21.39% in 2016, impacting the trade balance. Inflation has dropped to 6.52% per year, but mainly due to unemployment and recession. Denouncements of corruption through the operation called Lava Jato have put some presidents of the biggest companies from Latin America into jail, as well as politicians, former governors from most political parties. Some of them have already been condemned and the biggest leniency agreement of the world has been signed.

Under these circumstances, it could be imagined that the storm remained in the past and recovery would come soon from now on. However, in a breakdown of Lava Jato, the election campaign of the political slate between the impeached President and her Vice President - who is the current President of the country, is under investigation. Depending on what the federal investigators find out, the Supreme Court will judge, and completely new directions for the political environment will take place, including new presidential elections. If so, new elections not directly voted by the people, but indirectly by the Federal Congress, will be done.
 
In addition, the result from the presidential election in the United States shall affect the Brazilian economy more negatively. Considering the elected President will join efforts to resume the US economy and massive investments in infrastructure will force the increase of the interest rates. Thus, to avoid the exit of capital, the Central Bank of Brazil will tend to reduce the speed of the interest rate drop, which, again, hinders local investments.

While the GDP estimative for 2017 is 1% and although it is very low, it is great news after to 2 years of negative growth. But by far, not enough. Agriculture is still the great support to the economy; however, some threats are already in the radar: La Niña, a meteorological phenomenon, and international grain commodity stocks are at adequate levels, not pushing to significant higher prices.

Most of the foreign and local investors are waiting for next steps before they decide where and how to invest in order to minimize higher risks.

China represents the most important business partner of Brazil, whose export to the Asian country represents almost double the export to its second-ranked partner, the USA. China is the most important market for the Brazilian soybean, iron ore, sugar, cellulose and beef. China is ranked number one investor in Brazil and its investments are in energy, ore, bank, agribusiness, heavy machinery, automobile and air transportation.


A highlight about agribusiness investment from Chinese companies. Different from other sectors, agribusiness is a production input. Besides the fact that four companies share almost 90% of the pesticide market in Brazil, China is the main source of pesticides and, although it has not been quantified, more likely Chinese companies are the most important investors in pesticide registrations. Several Chinese companies, factories and traders, have applied product registrations and are waiting for the evaluations. The main difficulties, they complain, are the long time for registration, which in some cases take up to 8 years, and rule changes. These avoid the access of many other players interested in the biggest pesticide market in the world. Nevertheless, considering that agriculture has been supporting the balance of the Brazilian economy for many years, pesticides from China are, in some cases, 5-10 times cheaper when compared to prices practiced in Brazil. The access of qualified players would definitely enhance competitiveness of local farmers in the most important sector of the Brazilian economy.