Published On: May 18, 2016

Economic Questions for 2016

Share This
Tags

150206_EM_Unemployment

Brazil’s economy sunk into recession in 2015, and while 2016 may be a bit better, the recession isn’t going away anytime soon. Brazilians are struggling amid a slowed economy that has led to rising unemployment. Everyday consumers must also contend with an inflation rate now topping over 10 percent.

While everyone from salesmen to small business owners is looking for relief and solutions, it’s easy to blame the government, especially as the issue of the President’s impeachment are front and center. The corruption scandals enveloping the country certainly aren’t helping restore consumer confidence.

However, despite the economic destruction that the crumbling value of Petrobras has had on Brazil, experts note that Brazil’s financial problems do not have a simple solution or an easy scapegoat. “People are angry, many are losing their jobs. It’s natural to look for someone to blame when that happens,” one expert noted.

inflation

Economists state that the triple convergence of Brazil’s GDP recession, high inflation, and high unemployment has multiple causes, corruption being only one of them. For example, while corruption hurts the country and affects everyone, it is not new in Brazil. The current scandals being investigated by federal prosecutors in Curitiba started long ago. They were certainly occurring during the Lula administration and perhaps earlier. However, at that time, Brazil’s economy was booming.

In fact, government policies rarely have a direct effect on any country’s GDP. Rather, as Brazil is a major player in the world’s global economy, what happens in the rest of the world has a direct effect on Brazil. For example, the rise of the dollar has added to Brazil’s trading woes along with falling oil prices. The real has been weakened by Brazil’s stalled economy, and hurt even more by the rising dollar. However, the rise of the US dollar in the past year is a direct reflection of the strong US economy and is not related to Brazil.

Another major factor in Brazil’s economic fall is the slowdown of China’s economy, as China is Brazil’s largest trading partner. Brazil supplies China with iron ore to power its massive urban building expansion and also soy for animal feed. Brazil is a major exporting country in commodities and the fall in commodity prices has hurt the economy severely.

In an effort to bring more revenue to the country to replace lost trading income, the federal government is encouraging China to increase its investments in Brazil.

Three Gorges Dam in China

Three Gorges Dam in China

With this in mind, the Chinese state-owned power company, China Three Gorges, has agreed to pay Brazil 14.8 billion reais (3.7 billion dollars), for the rights to operate two massive hydroelectric power plants for the next 30 years. One of the dams is the Santo Antonio dam in Porto Velho. China Three Gorges made the commitment during a government auction of 29 operational power plants whose concession contracts have expired. The auction’s winner, as part of the contract, had to promise, after paying that sum, to sell electricity to consumers at the lowest price.

The auction was structured to raise funds for the government as quickly as possible. Brazil’s Treasury is struggling to bring down a budget deficit that in September 2015 led the credit ratings agency Standard & Poor’s to downgrade the country’s bonds to junk status.

Government ministers have been explicit about their desire to raise revenue quickly, and as a result, the auction was rushed. “There was very little time for possibly interested parties to arrange financing to participate,” a government spokesman said. China Three Gorges was the only company to bid on the Santo Antonio dam, for example.

Santo Antonion dam in Brazil

Santo Antonio Dam in Brazil

China Three Gorges, the world’s largest hydroelectric operator, had already invested 505 million dollars in Brazil in August 2015, when it bought a handful of smaller plants from a Brazilian company, Triunfo. The Chinese utility has been present in Brazil since 2011, when it spent 2.69 billion euros to buy a stake in a Portuguese energy company, EDP, with multiple operations here.

Another state-owned Chinese utility company, the State Grid Corporation, won a contract in July 2015 to build, at an estimated cost of 1.9 billion dollars, a 1500-mile transmission line to bring electricity from the giant Belo Monte hydroelectric plant in the Amazon to Brazil’s industrial heartland in the southeast.

China is also investing in other sectors of Brazil’s economy. In 2015, China’s banks promised 12 billion dollars in financing to Petrobras and 4 billion dollars to the mining company Vale. In November 2015, the Chinese conglomerate HNA bought a stake in Brazil’s third-largest airline, Azul, for 450 million dollars.

 

 

[Research for this article comes from The New York Times.]

Displaying 2 Comments
Have Your Say
  1. Jeff B. says:

    Thank you for this concise and cogent analysis of the economic situation.
    Best wishes from the States.
    Jeff B.

  2. Michael Rubin says:

    Thanks, Jeff. I’m guessing you could write a much better one!

Leave a comment

XHTML: You can use these html tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>