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Brazil economy in need of reforms, reduced state bloat

03 october 2013, 12:53
0
Brazil, Latin America's economic behemoth, is in dire need of structural reforms and reduced government bloat to fuel sustainable growth, AFP reports citing analysts.

This, they add, will not happen overnight and will take massive political will.

"Brazil's problem is that it carries a heavy load: the State," said economist Pedro Tuesta of the 4Cast consulting firm in Washington.

"There needs to be a radical change in the role of the State. Prioritize the country's infrastructure more than control the private sector," he argued.

On Wednesday, credit rating agency Moody's lowered its outlook for Brazil's sovereign debt from "positive" to only "stable."

"Key credit metrics are deteriorating, especially Brazil's government debt-to-GDP and the investment-to-GDP ratios," it said, warning that Brazil faces a protracted period of low growth.

In 2010, the economy posted 7.5 percent GDP growth after contracting 0.2 percent in the wake of the 2008 sub prime crisis.

In late 2009, influential British weekly The Economist, projecting a Brazilian economic rebound, posted a picture of Rio's iconic Christ the Redeemer statue on its cover, taking off like a rocket.

But two years later, the country grew a paltry 2.7 percent and an anemic 0.9 percent last year. This year the economy is projected to expand by only 2.5 percent.

The Economist recently portrayed the statue as a wayward rocket spiraling downwards and asked whether Brazil had blown it.

But, in the wake of last June's massive street protests against corruption and poor social services, President Dilma Rousseff, rejects criticism of the country's economic performance.

"We are the only major country with full employment. We have posted the third-best growth figures in the world during the second quarter. Whoever bets against Brazil will always lose," she added.

The world's top producer of coffee, sugar and orange juice and one of the biggest producers of meat, soybeans and iron ore, Brazil has benefited from high commodity prices on world markets.

Why the end to high growth?

"This price increase was artificial, fueled by zero interest rates in the United States and the huge demand from China," said economist Enrique Alvarez of New York-based IdeaGlobal.

Brazil, now the world's seventh largest economy, also boosted domestic demand. Its middle class expanded and improved its purchasing power amid a continuing low jobless rate.

With the domestic currency, the real, appreciating against the dollar, Brazilians increasingly traveled and shopped abroad, a trend that is continuing although now the real is depreciating.

Yet now the commodity price boom is over. And stimulus packages could be phased out at any time in major economies.

Meanwhile strong domestic demand and a global drought are pushing local prices upward while inflation is approaching the upper limit of the official target set at 6.5 percent.

The Central Bank opted to hike its base rate to nine percent to rein in surging consumer prices, which impacted growth.

Hobbled by inadequate infrastructure

Faced with chronically inadequate domestic infrastructure, Brazil is now trying to stimulate private investment to finance ports, highways and multi-million-dollar oil projects by state-run energy giant Petrobras to tap the country's huge deep-water oil reserves.

"We see positive initiatives, infrastructure concessions (...). But for the country to grow 2.5 percent, we need structural reforms. We need to reduce the tax burden, have more competitive (interest) rates, huge investment in infrastructure," Andre Gerdau, president of the steel group Gerdau, told the economic daily Valor.

The government recently held two auctions for highway construction, but one did not attract any bidders.

In a recent meeting with entrepreneurs in New York, Rousseff vowed to respect the rules of the game for investors.

But analysts believe that the so-called "Brazil Cost," the excessive operational costs associated with doing business in this country, is a barrier to increased growth through private sector investment.

For Alvarez, the issue is still how to restructure state machinery and in turn stimulate business creation and job creation.

The World Cup, which Brazil will host next year, can provide a welcome boost, with market analysts expecting a 2.2 percent expansion of GDP as a result.

But in the short term, the country will still reel from problems associated with the global economic instability.

"Brazil is a giant in terms of natural resources. And being a giant, it can move powerfully at times. But it carries a lot of fat and not much in the way of muscle," Alvarez said.

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