Saturday, February 13, 2010

The Economist on Brazil's Fiscal Recklesness

Finally an article about Brazil in the The Economist that shows the country's economy and politics more like they really are. Here's the summary of the whole trouble:
Almost continuously since 2003, federal-government spending has gone only one way, rising at an annual average rate of 8% in real terms (see chart). This year the budget allows for a 15% increase, which puts the finance ministry’s talk of prudence in perspective. This binge has been possible because revenues have risen fast, too, because of economic growth and because more businesses have left the informal economy and gone legal. But so long as the extra money continues to go on hiring civil servants rather than doing things that will allow the economy to grow faster without overheating, interest rates will remain high. At its present level of 8.75%, the benchmark rate would be absurdly high in most big economies. For Brazil, it is apparently too loose.
These were times of incredible worldwide liquidity and very positive prospects for Brazil, and yet growth rates have been subpar and interest rates remained extremely high. Imagine what will happen once interest rates spike in the rest of the world and the investors' infatuation with the country is over.

Brazil would do well to ignore grandiloquent forecasts put out by interested domestic and foreign financial analysts. These people have directly profited from the rise of the Brazilian markets, and will profit even more from their fall. It could also use the distraction created by the Greek imbroglio to do some real fixing of its economy before a change of tide takes place. Unfortunately, it doesn't appear that Brazilian leaders are capable of rising to the task.

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