External Environment Increases Challenges for Brazil

The rising interest rate in the U.S. adds pressure to the country’s finances, already shaken by political turmoil, downgrading and the failure to make any big changes in the economy.

The Federal Reserve raised basic interest rates last week for the first time in seven years. The rate began to fluctuate between 0.25 percent and 0.5 percent, and the American monetary authority signaled it would gradually promote further increases in proportion to the country’s economy showing sustainable signs of recovery after the global crises of 2008. In fact, the fundamental elements of the American economy, from industrial production to the labor market, are showing signs of improvement.

The initiative by the Fed was expected by investors, but even so it’s still cause for concern to developing countries. This is because higher interest rates make American bonuses and bonds more attractive. They are considered stable and safe by the market, and in this way encourage a redirection of investment from developing countries to the United States. Even before the Fed’s decision, the International Bank for Reconstruction and Development, or the World Bank, warned that the increase in basic American interest rates could have a negative impact on emerging economies.

The IBRD analysis indicates that the decision of the American monetary authority takes place at a particularly difficult moment, with enhanced economic slowdown and world trade. Apart from that, still in the wake of the global financial crisis of 2008, commodity prices, the main export products of the developing countries, are in a precipitously downward trend, mainly in the fields of petroleum and minerals. This situation has been affecting the growth of these developing nations and several of these countries are showing fiscal and trade deficits, according to the IBRD.

In Brazil, the increase in U.S. interest rates finds a situation even more degraded, considering the mistakes of an economic policy that neglected the fiscal side in order to bet on the “new economic framework,” action which lacks responsibility, if not logic.

The result is a recession with unemployment and rising inflation. Apart from that, the country is going through acute political turmoil which affects the economy, especially the decision to invest in business, as there is the worry of investing money in an institutionally uncertain environment.

Add to the chaos the recent downgrade of the country’s credit by Fitch Ratings, the second major risk rating agency to remove the stamp which indicates that Brazil is a good payer; and Joaquim Levy’s replacement in the Ministry of Finance, who was compromised by the fiscal adjustment, by Nelson Barbosa.

It’s no wonder the federal collection in December had the worst result for the month since 2008, with a decrease of 17.29 percent, compared to the same period in 2014. The Brazilian Central Bank predicts that the recession will continue for the third year in a row and that inflation will move closer to the target rate for 2017.

In economics, illusion doesn’t last, and the price to pay, in general, is high. And to Brazil the only thing that remains is to tighten its seat belts and start again.