Carnival and Positive Economic Signs Put Brazilians in Good Spirits
Week of February 20 – February 24
Most Brazilians are getting ready for Carnival this year in a considerably better mood than in 2016, as the country’s economy shows relatively good prospects for the coming months. The only risk is excessive optimism being transformed into enhanced frustration if things do not develop as well as hoped, as was the case in 2016’s latter half, when expectations that the recession would be over before December of that year were unfulfilled.
This time, however, outlooks are based on more solid grounds. Brazil’s Central Bank Monetary Policy Committee will very likely make a new significant cut in the country’s benchmark interest rate this week, following a previous 75bps reduction and two other less ambitious 25bps cuts. Also, Finance Minister Henrique Meirelles and his team have been successful in injecting a couple of dozens of billion dollars into the economy via micro-measures, such as allowing withdraws to be made from inactive Workers’ Severance Fund accounts, the repatriation of individuals’ assets abroad and the potential waiver of a 40 percent bonus payment paid by companies to employees dismissed without just cause.
Other signs encourage optimism as well. Foreign direct investments hit a historic monthly record in January. The U.S. dollar exchange rate is almost reaching the symbolic BRL$3 to US$1 mark, helping push inflation down and increasing Brazilian exports. Commodity prices for products that Brazil is competitive with have been rising and the 2017 agricultural harvest promises to be one of the best in history. Federal tax revenues probably had their first real increase in two years in January.
Yet, there is no doubt recovery will be slow. Credit will not be broadly available in the short term, with conditions not very favorable to consumers. Job creation will also demand a long period until it is notable, as it is almost always the case in any recession.
Financial markets’ radiant optimism in the last couple of weeks depend much on Congress passing President Temer’s reform bills. Although prospects are promising, there is no guarantee they will be approved without changes. The pension reform, in particular, will face much more intense opposition than previously approved reforms, since it directly affects the vast majority of Brazilians’ pockets.
Above all, the Operation Car Wash investigations will continue to imperil the government and its congressional allies. No significant developments are expected to take place this week until the end of Carnival, Ash Wednesday. Brazil’s year truly starts March 6. From then on, we should know whether the present wave of optimism is justified or not.More Testimonials