By Maarten-Jan Bakkum, senior strategist, Multi-Asset, responsible for Emerging Markets at ING Investment Management
Thirteen years after the last major crisis, another economic emergency threatens Brazil. It is now obvious that the golden years, during which the Chinese hunger for commodities and the global urge to invest in emerging markets knew no bounds, have not been used to solve structural problems.
The massive inflows of foreign capital during the years 2002-2011, an average of about USD 10 billion on a monthly basis, have been consumed and not invested. Money has been wasted because of corruption in the political system and state-owned enterprises, but there has also been a considerable advantage for average Brazilians, who were given an exceptional leap in purchasing power with all kinds of substantial subsidies.
It would be too easy to just blame the current problems on corruption. The system as a whole has failed. The priority of the governments of Presidents Lula and Dilma has been to reduce social inequality; the obvious choice given the wide disparities between rich and poor Brazilians, between southern and northern Brazil. But then the implementation of the socio-economic policy has been counterproductive.
A tangled mass of new subsidies and a rapidly growing government intervention have led to an excessive consumption growth, resulting in rising current account and budget deficits. The ever-increasing state banks essentially financed investments that were politically important, but economically irrational. Brazil thus, in fact, embraced the Chinese model.
During the years of increasing government intervention, the investment climate has deteriorated dramatically. Private investment growth has been negative for four years and a radical change in Brasilia is urgently needed to rotate the negative trend.