Brazilian Economic Concerns Deepen

The Brazilian economy, already badly damaged by the collapse of commodity prices and a series of economic downturns, suffered another hit this week as the country’s central bank released data indicating a 10th consecutive month of contraction in December of 2015. In total, the Brazilian economy shrank by more than 4 percent in 2015, causing economic instability and a substantially downgraded credit rating for the South American country.

In the center of the controversy over Brazil’s rapid decline from South America’s largest and most prosperous economy to its current state of contraction is Brazilian President Dilma Rousseff, who detractors claim to have facilitated the current state of affairs by badly mismanaging the country’s fiscal policy over the course of her presidency. Rousseff, already a strong proponent of semi-socialist economic policies, has proposed new taxes on financial transactions and other such measures to the Brazilian congress as solutions for the current crisis. The congress, however, has not been cooperative, arguing that it is policies such as these that are largely to blame for the financial turmoil currently gripping Brazil. Rousseff is also embroiled in a corruption investigation that has led to many members of her own party and government being accused of political wrongdoing.

Making matters worse for Brazil and lowering investor confidence there even further has been the outbreak of the Zika virus, a generally asymptomatic viral disease that has been linked to birth defects in children with infected mothers. This sudden outbreak has badly damaged Brazil’s tourism industry, one of its best sources of external revenue since the collapse of commodity prices last year. The virus has also raised serious questions about the attendance at the 2016 Olympic Games in Rio, which could bring much-needed tourist dollars to the country.

Analysts suggest that Brazil’s economic problems are far from over, projecting a contraction rate of 3.5 percent in the coming year. Echoing this pessimistic outlook, S&P recently made a further downgrade to Brazil’s debt rating, bringing it to a BB level. Though the debt rating of Brazil was already in a junk grade, this latest demotion sets it at two steps below investment grade debt, as opposed to the position at one step below that it previously held. “The ministry of finance believes that the downgrade of Brazil’s rating is temporary and will be reversed as soon as the results of ongoing measures start having an effect on the economy, leading to fiscal rebalancing and recovery of growth,” said Finance Minister Nelson Barbosa, speaking to the effects of the downgrade. S&P, however, stated that it would be difficult for the country’s debt rating to rise in the current climate without significant changes in fiscal policy and a more stable political outlook.