Challenges Await Brazilian Economy as Chinese Commodity Demand Stagnates

The slowdown of the Chinese economy, along with the Chinese government’s attempts to manage it carefully and gradually, have been the crux of most economic news for the past several weeks. Other economies dependent on supplying raw materials to China have been dealt a severe blow, and commodities prices have declined to reflect decreased demand. In particular, the Brazilian economy has been hard hit by this series of events. With a large amount of internal economic trouble to begin with, the collapse of commodities exports has had a profoundly negative impact on Brazil.

Brazil’s top two exports, iron ore and crude oil, have been consistently dropping in price. Much like Venezuela, Brazil has experienced significant repercussions from the Saudi oil glut, which has driven the price of a barrel of crude oil down below $40 for the first time in years. Iron ore, of which Brazil is the world’s third largest producer, has not been as seriously affected by market conditions. As the global demand for these two commodities drops, however, the Brazilian economy is being forced back onto agricultural exports. Soybeans, sugar, and poultry make up the remaining top five exports of the South American nation.

While worldwide economic events have not played into Brazil’s favor, much criticism has been leveled at recently reelected president Dilma Rousseff for weakening the economy, making it more vulnerable to external market pressures. Large social spending programs and a close tie between Rouseff’s government and labor unions have, for the past several years, been justified by the economic upswing of the commodity boom. However, as the Brazilian economy struggles to find its footing under these new conditions, Rousseff has received criticism from all sides. A recent scandal involving Petrobras, a state owned oil production company, and several other major production and construction firms has left Rousseff and her government widely unpopular. Preliminary estimates show that the scandal, which left high ranking executives at many of the involved firms facing criminal charges, will cost the Brazilian economy $37 billion in production this year. The scandal is a large part of the reason for Brazil’s sudden economic collapse.

In an effort to cope with both internal and external economic concerns, the Brazilian government has proposed a set of austerity measures that would reduce public spending, delay pay increases for state employees, and raise tax rates to generate more revenue. These measures, devised as a result of the downgrading of Brazil’s credit rating to junk status by the Standard & Poor’s, are intended to correct a budget deficit and encourage economic growth by the end of 2016, a move analysts have suggested is necessary for driving investment spending. Finance minister Joaquim Levy has finalized and submitted the austerity proposal to Brazil’s Congress, which has agreed to set aside time for debate and vote on the measures in the coming weeks.

It is not yet known whether or not the austerity measures will make it through the Congress. What is certain, however, is that it will face steep opposition from the Workers’ Party, of which Rousseff herself is a member, due to its cuts to social spending programs. Opposition leaders have also expressed concern, saying that the cuts do not go far enough. Pressure to compromise on austerity measures is high following the credit downgrade, leading to speculation that the measures may be passed.