-Analysis-

SAO PAULO — Is unanimity always stupid? Playwright Nelson Rodrigues, whose philosophy inspired generation after generation of Brazilians, famously said that it was. Today, it’s impossible not to think of this aphorism when listening to what’s being said about Brazil.

After praising former President Lula da Silva for his reforms and eloquent style, everybody from the OECD to the IMF to the Institute of International Finance is now bashing the country. The Economist, which four years ago illustrated Brazil’s booming economy with an image turning Rio’s famous statue of Christ The Redeemer into a rocket taking off, recently re-used the same illustration. This time, the rocket was nose-diving.

President Dilma Rousseff’s record is indeed disappointing. While Brazil’s growth had been stratospheric, it now stands at an anemic 2%. Deficits are deepening. Inflation is too high. What’s more, investors believe the current government isn’t doing what it should to right the ship.

The demonstrations in June highlighted the limits of the “Brazilian miracle,” which in the last 10 years led to a meaningful decrease in poverty and social inequalities. Suddenly, thousands of people who had never protested before took to the streets to express their disillusionment over an increased cost of living and poor public services.

And yet, the progress made both in economic and social terms over the last decade is undeniable. The unemployment rate is below 6%, and economists are talking of a full employment situation. The minimum wage was raised in successive steps, which, along with the family allowance program (Bolsa Familia), increased the purchasing power of the “new middle class.” Why, then, is there a feeling that this Brazilian model is running out of steam?

First of all, because the world has changed. Brazil is a great raw materials exporter and has benefited significantly from the “commodities supercyle,” boosting its commercial balance. But this era of abundance, driven in part by China’s hunger, is over. Like other emerging economies, Brazil’s development is slowing, and the situation could worsen once the United States decides to tighten its monetary policy.

Rousseff strays

In Brazil itself, a consensus seems to be emerging with regard to economic policy after decades of crisis, and it includes a sort of orthodox potion with three main ingredients: budgetary discipline with the goal of achieving primary surplus (before debt service), inflation targeting, and a floating exchange rate. Rousseff, however, has started taking some liberties with these best practice guidelines.

The deterioration of public finances was temporarily hidden by financial sleight of hand, but it now lies in plain sight. The budgetary deficit reached 3.3% of gross domestic product (GDP) in September. For the second consecutive month, Brazil even registered a primary deficit — even though its goal is to have surpluses of 2.1% of its GDP for the whole year.

After the global financial crisis, Lula, who left office in 2011, carried out a bold policy to revive the economy. Public banks rose to the front line to support credit. But the transfers of about $100 billion from the Treasury to the Brazilian Development Bank (BNDES) in the last five years have inflated gross public debt. According to the IMF, it now stands at 68% of GDP — although Brazil contests these figures — while the average for emerging economies is 35%.

“The crisis was used as a pretext for the reinvention of the state development model,” claims Gustavo Franco, former president of the country’s central bank.

On the surface, the situation is bordering on disaster. The current account balance deficit is at 3.6% of GDP. More worrying still: The strong flow of direct foreign investments is no longer enough to cover the deficit, which now stands at $80 billion. As a result, Brazil needs to attract capital just as volatility has returned to the financial markets.

The dollar, which is getting stronger compared to the Brazilian real, only makes things worse by favoring inflation that is now around 6% (the official target being 4.5%). Already, credit rating agencies Moody’s and Standard & Poor’s are threatening to downgrade Brazil, currently two notches above “investment grade.”

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Rio, is the party over? (Abetens)

But despite its shortcomings, not all is lost in Brazil. The country has enormous advantages, starting with its oil deposits. It also has ample reserves (amounting to some $375 billion), which should prove enough to withstand a storm on the markets. But the gap is widening between its economic potential and its poor growth performance.

So is there any prospect of change? For now, the timetable seems tight. After the Carnival and the FIFA World Cup in June 2014, there will be the October elections. For now, it’s still unclear whether the “could-do-better” side will make its voice heard against Rousseff, who will certainly be seeking a second mandate.