BUENOS AIRES — Brazil’s recession is following an almost identical path to the Argentine crisis 1998-2002, perhaps not surprisingly, as very similar factors were at play in both cases. And just as our economy began to recover in mid-2002, recent indicators suggest that Brazil may also be turning the corner. Could its economy rebound in 2017?
In 1997, before the crisis set in, Argentina’s GDP was growing at a rate of 8.1%, while inflation stood at just 0.3%. The country’s fiscal deficit (excess spending) was 1.7% of GDP, and public debt was at 29.6% of GDP. The weak points were a negative current account balance of payments (3.5% of GDP), a 16.8% jobless rate (though falling) and complaints about Argentina’s competitiveness abroad.
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A demonstrator in Sao Paulo — Photo: Alexandre Moreira via Zuma
Within a relatively short period of time, however, everything changed, due in large part to decreases in the price of Argentine export products (triggered by a double-digit drop in the currency exchange terms) and doubts about the strength of the government. Those factors put a damper on capital flows and triggered a vicious circle.
Between 1999 and 2001, Argentina’s GDP fell by 9.1%, consumption declined, prices fell by more than 4%, the fiscal deficit rose (as earnings fell against greater spending and interest payments), public debt increased by more than 15% of GDP, jobs were shed and cash reserves fell. The only “positive” here was a decline in imports, in reality a direct consequence of the recession.
The situation led to the well-known crisis of 2001, with its devaluation, asymmetric “pesification” (forced conversion of assets and debt into Argentine pesos), debt default and restructuring, and major political turmoil: at one point the country famously went through five different presidents in a single week. Argentina entered then into the “mother of recessions,” with massive job losses that also came, paradoxically, with a big external balance surplus.
Things began to change in 2002 with improvements to the currency exchange terms and a reduced outlflow of capital, which showed the importance of these variables in the Argentine economy.
From boom to bust
In Brazil, the economy was roaring as recently as 2010 and continued to perform fairly well until 2013, with growth rates above 3%, price increases and unemployment below 6%. The fiscal and foreign trade deficits were below 3%. Like Argentina, problems began with a deterioration in exchange terms, weaker government and a reversal of the capital account balance, all made worse by increased public spending.
The falling price of Brazilian exports meant a more than 30% decline in exchange terms, which reduced the purchasing power of everyday citizens, affected the country’s foreign accounts and reversed capital flows. These in turn led production and job creation to tumble and curbed fiscal revenues, which provoked more capital outflow and hampered governance.
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Rio’s Copacabana beach — Photo: Rodrigo Soldon
Brazilian GDP stagnated in 2014 and declined by almost 8% between 2015 and the first half of 2016. The Brazilian real lost value and was trading at over four against the U.S. dollar. Inflation, on the other hand, rose, as did unemployment, affecting nearly 10% of the workforce. The fiscal deficit, in the meantime, reached almost 9% of GDP (as economic activity declines, state revenues fall while subsidies and interest payments rise).
The resulting anger paved the way for the ongoing impeachment process against President Dilma Rousseff, who was suspended last month and faces the possibility of permanent removal.
Light at the end of the tunnel?
Since April, however, the evolution of the Brazilian economy has shown some positive signals. In the first quarter of this year, GDP suffered the biggest fall year-on-year (5.8%) but compared to the fourth quarter of 2015, this was the lowest decline in two years. Also, the balance of payments current account was in the black in April, for the first time since 2009, even though commodities prices had only just begun to recover.
In the same month, the capital account also improved notably. These tendencies strengthened the real, which rose 15% in value. The trade balance showed a surplus of over $6.4 billion, the biggest since 1989, and should produce an even bigger current account surplus than in April. Finally, fiscal accounts began to improve.
Both theory and Argentina’s experience suggest that if these trends continue, the Brazilian economy should start to improve in the second half of 2016 — assuming the precarious political situation does not worsen.
That said, the impeachment process is long and its results are presently uncertain. For now, though, the evolution of the capital account shows that investors have reacted positively to the political changes, even if on many occasions in history, political reactions have been quite the opposite of investors’ reactions.
A Brazilian recovery would benefit both the Brazilians and the Argentines. Brazil’s economy has a significant impact on ours (especially on industry and tourism). Our foreign trade figures for the first term in 2016 show a marked deficit growth vis-Ã -vis Brazil, as we export less to them and import more. A boost in the Brazilian economy and the price of the real could change that.
