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Earlier this week, President Dilma Rousseff was temporarily removed from office pending a trial as the country’s leaders face down a number of corruption allegations and a barrage of negative economic news.
But while Brazil faces numerous economic challenges, it also has strong trading prospects. Thomas Krieger, Regional Head for Latin America at Commerzbank, argues that by building a stronger export base and trading more with its regional neighbors, this key BRICS member can secure a better long-term economic future.
The BRICS Post spoke with Mr. Krieger about the outlook for Brazil’s economy.
TBP: Brazil’s is an export-heavy economy. What are the short-term and long-term prospects for Brazil’s economy given the decline in global commodities trading and drop in prices?
Krieger: Continued dependence on the export of raw commodities, such as oil, metal ores, and agricultural products, have certainly left Brazil vulnerable to volatile global prices and demand. The country did not take advantage of its more prosperous years – such as 2010, which saw 7.5 per cent GDP growth – to invest in the development of a broader, more diversified export base.
Indeed, Brazil is now paying the price. According to the International Monetary Fund (IMF), short-term prospects are disappointing: 2016 will likely see GDP contract by 3.5 per cent, while the country is in its second year of what is likely to be the worst recession since 1901.
If Brazil is to turn its economy around and get back on the growth path, it must diversify the profile of its export trade. The country needs to channel its energies into the production of a broader range of higher-value exports – whether that is aircraft or the car industry that the nation has fostered over the years – and thereby become less reliant on volatile raw commodities.
What does this mean for emerging economies like Brazil which export oil?
As with other oil-exporting nations, low prices, and hence low revenues, have certainly hit the country hard. Indeed, Petrobras, the state-owned oil company – already struggling with a corruption scandal – is faced with more than $105 billion of debt. Given the fiscal deficit of 10 per cent of GDP, the Brazilian government is unlikely to be able to help.
Again, this highlights the need for emerging economies such as Brazil to build a broader industrial base. This will enable it to diversify away from oil, support a greater share of manufactured products, and stabilise long-term export earnings.
As a member of BRICS, how does intra-trading help Brazil? Has it been reaping the benefits of such an association?
The ‘BRICS’ concept has certainly been key to fostering important political partnership among these countries, whether in groups like the G20 or other multilateral institutions such as the Asian Infrastructure Investment Bank (AIIB) – of which Brazil is the only Latin American member.
However, despite Brazil’s important trade with China, the BRICS idea has not translated into trading integration among its members. There are two major reasons for this.
Firstly – and most obviously – Brazil is simply too far geographically from Russia, South Africa and India for trading integration on a large scale. For this reason, the country is unlikely to be able to form a trading agreement (like NAFTA) with the other BRICS, or an integrated economic unit (like the EU).
Secondly – and perhaps more importantly – the nature of Brazil’s imports and exports limits the amount of trade it can engage in with other BRICS countries. The reason is supply and demand: the goods Brazil produces and requires are too similar with those of India, for example, for much bilateral trade. With both countries lacking the broad manufacturing base necessary for the production of advanced exports, India and Brazil instead look to other emerging markets where they can sell less-sophisticated goods.
Only in certain industrial areas can Brazil truly compete on a global level: a case in point being the success of its regional aircraft producer, Embraer. It is clear that Brazil must look outside the BRICS group, and make its own way in world trade.
Given Brazil’s current political crisis, what hope is there for economic turnaround in the long-term? Will Brazil see GDP growth in 2017/2018? What kind of policies should any future Brazilian government implement to turn the economy around?
Clearly, Brazil’s political instability and decline in investment flows have hurt short-term chances for recovery, and the IMF has suggested that 2017 will bring stagnant GDP growth.
Yet, despite Brazil’s current challenges, it is important we take a long-term perspective. It is the eighth-largest economy in the world, and will continue to be a trading power with significant growth potential. For example, the country is – and will no doubt remain – a strategic trading partner of Germany and Europe as a whole.
Already, it is host to some 1,600 German industrial companies: the largest stock of German companies working abroad. This is why we’re opening a new subsidiary of Commerzbank in Sao Paolo.
Of course, while commercial ties with Europe will continue to be of vital importance – along with trade with the United States and Asia – ramping up export trade with the rest of Latin America will be a key ingredient in securing Brazil’s long-term prospects.
The country would do well to develop greater trade with its neighbors, and could at last realise the benefits of closer engagement with the regional trading bloc Mercosur. In fact, building on its industrial head-start on nearby nations, such as Colombia, Peru and Bolivia, Brazil enjoys an important advantage when it comes to producing and exporting the higher-value goods it needs.
All in all, there is considerable potential for economic revival for Brazil in the long term. But unlocking that potential requires making some important changes in the country’s approach to trade.