Why you should be cautious when investing in Brazil
Brazil’s GDP growth
As you can see from the chart below, Brazil’s gross domestic product (or GDP) was growing at about 6% before the recession hit the economy in 2009, when GDP dipped below zero. The economy did recover very well following the crisis, managing to get its GDP to about 7.5% in 2010. However, the economy again took a gradual dip to levels below 3% and seems to be recovering at a sluggish pace currently.
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The credit crisis of 2009, which was a result of Americans with the poorest credit being lent money to purchase houses they couldn’t afford, impacted the U.S. economy badly. The crisis had repercussions on the world economy. At the time, when U.S. Broad market ETFs like the SPDR S&P 500 (SPY) along with U.S. banks like Citigroup Inc. (C) and Bank of America (BAC) saw their prices slump, ETFs tracking Brazilian equities too took a dip, largely driven by a drop in the Brazilian exchange rate.
The iShares MSCI Brazil Capped (EWZ), which measures broad-based equity market performance in Brazil and has holdings in top companies like Itau Unibanco Holding S.A (ITUB), Ambev SA (ABEV), and Petroleo Brasileiro SA Petrobras (PBR), declined as much as 66% from May 2008 to February 2009.
“Order and progress” (Brazil’s official motto) is sorely needed in Brazil
Brazil does hold its ground in certain areas. With its considerable industrial breadth and sizable working-age population, Brazil does boast full employment. However, the economy is growing at a sluggish pace, mainly on account of low productivity and inadequate investment in infrastructure and housing.
The Brazilian economy has been facing a downturn in economic growth to 0.4% in the last three months of 2013, due to high inflation and low business investment. Business investment in Brazil fell 2.1% in the first quarter of 2014—the biggest decline over the last two years.
Roadblocks to growth
Apart from these concerns, currently, Brazil also faces developmental roadblocks like high debt levels, high inflation, low productivity, and underdeveloped infrastructure.
Though Brazil may have enjoyed one of the world’s fastest growth rates over the past decade, it remains exposed to high inflation. Moreover, the country’s credit rating was cut by Standard & Poor’s to one notch above junk in March.
The next part of this series sheds light on Brazil’s debt rating downgrade by S&P and other macroeconomic obstacles impeding the nation’s growth.