Goldman Sachs’ outlook on Brazil
According to Ramos, the Brazilian government didn’t take the right steps to ensure sustainable and long-term economic growth for the country. Their monetary and fiscal policies so far have failed to deliver the right economic output.
The fall in commodity prices (DBC) (BCX) and political turmoil in Brazil have led to a contraction in the economy. In 4Q15, Brazil’s GDP fell by 5.9%, its lowest level since 1996. Most Latin American (ILF) economies’ performances were hammered due to the fall in commodity prices.
Brazil has yet to resolve several problems, such as spiraling unemployment, high inflation, political turmoil, stagnant economic growth, a high fiscal deficit, a deep recession, and downgrades from ratings agencies.
The Brazilian economy is experiencing high inflation of 10.4% despite the central bank’s interest rate hike. Currently, the short-term interest rate stands at 14.3%.
Key takeaways for investors
Ramos believes that if the current economic scenario continues and the present government doesn’t act, medium-term debt sustainability could worsen, and investors could demand higher risk premiums in order to take exposure to the Brazilian market.
The scenario could also lead to a loss of confidence and an outflow of capital from the country. Furthermore, the situation could lead to a capital account and balance-of-payment crisis.
Ramos pointed out that resolving the above issues will not be fast or easy to implement.
In the next part, we’ll analyze the recent performance of the Brazilian index.