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Brazil's slow rise from the ashes

The Emerging View

04 June 2015

Brazil looks a little like India a couple of years ago – slow growth, high inflation, a weak currency, external imbalances and policy makers with declining credibility. But, as with India, it is also an economy with a strong FX reserve position, sustainable levels of debt and a promising future owing to its significant geographic size, large population and decent demographic profile. Can Brazil restore former glories? We think the answer is yes.

Brazil’s problem hinges mainly on reverting to macroeconomic orthodoxy after favouring ultra-Keynesian economic policies since 2009. This means that fiscal and monetary adjustment hold the key to recovery. A coalition across the political divide, which should last through 2016, supports fiscal reform. Once the public finances respond to the on-going adjustment we expect the economy to recover, entering a ‘goldilocks’ period of improving growth amidst subsiding inflation.

This bodes well for investors willing to buy into the current weakness. Beyond 2018, the prospect of a new government also offers further potential upside in the shape of a more efficient state. 

Brazil is already making strides in the right direction. Many adjustments are underway, especially on the fiscal and monetary side, others are in the pipeline. A cross-party coalition in Brazil's parliament backs reform. Brazil has excellent chances of extricating itself from the current slump.

The full research is available on the link below.

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