Brazil: playing with fire

The Elcano Royal Institute is a think-tank for international and strategic studies that analyses world events and trends from a Spanish, European and global perspective.

The Analyses of the Elcano Royal Institute (ARI)are short pieces - of around 3,000 words - on aspects of current international affairs considered to be of relevance to Spain, its foreign policy or its security. In broad terms ARIs are intended to have a predictive bearing on events.Brazil is no longer a star performer in the emerging world, in which the economy is slowing down and falling into an abyss. Rising inflation and weak GDP growth have placed Brazil in a dilemma regarding monetary policy, while the large fiscal deficit prevents the government from using any fiscal stimulus. External shocks from the commodities market, China and the Fed have together stalled Brazil’s economic growth engine.

Brazil is experiencing the consequences of a lack of reform during its golden age. The Dutch disease, poor infrastructure, low quality education and inefficient pension system are all obstacles to restart the economic engine. A shaky political situation, emanating from corruption scandals and political ties in state-owned enterprises (SOEs), has delayed the action needed for economic recovery. The options confronting Brazil are limited and short-term pain in recession is unavoidable for a better long-term future. Inflation has to be controlled at all costs and structural reforms are needed to rebuild local and international investor confidence.