While Greece and China have received most of the global financial press of late, conditions in Brazil are continuing to deteriorate.
The Ritesh Anand Column
Growth has collapsed and the need for capital is still substantial as the decline in imports has only marginally outpaced the decline in export incomes.
Policy makers are constrained by a bloated budget deficit, an already disproportionately large public banking sector and a weakening currency which is forcing interest rate rises into a weakening economy.
Moves to enact significant austerity measures are adding to the downward pressure. There is a material risk that the current weakness will cascade into even greater problems.
It is interesting to step back and look at how Brazil got to where it is: From 2003 to 2011, Brazil benefited from a confluence of factors that supported an investment boom and a leveraging of its economy. The combination of cheap labour following major devaluations in 1998 and 2002, high local rates and the global commodity boom quickly attracted significant inflows of foreign capital and investment.
Over time, this dynamic pushed the currency up — eroding Brazil’s competitiveness — and supported rising import demand and the country became heavily reliant on foreign financing to fill the gap.
For most of the period since 2011, the collapse in US dollar incomes (due to persistent declines in commodity prices and the lack of competitiveness of the labour force) was met with increased borrowing and not a decline in spending. Consistent with the early stages of a balance of payments crisis, this increased the need for foreign capital as the ability to pay off foreign investors declined.
The pressures on the Brazilian economy have now come to a head. The economy is weakening rapidly, though so far the collapse in domestic demand has only cut the ongoing need for foreign capital in half. So foreigners have large positions that are getting hit and Brazil still needs to attract significant amounts of net new capital.
The slowdown is being driven from the corporate sector, where the unwinding of the commodity boom dried up profits and is forcing sharp cutbacks in capital expenditure plans and a rapid increase in layoffs.
With job losses now occurring at a faster rate than any time in the last 15 years, household incomes are under strain and they have sharply cut back on their spending. This is now creating mounting losses for Brazil’s creditors, particularly in the government-subsidised banks that have gone on a lending binge since the financial crisis. With policy levers constrained, the downward spiral is reasonably likely to continue.
Zimbabwe faces similar challenges as commodity prices have collapsed and the strengthening dollar has made it less competitive. Zimbabwe’s trade deficit exceeds US$2,7 billion or 24% of GDP. Mineral exports account for over 58% of total exports. They are, however, expected to decline this year due to both a decline in production and lower commodity prices.
Mineral exports are expected to decline by at least 20% in 2015 from US$2,2 billion (2014) to US$1,7 billion this year. While imports are expected to decline in 2015, Zimbabwe would continue to suffer from a huge trade deficit.
It seems the authorities are finally beginning to realise that the status quo is no longer sustainable. Zimbabwe is at risk of economic collapse. There is a growing realisation that the country’s investment policies are unfriendly and there is need to create a more attractive investment climate. It should be borne in mind that Zimbabwe competes globally for capital.
The case of Brazil highlights the need for fiscal prudence and monetary discipline. With heightened risk, the appetite for risk, especially in emerging markets, is declining rapidly.
Capital flows to Africa are expected to decline this year as the global economy falters. Zimbabwe competes for the same global cake as neighbours Zambia and Mozambique, hence it needs to look at itself in the mirror and honestly ask if it is indeed an attractive investment destination.
The country needs to focus on production rather than consumption; growth and development rather than ownership and control; employment creation rather than equity participation; needs to make land productive again; and ensure financial market stability.
It also needs to rebuild its manufacturing sector and create centres of excellence, eliminate corruption and encourage greater transparency and accountability in all sectors, particularly in government.
Both Greece and Brazil highlight the urgent need for government to focus on the economy. After a period of strong economic growth, Brazil faces significant headwinds. Greece is likely to sink deeper in debt. Without the support of Europe, Greece is likely to face economic collapse. Can anyone bail us out? Should or could the Sadc or African Union have done more to support Zimbabwe?
The country cannot rely on others to haul it out of its troubles. It has to find its own solutions. Its policies are working against its aspirations to the detriment of the economy.
Recent statements by government officials are encouraging signs, but words alone will not arrest the downward spiral — action is what needed. Zimbabwe can ill afford another crisis so soon after the 2008 economic crisis that led to dollarisation.
This time the options are limited and Zimbabwe needs to “bite the bullet” and do all that is necessary to invite much-needed capital.