Brazil: Why It Fails to Deliver on Potential

Looking beyond politics
Politics continue to dominate market sentiment. Doubts about the capacity to sustain the current economic model in coming years and a highly unpredictable Presidential election have fuelled recent market swings. But would a confidence shock alone be sufficient to raise Brazil's growth trend? We don't think so.

Why Brazil fails to deliver on potential
A rebound in sentiment could lead to a better growth outlook in the short term but would likely be insufficient to boost Brazil's medium to long-term growth trend. This is because a large part of Brazil's slowdown has clear structural roots, in our view.


The structural problem
Compared with other countries, investment in Brazil is low as is the domestic savings rate; the tax burden, meanwhile, is high and the current account deficit has climbed to uncomfortable levels. Also, the space to cut government expenditures is small; the drivers that helped push potential growth up in 2004-10 are not there anymore; profit margins continue to move lower and demographic gains are beginning to ease.

Understanding Brazil's ups and downs
Our growth accounting exercise confirms that the Brazilian economy benefited from favourable global conditions and an agenda of structural reforms in the 1990s and 2000s. Recently, however, global economic headwinds, the absence of structural reforms and policy uncertainty have been weighting on growth. According to our exercises, potential growth fell to 2.0-2.5% range and the demographic gains will soon start to pose larger headwinds to growth.

The need of reforms to boost Brazil's potential growth
A reform agenda that focuses on increasing the domestic savings rate, raising
investment and boosting productivity is the way to offset the longer-run trend of
declining potential growth.

see full report:  goo.gl/ssQG42


UBS Global Research
9oct14