Brazil’s new stimulus: Too little, too late

This week, the Brazilian government announced that it would make an additional 83 billion reais (approximately 20 billion USD) in credit available through 7 initiatives designed to free up credit in different sectors of the economy. Growth in the provision of private loans has been decelerating for the past five years.

The package is intended to provide a stimulus to the Brazilian economy, which is a grave economic downturn. GDP contracted by 3.7% in 2015, and is expected to contract at least another 3% in 2016. The announcement was greeted with skepticism from various perspectives.

On the one hand, there is fear that the government is ceding to pressure from the far left to abandon austerity policies. There are also fears that the new measures will not help in the fight against inflation, which has reached 12-year highs. Despite this, last week, the Central Bank opted not to raise interest rates. The government’s justification is that the difficult economic conditions will create deflationary pressure, but some analysts point to the fact that similar measures, taken during president Dilma Roussef’s first term, did not prove successful. In 2015, the Brazilian state faced a record deficit of 111.2 billion reais, which is equivalent to 1.88% of GDP and triple the amount from 2014. Public debt levels have reached levels of 66% of GDP.

On the other hand, there is doubt that these measures are sufficient to make much of an impact. The package is only worth 1.4% of the Brazilian GDP and it is unlikely to have a significant effect on the Brazilian economy as a whole. It is possible that it will help to increase liquidity, but even in this case, it is unclear whether companies will be willing to acquire additional debt in light of the current economic uncertainty.

More complex structural reforms will be required to turn the Brazilian economy around. For example, competitiveness can be improved by decreasing the tax burden and changing restrictive labor regulations.

Sources: Fabio Alves, Financial Times, O Globo, Folha Online, Globo 1, Estadão