The Sport of Protesting for Brazil

Furgeson Wellman by Brad Houle, CFA Senior Vice President

The Sport of Protesting for Brazil

Brazil has been in the news recently with images of large protests filling public squares that have turned violent in some instances. There is no one issue that is sparking the protests other than what can be described as a general dissatisfaction by the public. Issues from a rise in bus fares, lowering of fuel taxes and a call for improved government services have caused the citizens to take to the streets.

Until recently, Brazil has been considered a model emerging market economy with its burgeoning middle class and abundant natural resources. Also, next year is Brazil’s big “debutante ball” to the world as it is hosting the 2014 FIFA World Cup and the 2016 Summer Olympics. Despite spending on infrastructure as well as the government’s efforts to stimulate the economy, Brazil is struggling. The Brazilian stock market is down over 20 percent this year and the Real, Brazil’s currency, has depreciated versus the dollar. There are broader structural economic issues which are causing the slowdown in the economy and have filtered down to create social unrest.

Brazil is a large exporter of commodities with exports accounting for 14 percent of GDP, compared to 6 percent of GDP in the 1990s. Brazil exports agricultural products and metals, with China being a large trading partner of Brazil. With the Chinese slowdown and a general slump in commodity prices, pressure has been placed on Brazilian incomes. According to the World Bank, the per capita GDP is around $12,000, which has grown nicely in the last few years. However, this number also suggests that despite recent progress of income gains and standard of living, much of the population still lives in abject poverty.

Also hampering the Brazilian economy is an explosion of debt that accompanied the strong economic growth that was fueled by the commodity boom. With the private sector saddled with debt, the ability to invest and grow businesses is hampered by high current debt service requirements. As we have recently witnessed in developed economies, deleveraging is a long and painful process that crushes growth opportunities.

Despite the efforts to “dress up” Brazil for the World Cup and Olympics, there are global economic headwinds which are making it difficult for the country to pull out of the current economic malaise. Brazil is a reminder that conditions can change rapidly and dramatically in emerging markets. It also reinforces the growing interdependence of economies around the globe.