Brazil’s Highs and Lows

By | Updated July 10, 2014

It’s 2007 and the World Cup is awarded to soccer-mad Brazil; euphoria reigns. Brazilians see it as belated recognition of their rising international standing. Investors pile in to ride the surging economy’s commodities boom. Fast-forward to 2014 and the tournament ends ignominiously for Latin America’s colossus, shamed 7 to 1 on home turf by Germany in the semifinal round. That followed street demonstrations the previous year, with citizens protesting high prices, poor public services, corruption and the bloated costs of the soccer tourney under the banner “The Giant Has Awakened.” Cows starved in a multiyear drought. What went wrong? Can Brazil bounce back from its disgrace in the Beautiful Game and compete again in the international economy?

The Situation

Brazil’s economic growth has slowed to its weakest three-year pace in a decade, advancing just 2.1 percent on average from 2011 through 2013. The currency has fallen 25 percent since President Dilma Rousseff rose to power in 2011. Sovereign debt was downgraded on March 24 for the first time in more than a decade. Business confidence in June reached the lowest level in more than a decade. There’s more: With exports dropping, in January Brazil recorded its worst trade gap since at least 1991. Petrobras, the state-controlled oil company, has lost about 60 percent of its market value since 2007 and the commodities empire of Eike Batista, once Brazil’s richest man, has collapsed. Sluggish growth has been accompanied by inflation running above the official 4.5 percent annual target for nearly 4 years. The drought hurt the grain harvest and threatened supply of electricity. Polls say Rousseff, chosen by her popular predecessor Luiz Inacio Lula da Silva, is no longer assured of a first-round victory in October presidential elections.

The Background

Brazil has suffered boom-and-bust cycles and political instability for the better part of two centuries, since independence from Portugal in 1822. Upward of 45 percent of its 2013 exports were raw products, meaning its prosperity is sensitive to the vagaries of commodities markets. On paper, Brazil looks like a powerhouse. It’s the fifth-largest country in the world, by land mass and population. Its offshore oil reserves include the Western Hemisphere’s biggest discovery since 1976. It has the second-largest iron ore reserves, is the second-largest producer of soybeans and third-largest of corn. About 80 percent of its electricity comes from hydroelectric dams and it produces ethanol, meaning it has one of the world’s least carbon-intensive economies. On the other hand, its wealth distribution remains among the most unequal. Prosperity provided cash to beef up the Bolsa Familia social welfare program that became an international model for poverty eradication. The new middle class received credit and went shopping, boosting growth. Now, with commodity prices slipping and industry stagnating, that model appears to have run its course. Investment that would make the economy more efficient has remained well below half that of China as a percentage of GDP.

The Argument

Finance Minister Guido Mantega said on Feb. 21 that Brazil is living through a period of “lean cows” following a golden stretch between 2003 and 2010 marked by surging GDP growth, falling poverty, narrowing inequality, investment grade bond ratings and United Nations praise for advances in life expectancy, educational attainment and income. He and Rousseff tend to blame Brazil’s modest performance on slow international growth after the financial crisis, pointing out that unemployment is near a record low and foreign reserves have risen past a healthy $375 billion. Once the world economy revs up again, they argue, Brazil’s boat will rise. The government says it has a new growth strategy based on private investment in transport and energy. Last year it sold oil-exploration rights for the first time in five years, reaping more than $6 billion. Critics assert that Brazil has yet to ignite the next stage of growth by reducing the tax burden, the byzantine bureaucracy and the steep tariff wall. These would boost investment, they say, and more flexible labor laws would improve productivity. They want Brazil to shift reliance away from consumption, which along with government spending still accounts for about 85 percent of GDP. Morgan Stanley counts Brazil as a member of its “fragile five” afflicted with high inflation, widening current-account deficits and vulnerable currencies. As Brazil’s people struggle to regain their psychic equilibrium after their worst World Cup loss in history, the real’s depreciation during Rousseff’s term — the second-worst among the world’s most traded currencies — is a sign investors aren’t optimistic about economic recovery.

The Reference Shelf

  • Pimco’s “Emerging Markets Watch” sees a shaky future for Brazil’s financial markets “unless an effective policy mix is restored.”
  • The Brazilian Institute of Economics, a think tank, finds Brazil’s tax breaks too costly.
  • Bloomberg Businessweek recounts how Brazil’s richest man, Eike Batista, lost his $34.5 billion fortune.

(This QuickTake includes a corrected label for the vertical axis of the current account chart.)

(First published March 27, 2014)

To contact the writer of this QuickTake:

David Biller in Rio de Janeiro at


To contact the editor responsible for this QuickTake:

Harry Maurer at