Brazilian inflation is now at 10 percent and the economy is shrinking by 3 percent, according to the FT. Dire economic conditions and a massive corruption scandal have now paralyzed the country’s political leadership, adding to the dysfunction created by a constitution that makes real financial reform virtually impossible anyway. Moreover, a whiff of panic has both both foreign and domestic investors ready to bolt.
That’s life in Brazil these days, and it’s hard to see better news coming for the country any time soon.
Brazilians know a thing or two about financial panics, having suffered them in the 1980s and again in the early 1990s (when monthly inflation sometimes hit 30 percent). At one point, all the bank accounts in the country were frozen and depositors couldn’t get at their money. At other times, hyperinflation has turned life into a crazy carnival and you couldn’t use credit cards or buy anything on time because inflation would wipe out the value of debts. Supermarkets and other stores stopped marking items with prices. Instead, they put letters and numbers on the shelves—A17, say, for a pair of sneakers. Customers would then have to check the notice at the front of the store telling you how much money A17 cost. Overnight, or sometimes in the middle of the day, the price would change and new sheets would be printed. Workers ran to the store on the day they got paid to buy what they needed before the money lost value.
That hasn’t happened for a while in Brazil, thanks to former President Fernando Henrique Cardoso and his Real Plan (Cardoso governed Brazil from 1996 to 2003). And for a time, the Worker’s Party president who followed him, Luíz Inácio da Silva, kept with the program. But gradually the Worker’s Party turned out to be a lot like Mae West, who famously said, “I used to be Snow White, then I drifted.” The Worker’s Party under President Dilma Rousseff has indeed drifted into dangerous territory.
The Olympics are coming to Rio next summer (ironically, it will be winter in Brazil), and that might give the economy a shot in the arm. But overall, things have not looked this bad in Brazil since Fernando Henrique took the oath of office. That’s not good news for the region, or for the United States. Brazil accounts for about 50 percent of Latin America’s GDP, and acts as a stabilizing force in a sometimes troubled part of the world. With other Latin lefty economies melting down as falling commodity prices, populist economic policies, and growing corruption crowd out growth, Latin America could make more news in 2016 than it has for some time. Strong Brazilian leadership will be needed, but Brazil may be too consumed by its own problems to help.
Foreign investors, portfolio managers, and diplomats need to be on the alert: Storm warnings are up in Latin America.