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When the music stops

  • Published at 07:26 pm June 30th, 2016
When the music stops

The Brazilian economy has been in crisis for some time now. Brazil’s economic difficulties started when commodity prices for iron ore and agricultural products that Brazil exports in abundance started falling in 2011.

According to the International Monetary Fund (IMF), the Brazilian economy entered a deep recession in 2015, contracting by 3.8%. To put that into context, the Brazilian economy only contracted by 0.1% in 2009 following the global financial crisis.

Moreover, the last time Brazilians experienced such a deep recession was in 1990, when the Brazilian economy contracted by more than 4%.

The economic crisis has been made worse by a widening political crisis involving Brazilian President Dilma Rousseff. President Rousseff will be impeached over links to an $8 billion corruption scandal in Brazil’s state-owned oil producer, Petrobras.

Rousseff was the chairperson of Petrobras when the corruption allegedly took place between 2004 and 2012.

The twin economic and political crisis is taking a heavy toll on the Brazilian economy, and households more specifically. The unemployment rate in Brazil was 9% in 2015, and is expected to climb to over 10% in 2017 and remain in double-digit territory until 2021.

According to some estimates, that means almost 9 million people will be out of work, out of a total labour force size of close to 110 million.

The way international investors have lost confidence in Brazil and are exiting the country en masse should provide plenty of lessons for Bangladeshi policy-makers

What happens next?

The outlook for the Brazilian economy is bleak on all accounts. It is difficult to predict how the Brazilian economy will recover from this deep recession.

There is little doubt that the unfolding political crisis is weighing heavily on household and business confidence, reducing domestic and foreign investment and job creation.

And with the President Rousseff fighting for political survival, the government appears to lack a comprehensive plan to turn the economy around.

Given the relatively weak outlook for global economic growth and international trade, it is also unlikely that Brazil will be able to export its way out of recession, even if commodity prices rebound somewhat in the second half of this year as some experts believe.

Current investor sentiment on emerging market economies is not very bullish in general, and is likely to remain subdued for some time yet. And even if sentiment improves, international investors are unlikely to rush back to Brazil in the short-term.

Not surprisingly then, the IMF forecasts Brazil’s GDP to remain in deep recession in 2016 before experiencing modest growth in 2018.

Lessons for Bangladesh

There is no obvious or direct connection between the Brazilian crisis and Bangladesh. The two countries do not have strong trade and investment linkages, so Bangladesh’s economy will not be affected by what is happening in Brazil.

Moreover, Bangladesh is not a major commodity exporter like Brazil and it is not adversely impacted by low commodity prices. In fact, being a net importer of food and energy products, Bangladesh benefits from low-commodity prices in international markets.

But the way international investors have lost confidence in Brazil and are exiting the country en masse should provide plenty of lessons for Bangladeshi policy-makers.

Bangladesh’s economic track record of achieving 5-6% GDP growth in last 15 years despite major political turmoil does not mean continued growth in the future is guaranteed.

As Bangladesh’s trade and investment linkages with the global economy deepens, the economy will become more sensitive and vulnerable to negative domestic socio-political shocks.

With foreign investors increasingly relying on Bangladesh to do business, whether it be in RMG, cotton, leather, jute, or other industries, domestic political turmoil has far greater potential now to scare away foreign investors and adversely impact trade and investment than at any point in the past.

Bangladeshi policy-makers would be well-advised to take those sensitivities seriously.