Brazil gets its act together

The Brazilian government is showing signs that it is ready to turn the economy around.

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President Dilma Rousseff: plenty on her plate

Not long ago Brazil was a favourite with foreign investors, but now things look bleak. The worst recession for 25 years is looming, says the FT: in the first quarter of 2015 the economy contracted by 0.2%, or 1.6% year-on-year. Unemployment is at a four-year high, real incomes are falling and consumption declined on an annual basis for the first time since 2003.

Meanwhile, a nasty drought has helped boost inflation to an 11-year high of 8.5%; electricity prices have rocketed, because most of Brazil's energy is hydroelectric. The government's inflation target is 4.5%, so analysts expect the central bank to tighten monetary policy further, even though the economy is already floundering. The government also overspent in the last few years, notably on wasteful subsidies. A huge corruption scandal at Petrobras, the state-owned oil major, has compounded the crisis.

However, there are signs that the administration is "beginning to restore the economic credibility [it] squandered" in the past few years, says The Economist. The Brazilian Congress recently voted through cuts to welfare spending, which should save $2.6bn in 2015, while discretionary government spending has been cut by a record sum.

A small primary budget surplus is expected this year, which should placate the credit-rating agencies and enable Brazil to retain its investment-grade rating. "This is Brazil under new management," according to Marcelo Carvalho of BNP Paribas.

But the new management still has plenty on its plate, notes The Economist. Major impediments to Brazil's long-term development remain. Key problems include "an enterprise-crushing tax system and antiquated labour laws". Brazil also suffers from poor infrastructure, a reflection of low investment.

Still, it's encouraging that policymakers have started to get their act together, while the stockmarket remains reasonably valued on a cyclically adjusted price/earnings ratio of ten. That implies plenty of long-term upside if further sensible moves are forthcoming.

Brazil is also a major exporter of agricultural commodities, which MoneyWeek believes are in a structural bull market, and a young population also bodes well for growth; 60% of Brazilians are under 29. Investors can access Brazil through the iShares MSCI Brazil UCITS ETF (LSE: IDBZ) and the JP Morgan Brazil Investment Trust (LSE: JPB).

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