What’s gone wrong in Brazil? Everything…

Brazil's economy is not pretty - it's heading for its worst recession on record. But bold long-term investors could be rewarded.

Brazil is in crisis. The economy is expected to have shrunk by almost 4% last year and by another 3% this; if this pans out, it would be the worst recession on record. Both business and consumer confidence have hit record lows. Public debt is rising fast and credit-ratings agencies Fitch and Standard & Poor's downgraded Brazilian government paper to junk last year.

What's gone wrong? Everything. The downturn in commodities that Brazil specialises in, such as oil, iron ore and soya, has hit exports hard. Brazil's structural problems, notably "poor productivity and unaffordable, misdirected public spending", only made things worse, says The Economist.

The government under President Dilma Rousseff did nothing to rectify these in its first term (2011-2014), which saw "incessant microeconomic meddling and fickle policy-making" such as tax breaks for favoured industries that "bloated the budget [and] stoked inflation".

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Inflation has hit a 12-year high of more than 10%, so there is little scope for the central bank to boost growth with lower interest rates. A fragmented political system, now bogged down in impeachment proceedings against Rousseff, also suggests any turnaround will be some time coming.

It's not a pretty picture. But bold long-term investors could be rewarded. There are glimmers of hope, with politicians now openly discussing privatisation, reform of the expensive pension system and constitutional change. Brazil's young population and plentiful supply of soft commodities are also advantages. There also comes a point when all the bad news is in the price on a cyclically adjusted price/earnings ratio of just seven, the potential upside if Brazil gets its act together is substantial.

Investors can get exposure via the iShares MSCI Brazil UCITS ETF (LSE: IBZL) and the JP Morgan Brazil Investment Trust (LSE: JPB).

Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.