OUTLOOK '14: Economic prospects darken for Brazil

06 January 2014 20:00 Source:ICIS News

Brazil flagHOUSTON (ICIS)--Economic prospects continue to darken for Brazil, Latin America's largest economy.

The nation's economy actually shrank by 0.50% in the third quarter, according to the Brazilian Statistics Institute (IBGE).

Economists surveyed by the Brazilian Central Bank now expect the economy to grow by just 2.10% in 2014. Earlier in August, they expected growth of 2.60%.

This year is expected to only be slightly better. Economists forecast the economy will grow by 2.35% for 2013, which would be the third year of slow growth.

Several factors are dragging down Brazil's economy.  

The government has sent ambiguous signals about policy direction, which has reduced investor confidence, according to a report issued last summer by Standard & Poor's (S&P). 

One economist interviewed in the autumn said that the Brazilian government is intervening too heavily in the nation's economy. That, in turn, is discouraging investment, said Pedro Tuesta, senior Latin America economist for 4cast, a financial analysis company.

Meanwhile, household debt has increased over the years, which will cause consumers to cut back on spending.

S&P also noted that Brazil has delayed policies intended to boost private investment, especially in the country's inadequate infrastructure.

In a special report, The Economist noted that Brazil would have to triple its annual infrastructure spending for the next 20 years to catch up with the levels of other big economies.

Other challenges loom as well. Brazil's investment level in terms of GDP is about 10%, which is exceptionally low, Tuesta said. As a percentage of GDP, taxes make up 35-37%, a large amount for a developing country.

Brazil will need to address these challenges all while fighting inflation, which has run above the target level of the country's central bank.

To fight inflation, the Brazilian Central Bank increased the nation's Selic (short-term) interest rate to 10.00%.

The bank's policies seem to be taming inflation, however. The president of the central bank, Alexandre Tombini, told a Senate commission that inflation fell by 92 basis points from June to November.

Another bright spot is Brazil's unemployment rate, which remains at historical lows, Tombini said.

For petrochemical markets, Brazilian consumption of resins lags behind its peers in Latin America, meaning the country has a potential for fast growth, said Calo Carvalhal, senior analyst for Latin American petrochemicals at JPMorgan. Carvalhal spoke in November to delegates at the annual meeting of the Latin American Petrochemical Association (APLA).

Producers operating in Brazil, though, could be hard pressed to meet that demand because of foreign competition.

Three out of the four crackers in Brazil rely on oil-based naphtha as a feedstock, which puts them at a cost disadvantage against US producers, which rely on gas-based ethane.

Such ethane crackers give US producers of ethylene derivatives a cost advantage against their Brazilian peers.

Already Brazil has imported record amounts of polyethylene (PE) and polyvinyl chloride (PVC), a consultant said on the sidelines of the APLA meeting.

As the US increases its capacity of ethylene derivatives, Latin America will be a natural market for its exports.

By Al Greenwood