Think Tank: Brazil's economic prospects darken for 2014

10 January 2014 09:47 Source:ICIS Chemical Business

Economic prospects are dimming for Brazil, Latin America’s largest economy. The nation’s GDP actually shrank by 0.5% in the third quarter of 2013, according to the Brazilian Statistics Institute (IBGE).

Economists surveyed by the Brazilian Central Bank now expect the economy to grow by just 1.95% in 2014. Earlier in August, they expected growth of 2.6%.

 

The sun may be setting on growth in Brazil

Copyright: Rex Features

Economists forecast the economy will grow by 2.28% for 2013, which would be the third year of slow growth.

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).

The government is intervening too heavily in the economy, 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 noted that Brazil has delayed policies intended to boost private investment, especially in infrastructure. In a 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.

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. One bright spot is Brazil’s unemployment rate, which remains at historical lows.

Brazil resins consumption lags behind its peers in Latin America, meaning the country has the potential for fast growth, said Calo Carvalhal, analyst for Latin American petrochemicals at JPMorgan. Carvalhal spoke in November 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.

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