Growing Stagflation Fears in Brazil... Politics Also Weighing Down the Economy

Environmental Regulations in China Ahead of Beijing Winter Olympics Negatively Impact Brazil's Iron Ore Exports
Brazilian President Bolsonaro Accelerates Political Turmoil Ahead of Next Year's Election

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Gong Byung-sun] The fear of stagflation, where economic recession and inflation occur simultaneously, is growing in Brazil. Amid slowing economic growth due to regulatory risks in China and other factors, the political situation is also expected to remain unstable until next year's presidential election.

According to Shinhan Investment Corp. on the 25th, although Brazil's GDP growth rate has been steadily revised upward, it has been slowing since August. On the 22nd (local time), the Central Bank of Brazil raised the benchmark interest rate from 5.25% to 6.25%, marking the highest level in over two years. However, the International Monetary Fund (IMF) maintained Brazil's economic growth forecast for this year at 5.3%. Furthermore, next year's growth rate is expected to remain at 1.72%.

The current situation in Brazil cannot be explained merely by concerns over the US tapering of asset purchases and the weakening attractiveness of emerging market investments due to global economic slowdown. In the second half of this year, Brazil's stock market and its currency, the Real, have been the worst performers among major countries. The stock market decline exceeded -10%, and the currency depreciation rate was greater than -5%.

Although Brazil's daily COVID-19 cases, which once approached 80,000, have dropped to around 15,000 this month, external factors are worsening the economic growth rate. Industrial production has been declining for three consecutive months due to sluggish production of intermediate goods such as steel and sugar. Since exports of raw materials and to China constitute a significant portion, regulatory risks in China, COVID-19 resurgence, and floods are having adverse effects. Additionally, ahead of the Beijing Winter Olympics next year, China announced plans to strengthen environmental regulations and reduce iron ore consumption, which is also negative news. This is expected to directly impact Brazil's iron ore export sector due to a sharp drop in iron ore prices.

Inflation remains uncontrolled. Even considering the base effect from last year's COVID-19 shock, temporary factors such as drought, cold waves, and supply chain disruptions have prolonged the inflationary trend. In August, Brazil's consumer price index recorded a 9.68% year-on-year increase, far exceeding this year's target inflation rate of 3.75%. Minyoung Park, a researcher at Shinhan Investment Corp., said, "The upward trend is likely to continue through the September data," adding, "The Central Bank of Brazil is expected to maintain its policy of raising benchmark interest rates until the end of the year."

Moreover, the political situation in Brazil is also reducing its investment attractiveness. Jair Bolsonaro, Brazil's president who has been called the 'Trump of Brazil' and has sparked various controversies since the beginning of his term, is intensifying political turmoil ahead of next year's presidential election. Earlier this month, President Bolsonaro deliberately escalated conflicts and consolidated his support base by personally participating in a pro-government rally held on Brazil's Independence Day. This strategy appears to have been chosen as his approval ratings are significantly trailing those of former President Lula da Silva in the upcoming election.

Researcher Park explained, "Issues related to tax reform and the budget bill are also increasing volatility in Brazil's financial market," adding, "Political uncertainty is likely to persist until next year's election, so caution is necessary."