The Brazilian authorities have today announced a 55 billion Reais ($32 billion) cut in government spending for 2012. This is roughly in line with what investors had hoped for and further illustrates the massive improvement in the Brazilian authorities and their handling of the economy over the last 10 or 20 years. So what does this mean for the Brazilian government and the outlook for the Brazilian economy?
Brazilian actions as sweet as a nut
When you take into account the fact that total government expenditure for 2012 is expected to be around 1.5 trillion Reais the confirmed budget cut of around 55 billion Reais is a significant move in the right direction. This comes at a time when the Brazilian authorities are under pressure from international investors who are looking for the government to take the lead over the ongoing worldwide economic crisis which will at some point, if it continues, impact upon growth in South America.
Thankfully the authorities have anticipated this potential problem in the short to medium term and the reduction in government spending for 2012 should give the Brazilian Central Bank significant scope to reduce interest rates in the short to medium term if and when required. When you take into account the 55 billion Reais reduction in spending is on top of the 50 billion Reais reduction last year it does begin to have an impact upon sentiment and gives an all-round belief that the authorities are more in control than ever before.
There is no doubt that investors have been reissued by the government’s early decision to cut government spending in 2012 as a means of reducing the potential increase in national debt while maintaining a focus upon growing economy. On the surface it may seem difficult to comprehend how you can cut government spending while also continuing to focus upon the economy but there have been further developments under the surface.
In a sign of the times the government has confirmed that infrastructure and housing programs will not lose so much as a Real from the announced budget cuts and will effectively be ring fenced. The housing program will attempt to help those at the bottom end of the income scale while the investment in infrastructure will support the employment market and local businesses. All in all, the decision to leave these two particular areas ring fenced and untouched is seen as vital to the stability of the economy going forward and confidence in the government.
Will Brazil continue to grow?
At the same time as announcing these expected budget cuts the government has also confirmed it is still targeting economic growth for 2012 of at least 4%. While this may look slightly ambitious against the third-quarter figures for 2011, which saw the economy flat line, we have to take into account this was against a very difficult worldwide economic backdrop. If the authorities are able to maintain growth of around 4% in the Brazilian economy in the short to medium term this will almost certainly confirm that the dark days of years gone by have been left well and truly behind.
It is also worth taking into account that the Brazilian economy is the largest in South America and as such tends to lead the area in relation to economic activity. So while other large economies in South America have their own agendas and their own policies, in many ways they are all hanging on the every word of the Brazilian government to see exactly what it will do in the short to medium term and the outlook for the Brazilian economy and the South American economy.
Who would have guessed we would see austerity in Brazil!
It seems bizarre at times to be talking about Brazil and austerity measures in tandem with economic growth expected to be, in the words of the government, at least 4% this year. If we take a step back 10 or 20 years we see a very different Brazil with a very different political background and a very different economic outlook. As we have mentioned on numerous occasions, many investors believe that Brazil was something of an “economic basket case” in years gone by with very few investors looking beyond the short term and many staying away from the region.
However, the amazing change in the South American economy as a whole has seen Brazil take the lead and other countries such as Argentina following suit. There is also a very strong relationship with the Chinese government and the Chinese economy does play a central role in South America. It will be interesting to see how the major economies of South America manage to navigate the good ship “South America” through the ongoing worldwide economic turmoil and whether they will reach calmer waters before the situation has any impact upon South America.
Investor confidence builds again
It is very difficult to underestimate the value of investor confidence in Brazil, the Brazil economy and in particular the Brazilian government. At this moment in time it seems that the authorities have not yet put a foot wrong over the last couple of years and appear to be heading in a very different direction to the likes of the UK, Europe and the USA. Even though there will be mistakes at some point and the economy will suffer, especially if Europe and America continues to struggle, in relative terms the strength of the Brazilian economy is inspirational.
Investor confidence in the region, against a backdrop of investors pulling out of Europe, leaves significant “safe haven” money looking for a home in the short to medium term. We have recently seen Australia attracting the attention of investors due to its own “safe haven” tag and many believe that Brazil will follow suit. The relative strength of the region is higher than it has been in living memory and the economies of Brazil, Argentina and the other countries making up the South American economy have all benefited. When will it end?