News ID: 137043
Published: 0322 GMT February 20, 2016

Fears grow that Brazil’s resolve on economy has collapsed

Fears grow that Brazil’s resolve on economy has collapsed

Political street brawls may be commonplace in some parts of Latin America but until this week they were unusual in Brazil.

However, these are not normal times in Latin America’s largest economy. Many analysts fear a consensus in Brazilian politics on how best to manage the economy is collapsing and with it hopes of a quick recovery, the Financial Times wrote.

It has been a particularly bad week. On the same day that police were using tear gas to disperse supporters and opponents of Brazil’s former president Luiz Inácio Lula da Silva, Standard & Poor’s, the rating agency, downgraded the country’s credit ratings to two notches below investment grade and signaled more cuts to come.

Crowds had gathered outside the São Paulo court where Lula da Silva was due to appear into testify in an investigation into alleged underhand property dealings by his family.

The mood turned ugly when supporters from the leftist leader’s ruling Workers’ party, the PT, clashed with opposition protesters who were trying to inflate a giant doll depicting Lula da Silva as a convict — a reference to growing corruption allegations against his former government and that of his hand-chosen successor, President Dilma Rousseff.

Meanwhile, the news S&P was pushing Brazil’s rating deeper into junk territory as it cut Brazil’s rating to BB from BB+, marked the second time it had reduced rates in five months.

S&P said the move was driven by political uncertainty and policy mis-steps in Brasília, which it also blamed for the deepening of the country’s recession, expected to be the worst in over a century.

“It is hard to envisage Brazil returning to positive growth until its political uncertainties recede,” Standard & Poor’s said.

After achieving economic growth of 7.5 percent in 2010, the final year of Lula da Silva’s eight years in office, the economy has gone into reverse. S&P estimates that gross domestic product contracted 3.6 percent last year and expects another decline of three percent this year.

A former socialist firebrand, Lula da Silva surprised markets by maintaining the so-called tripod, a macroeconomic framework put in place by his predecessor, former president Fernando Henrique Cardoso of the more centrist PSDB party. The tripod was based on inflation-targeting by the central bank, a floating exchange rate and ‘fiscal responsibility’, particularly the running of primary budget surpluses — the government balance before interest rate payments.

Rousseff, however, switched to a state-led model when she took office in 2011 — suppressing inflation through price controls and trying to direct interest rates and the exchange rate. The experiment failed as the economy went into freefall, inflation soared and public finances dwindled.

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