{"id":588,"date":"2011-07-27T02:45:17","date_gmt":"2011-07-27T04:45:17","guid":{"rendered":"http:\/\/observingbrazil.com\/?p=588"},"modified":"2019-09-09T01:18:53","modified_gmt":"2019-09-09T01:18:53","slug":"brazils-financial-position-as-u-s-edges-toward-default","status":"publish","type":"post","link":"https:\/\/gregmichener.com\/blog\/brazils-financial-position-as-u-s-edges-toward-default\/","title":{"rendered":"Brazil’s Financial Position as U.S. Edges toward Default"},"content":{"rendered":"

With the U.S. teetering at the precipice of default, countries around the world are struggling to understand how they might be affected. Brazil\u2019s current economic situation is a mixed batch: on the one hand, it is stable and flush with reserves (about US$350 billion); on the other hand, investors looking to diversify out of the dollar may be lured to the Brazilian markets because of the country’s high interest rates, putting further pressure on the much sought Brazilian Real. While undoubtedly a downer for the manufacturing sector, a stronger Real might bring about the conditions needed for long-awaited tax and labor reforms to occur.<\/p>\n

A Strong Real, the Dollar, and Inflation<\/strong><\/p>\n

The first semester of 2011 saw more than R$30 billion surge into Brazil, looking to cash in on some of the highest real interest rates in the world. This amount even compensated for Brazil\u2019s trade deficit, which has gone strongly negative because of high domestic demands for imports, driven by the surging Brazilian Real.<\/p>\n

Investors have forced up the Real\u2019s value, but so too have continuous demands for Brazil\u2019s commodities (driven mainly by China)\u2014 the currency has appreciated by more than 35 percent since 2005. Ironically, the government\u2019s principal means of combating inflation\u2014now running at 6.5 percent\u2014is to raise interest rates, which further increases the flow of investment money into Brazil, putting upward pressure on the Real. Today, the Real hit the highest level in more than 12 years relative to the dollar.<\/p>\n

Interestingly, just as the international markets appear to be dumping dollars, many Brazilians have been doing just the opposite. My mother-in-law had to order dollars a week in advance; the strong Real and uncertainty about inflation is prompting many Brazilians\u2014ironically\u2014to buy dollars.<\/p>\n

Manufacturing Sector Ekes out a Margin while Government Gets Fatter<\/strong><\/p>\n

As a result of the strong Real, Brazil\u2019s manufacturing sector is getting hit hard on exports. The commercial deficit, which excludes construction, public utilities, and commodities, was R$30.4 billion in 2010, reports today\u2019s Estado de S\u00e3o Paulo<\/a>. Luckily, the internal market is strong and high-tariff walls still serve to protect Brazilian industry from foreign competitors.<\/p>\n

Yet just as the manufacturing and industrial sectors are feeling something of a squeeze, the government is posting record revenues on taxes. Today, the Estado de S\u00e3o Paulo reported<\/a> that government accounts are up 123 percent over the same period last year. Remember, of course, that last year was an election year, and President Luiz In\u00e1cio Lula da Silva was spending prodigiously to ensure his anointed successor\u2019s victory. Last year the government went into the red, making this year\u2019s surplus\u2014relative to the same period last year\u2014more comprehensible and, indeed, less impressive.<\/p>\n

But revenues appear to be up also because of record tax receipts\u2014 almost 20 percent more than last year\u2019s first semester, according to the same Estado de S\u00e3o Paulo report cited earlier. The windfall in tax dollars may be a result of the increased consumption of imports, whose tariffs pay out handsomely for government, and from higher income tax revenues, the product of an increase in real wages\u2014 a higher minimum wage and wage inflation.<\/p>\n

Current financial windfalls put the government in a strong position to spend more money. After having paid off most of President Lula da Silva\u2019s pre-election debts, Rousseff is apparently eager to do just that\u2014 plough dollars into infrastructure and social programs.<\/p>\n

Demands for Tax Reform<\/strong><\/p>\n

Yet even as government luxuriates in its newfound wealth, the total tax burden continues to rise in Brazil. It now hovers around 35 percent of GDP, about 10 percent higher than it was when Brazil approved its democratic Constitution in 1988<\/a>. Taxes in Brazil are now the highest in the hemisphere.<\/p>\n

The interesting thing about the simultaneous increase in taxes and the value of the real is that it has put greater pressures on business, particularly the manufacturing and industrial sectors, both of which have become less competitive both here and abroad.<\/p>\n

Business, in turn, is understandably putting greater pressure on government for reform. Several organizations have launched campaigns for reforms, as exemplified by this tax-protest video by Brazil\u2019s Federal Confederation of Industry<\/a>. Taxes and bureaucratic procedures that used to be taken for granted are now being examined with a more critical eye by business, a sector keen to exploit efficiencies. Corruption and waste have also come under the microscope, phenomena that make a high tax burden and rigid bureaucratic imperatives all the more bitter to swallow.<\/p>\n

Business owners regularly complain that if they were to comply with all tax and labor laws (which impose their own taxes), they would not be able to keep their businesses afloat. As it stands, the system encourages evasion, illegality, and informality. Tax reform has become a big issue, and President Dilma Rousseff has promised to send a tax reform to Congress one piece at a time. The odds are not good: former Presidents Fernando Henrique Cardoso and Luiz In\u00e1cio Lula da Silva both failed. What is sure is that the government needs to update burdensome, anachronistic policies that continue to jeopardize Brazil\u2019s international competitiveness.<\/p>\n","protected":false},"excerpt":{"rendered":"

With the U.S. teetering at the precipice of default, countries around the world are struggling to understand how they might be affected. Brazil\u2019s current economic situation is a mixed batch: on the one hand, it is stable and flush with reserves (about US$350 billion); on the other hand, investors looking to diversify out of the Read more about Brazil’s Financial Position as U.S. Edges toward Default<\/span>[…]<\/a><\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[92,93,94,95,21],"class_list":["post-588","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-brazilian-real","tag-default","tag-manufacturing","tag-tax","tag-u-s"],"_links":{"self":[{"href":"https:\/\/gregmichener.com\/blog\/wp-json\/wp\/v2\/posts\/588","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/gregmichener.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gregmichener.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gregmichener.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/gregmichener.com\/blog\/wp-json\/wp\/v2\/comments?post=588"}],"version-history":[{"count":1,"href":"https:\/\/gregmichener.com\/blog\/wp-json\/wp\/v2\/posts\/588\/revisions"}],"predecessor-version":[{"id":1671,"href":"https:\/\/gregmichener.com\/blog\/wp-json\/wp\/v2\/posts\/588\/revisions\/1671"}],"wp:attachment":[{"href":"https:\/\/gregmichener.com\/blog\/wp-json\/wp\/v2\/media?parent=588"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gregmichener.com\/blog\/wp-json\/wp\/v2\/categories?post=588"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gregmichener.com\/blog\/wp-json\/wp\/v2\/tags?post=588"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}