The Brazilian Real lost almost three percent against the dollar today after Standard & Poor's cut the country's credit rating to junk. And while this latest blow for Latin America's largest economy felled the Real briefly to 3.90 against the U.S. Dollar, a thirteen year low, the currency has been sinking for more than a year having lost 73 percent of its value since last September.
The collapse in commodity prices in the past year and the slowdown in China, its biggest export customer have played havoc with the Brazilian economy. A scandal at the state-owned oil company Petrobras and an official inflation rate of almost 10 percent, more than double the 4.5 percent target, have undermined the administration of President Dilma Rousseff and driven her approval rating to a record low of just eight percent.
The Brazilian stock market index, the Bovespa has fallen 25 percent in a year reflecting its current recession and dismal prospects.
Brazil entered recession in the second quarter. The world’s seventh largest economy contracted 1.9 percent after a 0.7 percent fall in the first. The year on year comparison has been negative for five quarters with the largest drop 2.6 percent in the second quarter of this year.
Economists polled by the central bank expect the economy to contract 1.76 percent this year and grow just 0.2 percent in 2016. Others analysts expect a deeper fall this year, 2.2 percent, and a decline of 0.2 percent next year. With GDP extremely weak in either prediction, it would not take much to tip the economy into a much deeper contraction.
Industrial production dropped 1.5 percent in July, the second decrease in a row, and has declined in five of the last six months. Retail sales have been negative for five months and in six of the last seven. Unemployment was 7.5 percent in July and is expected to climb to 8.0 percent this year and 9.0 percent next.
The central bank has been forced to raise it main Selic rate to 14.25 percent in an effort to defend the Real and stem the flow of capital from the country and the government has introduced stringent austerity measures designed to tackle high level of debt.
With uncertainty rife in the world economy, forecasts for global economic growth declining, the administration of President Rousseff crippled by unpopularity and an American rate hike imminent if not immediate Brazil seems likely to be in for a difficult eighteen months.
Chief Market Strategist
WorldWideMarkets Online Trading