Causes of Brazil’s downturn

September 24th, 2015

Brazil, a country many considered an emerging market, is experiencing déjà vu. In the 1980s and early 2000s, Brazil faced a very similar emerging-market financial dislocation. However, with each cycle that occurs, it seems that Brazil’s economy is hit even harder. This time around, Brazil’s currency was dramatically devalued, borrowing costs and domestic interest rates also increased. Many economist believe that this keeps happening to Brazil because much of their economy is self-feeding each other into a cyclical downward turn. Brazil’s credit rating was recently downgraded even more by Standard & Poor’s earlier this month, which, in turn causes higher borrowing costs, interest rates, and constant refinancing. Many of Brazil’s biggest companies are also involved in very scandalous, corrupt business with the government, the citizens, and other companies as well. The country’s biggest company, Petrobras, will have to be bailed out of bankruptcy much like the United States and General Motors.

The relationship between the financial sector and economic prospects also act as catalyst for Brazil as well. The financial markets have been extremely volatile recently, so coupling that with Brazil’s recession and high inflation makes for a chaotic economy. This cycle leads Brazil into skyrocketing productions costs, decrease in GDP, increases in unemployment, and falling wages.

Many economists suggest that Brazil is a prime example of how emerging markets aren’t showing the promise that they were expecting. However, I feel like with “techfin” or technological finance hitting many emerging markets, the economy of developing nations can dramatically grow. The use of many high level technologies have come to emerging markets, and I feel like those will drive the economies forward.

-- Kevin Dong NYU Stern School of Business B.S. in Finance and Statistics (847)749-6786 | kevin.dong@stern.nyu.edu