Brazil & Southern Cone - July 2015 (ISSN 1741-4431)

Brazil’s unemployment rate continues to rise. On 10 July, the national statistics institute (Ibge) reported that the national rate of unemployment had reached 8.1% in the quarter ending in May. This was a major increase from 7.0% in the same period in 2014 and 7.4% in the previous quarter (December-February). The biggest reduction in jobs came in the automobile sector, with 78% of companies stating that they had cut back their staff.

Two days earlier (8 July), the daily Folha de São Paulo published a survey showing that a majority of companies in the extractive and manufacturing industries had cut their work force to cope with the domestic economic recession.

Of the 2,307 companies polled in the Folha survey, 50% said that they had fired employees during the October 2014- April 2015 period. Sixty per cent said that they had cut vacancies or taken other cost-cutting measures. Most of the companies surveyed (67%) cited a drop in production as the reason for cutting their workforce; around a third blamed financial difficulties for the move.

A survey of economists by Reuters found that unemployment is expected to rise to 7% this year and 8% in 2016. Rising unemployment could help control inflation, currently running at close to 9%. But it is also likely to damage President Rousseff’s rock-bottom popularity. Employment had been one of the few bright spots in the Brazilian economy over the past year.

New inflation target from 2017

On 25 June the central bank’s monetary council announced that the ‘band of tolerance’ around the inflation rate target would be 1.5% from 2017. Since 2004 the central bank’s inflation target has been 4.5% plus or minus 2%. At present inflation is running at close to 9%, meaning that the central bank governor, Alexandre Tombini, will have to write to the finance minister, Joaquim Levy, to explain the failure to hit the target. Interest rates are likely to continue to rise in order to rein in inflation. Most analysts expect another 50 basis points rise in July.

The reduction in the band of tolerance is meant to show that the government is serious about tackling inflation, despite the fact that it has failed to reach the 4.5% target since 2009. According to one source at the central bank quoted by the local O Estado de São Paulo, “the goal is challenging and the choice was made in search of greater credibility for the central bank”. Apparently, Levy was the driving force behind the reduction.

With interest rates likely to continue to rise, some economists have expressed criticism at the government’s apparent willingness to tackle inflation at all costs. Luís Eduardo Assis, a former central bank director, has said that, “this is going to cost us another recession or a political crisis”. The central bank’s benchmark interest rate, the Selic, currently stands at 13.75%. The central bank now forecasts that Brazil’s economy will shrink by 1.1% in 2015, its worst performance since 1990.

FDI – up or down?

The latest foreign direct investment (FDI) report by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) says that after a decade of strong growth, FDI inflows to the region fell by 16% in 2014.

Despite a couple of blips in 2006 and 2009, FDI flows into the region rose steadily over the last decade, from US$46.9bn in 2003 to a peak of US$189.9bn in 2013. But the trend broke last year, according to ECLAC, with a 16% drop to US$158.8bn. Behind this lay the impact of lower commodity export prices and slower GDP growth across the region. A further fall is expected in 2015 because of continuing sluggish growth. Comparatively speaking, Latin America and the Caribbean is slipping back in the FDI stakes relative to Asia. Although global FDI fell by 7%, much of this was due to reduced flows into developed economies. FDI into developing countries as a group rose by 5%, but this in the main reflected strong increases in Asia, offset by the 16% decrease in Latin America and the Caribbean.

As usual, the two largest recipients of FDI in the region were Brazil and Mexico. Brazil recently has changed its methodology for calculating FDI. Under the old approach – which is comparable with other countries covered by ECLAC – FDI inflows last year were worth US$62.5bn, or 39.3% of the regional total. Under the new methodology, Brazil says its 2014 FDI was a higher US$96.8bn, or 50.2% of a correspondingly revised regional total of US$192.9bn. Using the old methodology for the purpose of comparison, Brazil saw a 2% fall in FDI last year. ECLAC makes it clear it expects FDI to continue on a falling trend in Brazil this year.

As a share of regional GDP, FDI was 2.6% in 2014, a little below the long-term average. It was just 1.5% of GDP in Brazil (and 2.0% of GDP in Mexico). By source countries, the largest single investor in Latin America was The Netherlands (20% of the total that can be attributed to specific countries of origin), followed by the US (17% of the total) and Spain (10%). The Netherlands tops the list mainly because of its large investments in Brazil. end box

• Alicia Bárcena, ECLAC’s executive secretary, said that Latin America should not make it a priority to recover last year’s fall in FDI inflows, but should focus instead on “attracting the FDI that contributes to productive diversification”. “This means”, she said, “articulating FDI with industrial policies and national development strategies based on quality and environmental sustainability”.