Brazil’s economic recovery will depend on public investments
Falling public investments threaten Brazil’s economic recovery

Brazil’s economic recovery will depend on public investments

When Brazil officially left its longest-ever recession last June, President Michel Temer gleefully tweeted, “The recession’s done!” His then-Minister for Finance Henrique Meirelles joined in on the celebratory antics, calling it a “historic day”. Yet financial markets remained skeptical, with the government’s international credit ratings wobbling dubiously between stable and junk ratings.

Economic growth has since remained slight, but economists say that one key area likely to hinder Brazil’s long-term recovery is the country’s continually plummeting rate of public investments. Economists are now fearful that the strategy could hinder the return of foreign investments to Brazil and damage the country’s overall recovery.

The government has been continuously reducing public investments since 2014, a strategy that economists and ministers alike agreed was necessary. But the NGO Contas Abertas, which tracks government expenditure, is concerned that its impact may be more severe than currently anticipated by policymakers.

“Public investments are still falling, having closed last year with a significant decrease compared to 2016’s values and those of previous years,” said Gil Castello Branco, an economist for Contas Abertas.

Where are Brazil’s public investments smaller?

Contas Abertas revealed to The Brazilian Report that public investments disbursed by the Ministry of Cities fell by 198 million BRL during the first two months of 2018, when compared to that same period in 2017. Investments in the Ministry of Transportation also fell from 1.1 billion BRL to 999.7 million in 2018.

But the data from early 2018 fits a pattern established over the last few years. Between 2014 and 2016, Institute of Applied Economic Research (IPEA) economist Rodrigo Octávio Orair demonstrated that public investments, including state investments, fell by 37 percent from 228.2 billion BRL to 143.9 billion BRL.

But Orair believes that public investment levels could return to being on par with those during the 1990s, in relative terms. Orair, who is also the director of the Independent Tax Institution (IFI) to the Federal Senate, says that the cut to these investments is likely to be felt further in the future, rather than immediately.

“As investment tends to benefit future generations rather than current ones, it is usually the area that most suffers,” he told BBC Brasil. “The cut in investment has little impact on the current provision of services. Between closing the school, closing the hospital, and canceling construction, the government opts for construction.”

Not all areas have witnessed the same reduction in spending, however. According to information provided by Contas Abertas to The Brazilian Report, the Ministry of Defense was among those that had seen a rise in public spending over the first two months of 2018 when compared to the previous year.

The Ministry of Defense received 291.3 million BRL in January and February of 2017. This year, those numbers rose by 40.6 percent to 409.8 million BRL. Other areas with increases over the same period were the growth acceleration scheme PAC and the housing scheme Minha Casa Minha Vida, which received an additional 3.2 million BRL and 23.1 million BRL respectively.

By December 2017, private foreign investments began a slow return to Brazil after four consecutive years of falling. But public investments signal reliability for private investors – meaning falling public investments could actually be putting investors off.

How this impacts the economic recovery

This week, the International Monetary Fund (IMF) released new projections for Brazil, predicting that the country will only achieve a primary surplus – the point by which government revenues overtake its expenses – by 2022, with public debt inhibiting progress.

Gross debt is forecast to increase from 84 percent last year to 87.3 percent of GDP in 2018, and again to 91.1 percent in 2019. The IMF also predicted that Brazil’s economy will grow by 2.3 percent over 2018, compared to the government’s expected 3% growth. Among its concerns, the IMF cites Brazil’s failure to pass pension reforms.

Contas Abertas noted that further economic woes could lie ahead if mandatory expenditures are not curbed. They continued to rise above inflation and economic expansion during the first two months of 2018, with personnel expenses increasing by 3.9 percent and social security benefits by 6.34 percent.

But Castello Branco is a bit more optimistic. “In short, without the reforms and the political crisis, compulsory expenditure will continue to grow,” concluded Castello Branco. “The serious fiscal situation may be mitigated if revenues continue to rise, as has been observed in recent months.”

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BY Ciara Long

Based in Rio de Janeiro, Ciara focuses on covering human rights, culture, and politics.