Macroeconomics and individuals. Brazil is encountering a financial

Macroeconomics Project Report    

Economic Crisis – Definition

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A situation in which the economy of a country experiences a sudden downturn
brought on by a financial crisis. An economy facing an economic crisis will
most likely experience a falling GDP, a drying up of liquidity and
rising/falling prices due to inflation/deflation. An economic crisis can take
the form of a recession or a depression. Also called real economic crisis.

 

Economic Crisis – Causes

Here are a few factors that contribute towards the cause of an economic
crisis:

·      
Mark-to-market
accounting

·      
Ratings
agencies

·      
Infighting
among financial regulators

·      
Securitization
of loans

·      
Credit
default swaps

·      
Economic
ideology

·      
Greed

·      
Fraud

·      
Politics

 

The Brazilian Economic
Crisis (2015-2017)

 

Brazil is A country approximately that of measure of the united states,
geographically speaking. Yet, from a budgetary standpoint, those two monster
countries uncovered little to none similarity. Brazil may be at present viewed
as a “third world” country and Despite it might appear to be rigid
and unwelcoming from a outside view, there is nothing “third world”
something like this breathtakingly delightful nation and individuals.

Brazil is encountering a financial crisis, which began in mid-2015
and proceeds into 2017. The financial crisis is combined with a political
emergency in Brazil that brought about the indictment of president Dilma
Rousseff and in broad disappointment with the political framework.

In 2015, Brazil’s GDP fell by 3.9% because of a drop in pay
levels, limitations using a credit card and an ascent in the fundamental loan
fee. In 2016, Brazil’s GDP fell by 3.6% with diminishments over all areas of
the economy. It was the first run through since 1931 that the GDP fell in two
continuous years.

The Brazilian Economic Crisis – Origin Causes

Fiscal deficit drives economic crisis

The core of the charges of financial flippancy against President
Roussef spin around here and now, off-the-books credits the legislature got
from government-claimed banks, Summerhill clarified. As income touched base in
the treasury, the administration instantly reimbursed the advances. After some
time, in any case, it couldn’t stay aware of the reimbursements.

While the gauge “basic” estimation of these credits was
approximately 1 billion Brazilian reals for every year from 2001 to 2008, the
volume of these advances later detonated, achieving some $58 billion by 2015.
This level of spending, he stated, prompted swelling (10 percent in 2014) and
has undermined the adequacy of Brazil’s Central Bank.

The delicate advances were utilized principally to finance “a
convoluted exhibit of endowments” to huge business crosswise over monetary
segments that has made market bends and decreased the proficiency of the
Brazilian economy. These twists additionally speak to basic hindrances to powerful
state speculation, the student of history clarified. Subsequently, interest in
capital products in Brazil, pretty much, zeroes out, regardless of immense open
spending that speaks to 40 percent of GDP.

Brazil’s financial emergency is the principle driver of its ebb
and flow monetary misfortunes, Summerhill said. Today, he finished up, the
market has no trust in the nation’s financial arrangement, and, as found in the
fall of genuine speculation, even business visionaries have downsized Brazil,
he said.

A crisis in government

Geddes, a UCLA political scientist, explained what is happening on
the government front.  “Roussef is being impeached for a minor
infraction, but there’s an aspect of the situation here that’s like prosecuting
Al Capone for tax evasion,” she said. “What she is accused of is not a big deal
— lots of people have done it, and other people didn’t get impeached for
it. “On the other hand, while she’s been in charge, amazing levels of
stealing from the state has taken place. … The extent of corruption — the very
large number of deputies and other political figures that are involved — means
that it won’t be just the president who falls, but a large part of the
Brazilian political class that is not long for this world.” 
Because of Brazil’s fragmented multiparty democracy, Geddes explained that the
president never rules with a majority and needs the support of multiple
legislative parties to accomplish anything. Local pork projects and patronage
are essential to making the political system work.
“The great irony, and the thing that’s so upsetting about the current situation
in Brazil,” said Geddes, “is that we have Brazil’s most ideological and
disciplined party (the Workers’ Party) — the party that was considered honest
and that was going to bring about a real change in distributive issues in
Brazil — and it apparently ends up relying on corruption to hold the
president’s legislative coalition together. “Yet Geddes held out a note of
hope, arguing that the crisis might lead Brazilians to reassess what they want
from their government and produce a “real change in the political path.”

Investigation implicates most of Brazil’s political class

Gehrke, likewise a political researcher, gave the group of
onlookers a nitty gritty foundation on the examination concerning the Petrobras
outrage that debilitates to cut down three governors, 12 congresspersons and
two government priests for debasement.

The Operação Lavo Jato (“Operation Car Wash”)
examination concerning the Petrobras outrage was started by the Brazilian
government police and legal in March 2014. Specialists revealed an offer gear
cartel made by the greatest Brazilian development organizations for benefit
contracts with Petrobras, Gehrke clarified. For as long as 10 years, lawmakers
were remunerated to name Petrobras executives, who got kickbacks on overrated
contracts and kept Petrobras from exploring those agreements.

While the majority of the immense edges on the agreements went to
cartel individuals, Gehrke said that a specific measure of the benefits went to
tax criminals, who redistributed these assets to legislators and three
political gatherings. The cartel’s benefit from the plan arrived at the
midpoint of 2– 3 percent of the yearly income of Petrobras, Gehrke said.

Albeit a large portion of the CEOs of the organizations included
are presently in prison, Gehrke clarified that some are now out of prison since
they named government officials complicit in the plan.

The Lavo Jato and different examinations have prompted genuine
claims against abnormal state performing artists over the political range,
including President Roussef, previous President Luiz Inácio Lula da Silva, the
leaders of the Chamber of Deputies and the Senate, and others.

Brazilians are burnt out on the political mayhem and the monetary
emergency, which may prompt some sort of arrangement that would abstain from
harming the whole political class, he conjectured.

Several processes converge

According to Brazilian sociologist Véras de
Oliveira, several social processes have been converging simultaneously
over the past four years in Brazil: a systematic campaign against the Workers’
Party for corruption; the huge growth of new evangelical churches and their
political representatives; and rising fascist attitudes among middle-class people.

In his view, the wave of mass social protests in Brazil that began
in June 2013 fell into two categories following Roussef’s re-election in 2014 —
protests in favour of impeachment organized by right-wing political groups,
primarily by means of social networks, and protests in favour of democracy and
human rights (and against a possible “coup”) organized by unions and social
movements.

The populist Brazilian Democratic Movement Party, the party of
Vice President Temer — and the conservatives are now in the ascendant, he
said. 

The panel discussion held May 4 was co-sponsored by departments
within the Luskin School of Public Affairs and UCLA College as well as the UCLA
Institute for Research on Labour and Employment.

 

 

The Concepts Involved in this economic crisis

Unemployment

Prior to the subsidence, Brazil’s unemployment rate floated around
6.8% for the vast majority of 2014 and had been for the most part expanding
since February 2015, averaging 8.5% out of 2015. The economy lost more than 1.5
million employments all through 2015, energizing open discontent against the
political foundation and the political initiative of the Worker’s Party and
President Dilma Rousseff. The unemployment rate kept on ascending all through
2016 to complete the year at 12.0%, with 12.3 million individuals jobless and
an expected 2.8 million private division occupations cut over the former two
years.

Budget Deficit

 Brazil is as of now
encountering a fiscal emergency and an increasing budget deficiency which,
according to Bloomberg, has been “the largest-ever primary budget gap …
as a two-year economic recession sapped tax collection while expenses grew
further. “The government deficiency reached 5.8 billion (U$1.7 billion) amid
the initial three months of 2016, the broadest revealed since December 2001.
The two-year long fiscal deterioration can be explained by the decrease in
government income from taxes because of the recession, while expenses from
government have been developing constantly.

Credit rating

Standard & Poor’s credit rating for Brazil stands at BB with
negative outlook. Moody’s credit rating for Brazil was last set at Ba2 with
negative outlook. Fitch’s credit rating for Brazil was last reported at BB with
negative outlook. DBRS’s credit rating for Brazil is BB with negative outlook.
In general, a credit rating is used by sovereign wealth funds, pension funds
and other investors to gauge the credit worthiness of Brazil thus having a big
impact on the country’s borrowing costs.

Inflation

When dilemma rouseff became
president in 2011 she increased the public spending and minimum wage wage which
gave more money in the hands of public which in turn increased the inflation bank
also lowered its discount rate from 11.5% to 7.25%. This triggered
inflation, which Rousseff made worse by cutting sales taxes and lowering prices
on food, gasoline and bus fare and few other things

Price controls did also
hurt the profits of the state-owned oil company, Petrobras, and unfairly
competed against Brazil’s formerly successful firm of  ethanol production. Business leaders made investment
in the face of such government intervention. This was only aggravated by
problems in the government auctions of road and railway projects, and further
interventions were made  in the
electricity and banking industries.

The expanded fiscal
and monetary policy did  inflation
outpaced the newly-raised wages. As a result, consumers cut back
their spending.

recovery methods

the pension reform and and social security together
ensures that profound change in government spending is made which will allow for
implementation of pro inclusive growth policies  Additionally, other important reforms are
aimed at increasing the productivity and

the competitiveness of the Brazilian economy.
They align the functioning of some

home markets with the best practices
adopted by advanced economies—rangingfrom labor market flexibility  to

improving credit market conditions for both
creditors and debtors, to leaning on

acts governing new and ongoing investment
projects.

Microeconomic
reforms. There is a national awareness that
reforms need to be

made to sustain economic growth in
progress. Among the microeconomic reforms

to improve the country’s productivity and
reduce bureaucracy, we can mention

measures to reduce the time of opening of
companies, simplification of the payment

of taxes and greater facilitation for the
import and reduction procedures.

Structural
reforms. Main structural reforms announced at
the end of the last year

are positive factors to encourage foreign
investors towards Brazil. One important

aspect affecting openness that was recently
addressed is the local content policy. A

more flexible New Local Content Policy was
implemented for the upcoming oil

and gas auctions in Brazil—reducing the
local content requirements. This policy

review seeks to reduce the burden over
investment projects, increase the processes

transparency and attract foreign
competition for the next auctions bids. Since these

sectors are responsible for large shares of
the gross fixed capital and technology

induction, resuming investments should
contribute to improve both productivity

and growth.

Besides trade and investment opening
measures, Brazil is advancing important

reforms that should help raise productivity
and free up resources for investments,

while improving the social cohesion. First
of all, the flagship of these reforms is the

Social Security and Pension System in
Brazil. It aims at strengthening the

sustainability of the social security
system, which is one of the pillars for the

protection of low-income households. The
measures are aligned with international

best practices and assess the minimum
retirement age, the adjustment of welfare

benefits, and the convergence of the rules
of the private and public systems.

Although the effects of the proposed Social
Security and Pension System reform

are expected to have full direct effects
only in the long run, the improvement in the

economic scenario, resulting from its
approval, will have impacts in the short term,

with a positive effect on fiscal policy,
making it possible to further lower real

interest rates and stimulate investment and
job creation. Recent estimates suggest

that, in terms of government spending, the
proposal allows for savings of 1.1 p.p. of

GDP by aligning the rules for accessing
social security benefits with Brazil’s

current fiscal and demographic reality. On
the other hand, revenues could go up by

0.3 p.p. of GDP, mainly because people will
remain in the labor force longer,

contributing to the sustainability of the
pension system. The approval of the Social

Security and Pension Reform bill, together
with the approved constitutional

amendment imposing strict rules limiting
increases in public expenses (for 20

years), would be a key step toward the
stabilization of public debt in the medium

term, the further reduction in interest
rates and the resumption of steady economic

growth.

Another important step is the modernization
of the Brazilian labor legislation

that is under way. This refinement to the
labor legislation aims at making the job

market more flexible. One of the main
principles of the labor reform is to give legal

legitimacy to contracts signed through
collective bargaining. The negotiations

between employers and employees will
prevail over the Labor Laws (CLTlimiting the power of courts in interpreting
the law, and ending the compulsory

contribution to labor unions. In addition,
the labor market reform will generate

more formal jobs in Brazil. As a result,
more workers will be contributing to the

social security and pension system, which
contributes to improve the result of the

social security and pension accounts. The
labor market reform complements the

macroeconomic measures that make the
business environment in Brazil more

dynamic, efficient and competitive. And
there is more to come: new financing

instruments for deepening the market for
real estate, new market-oriented interest

rate for the BNDES loans, refined
regulatory framework for micro-and-individual

entrepreneurship, updated Bankruptcy Law,
etc. Macro policies

Fiscal
consolidation program: The central government
has taken actions to limit

and, at the same time, to revise the
priorities for government spending, seeking

higher quality in expenditures. Moreover,
studies are under way to modify

segments of the tax system. These steps
concur for increasing the predictability of

macroeconomic policies, restraining the
real growth of public expenditure, and

assuring the sustainability of the public
debt.

The main steps already in place are
limiting federal government spending and

consolidating debts of subnational
entities. Others, like rationalizing social

programs, federal support (to BNDES, for
example) and tax rules are under study

and should be out for approval later this
year.

Infrastructure Investment

Investment
Partnership Program (PPI): The
central government decided to improve

the governance of its interaction with the
private sector through partnership

contracts for the execution of
infrastructure projects. The guidelines include greater

maturity in the projects to be tendered
(including in the issue of environmental

licenses), incentive to international
competition and medium players, greater

rationality in the required investments
(with the use of demand triggers), and

greater transparency both in service level
indicators to be provided and in the risk

matrix.

Also under discussion is the Renewal of PPI
Contracts. It seeks to extend the

partnerships in order to enable new
investments not initially predicted in the

original contracts, with the inclusion of
new performance rules and goals.

On another venue, a more flexible New Local
Content Policy was implemented for

the upcoming oil and gas auctions in
Brazil, aimed at bringing back investments in

the oil and gas sectors. The new policy
intends to reduce the number and

complexity of the rules, consequently, the
burden over investment projects, and to

increase the process transparency and
attract foreign competition for the next

auctions bids.

Labor
Market (and inclusive growth)

Major microeconomic reforms are being
implemented and are also expected to

impact the productivity of the Brazilian
economy. For instance, some of the labor

market rules prevent firms from hiring
employees in a more flexible way. Hence,

proposals are being made to grant greater
legal weight to collective contracts—

limiting the judiciary power in
interpreting the legislation—, which would result in

both more stable rules and more prominent
roles for workers when negotiating their

rights.

Another measure that will impact the labor
market in Brazil is the modernization of

the Immigrants Law. Recently approved, the
Law guarantees equal rights to foreign

residents—as those of native-born—in
Brazil, including the access to public health

and education services.

Credit Markets

The government has announced that in 2018
the interest rate BNDES’ loans (TJLP)

will be replaced by a new rate, the TLP.
This measure will move the rates charged

on BNDES’ loans closer to the ones applied
by the market.

In order to further develop and improve
credit conditions for the Brazilian real

estate sector, the central bank just ended
the public audience period for the terms of

a new funding instrument, the Secured Real
Estate Bills. Once issued, it will

increase the sources for real estate
financing as well as reduce the risk for

investments in the sector.

It is being implemented an initiative to
refine the Regulatory Framework of

Microentrepreneurship and Individual
Microentrepreneurs. It aims at designing and

implementing adequate, simplified and
specific regulatory framework to

microentrepreneurships and individual
microentrepreneurs. The measure should

reduce the incidence of informal jobs and
businessmen in the country.

Although some of the measures catalogued
above will improve the business

environment, the Brazilian National
Congress is also preparing a specific bill to

strengthen the autonomy of the regulatory
agencies in order to increase

infrastructure investments.