Source: slate.com

In the past few weeks we have been discussing the different measures the central banks have been taking in an attempt to resolve the current issues. As China was expected to have a hard landing and as Brazil’s economic woes seem to be accelerating rather than improving, it’s not unlikely both countries will continue to dominate the scene of the world economy as they account for half of the BRIC countries.

The elephant in the room is obviously China. Nobody knows the real situation of the country’s economy and most definitely don’t believe the ‘official’ numbers the country is releasing, but let’s first take a minute to digest how Brazil is doing. After all, it is one of the BRIC countries and has a relatively sizeable economy that has been growing at a fast pace, until this growth rate was abruptly halted.

Source: tradingeconomics.com

Whereas the country’s GDP grew by almost 3% in 2013, this improvement came to a screeching halt in 2015 as the GDP shrank by 3.8%, and the consensus estimates for the current financial year are indicating a similar contraction. Good, fine, two years of a 4% correction might not be a huge problem and could be a good way for the country to catch a breath and re-think its economy, but what’s even more dangerous is the inflation rate. Not only will the GDP shrink by approximately 4% this year, the CPI inflation rate will very likely increase to almost 10%.

But wait, that’s not it. Brazil was generally seen as a country with an acceptable risk/reward ratio as the government debt remained under control, but the recent huge budget deficits have quickly changed the situation. Whereas Brazil had a government debt/GDP ratio of less than 50% in 2012, it ended 2015 with a total debt ratio of almost 70%, increasing to 80% by the end of next year (according to estimates from ABN AMRO, a well-known European bank).

Source: ibidem

Combine that with an increasing unemployment rate (which doubled in 2015 from a little bit over 4% to almost 8% and a crashing consumer confidence, and you just know you’re in for some problems. In fact, the consumer confidence has now reached an ultra-low level we haven’t seen in over a decade. Even during the global financial crisis the consumer confidence level didn’t fall below 90, whilst it has now dropped to the mid-sixties on the back of the huge political scandals in the country.

Source: ABN AMRO

Indeed, an impeachment procedure against president Rousseff has been started, but the problem isn’t necessarily limited to Rousseff herself. In fact, the loudest voice asking for her to be removed from office is coming from Cunha, who doesn’t really have the best name either. On top of that, the investigation is much more widespread than just having a look at Rousseff’s dealings in the Petrobras scandal. Several party members of Rousseff’s party as well as members of her alliance partner (the Partido de Movimento Democratico Brasileiro) are also being investigated, and the problem doesn’t seem to be able to be contained to just the people in power.

Source: stockcharts.com

Political insecurity can kill a country’s economy, and it is slowly and surely suffocating Brazil’s economic prospects. In fact, it’s still possible the Tribunal Superior Eleitoral might still annul and invalidate the results of the election of 2015 (yes, that has been two years ago!) which could push the country over a cliff. Invalidating the electoral results would have a devastating effect on the stability of the country as there’s no way to tell what the outcome of the new elections will be.

As the total size of the Brazilian economy is $2.2T, the world should pay more attention to this situation, as it once again indicates there is no real locomotive for the world economy anymore. Corporate profits in the USA are falling, China is having a tough time as well, the Middle East is seeing its purchasing power being crushed due to the low oil prices and now Brazil is facing a hopeless situation as well. The CDS premiums have increased exponentially, from 100 bps in 2013 to a high of in excess of 500 bps last year. The political problems are tightly connected to the country’s economy, but impeaching a president and appointing a new one most definitely will not be Brazil’s Saving Grace.