Macroeconomics political framework. In 2015, Brazil’s GDP fell

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

domestic markets with the best practices
adopted by advanced economies—rangingfrom labor market flexibility (that also
accounts for new immigrants rules), 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.