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Analysis

Brazil plummets, Argentina secures foreign investment

by David Smith

Brazil plummets, Argentina secures foreign investment

Latin America’s heavyweight economies are heading in different directions. The outcomes in Brazil and Argentina will significantly affect the region.

Numbers from Brazil show the worst economic crisis in a generation. The real has sunk against the dollar, devaluing 50% in a year, while inflation recently broke through the 10% barrier – a level deemed unacceptable just a few months ago. Unemployment figures underline the dire economic position. More than 1.5m jobs were lost last year – 600,000 in December – with virtually every sector reporting contraction. GDP shrank by 3.8% and a similar outcome appears likely this year – the first time the regional giant will have suffered consecutive years of economic contraction since the 1930s.

President Dilma Rousseff, facing impeachment as the Petrobras bribery investigation moves ever closer to the leadership of her Workers’ party, blames Brazil’s woes on the global economy, the slowdown in China, and rising US interest rates. But one banker in Sao Paulo says that Rousseff is ‘in denial of the real problem… Brazil can’t afford her government and Brazil can no longer lead the region.’

By contrast, Argentina’s new leadership has made a good start. President Mauricio Macri took his pro-market, pro-business message to the World Economic Forum in Davos, and won guarantees of billions of dollars of foreign investment from major multinationals. His inheritance is daunting – 25% inflation, a fiscal deficit of 6% of GDP, and the peso swinging between 9 to the dollar (the official rate) and 16 and higher (unofficial). The currency is floating freely, government spending is being cut, taxes on exporters have been slashed, and Argentina is returning to world markets with a conviction not seen in a decade.

The government has to make tough decisions, not least how best to curb wage rises in the face of high inflation. But the change of direction is palpable. According to a long-term investor in Argentina and Brazil, ‘The government in Argentina seems to understand you can’t avoid the fork in the road. Brazil just looks the other way.’

Other countries are watching. In Colombia, Peru, Mexico and Chile, where change has been the mantra in recent years, there is a belief that Argentina’s new direction will be the litmus test for an agenda based on pragmatism rather than ideology. The hope is that Brazil’s crisis will be the catalyst for fresh thinking throughout Latin America, rather than dragging the region towards further recession.

David Smith represented the UN Secretary-General in the Americas, 2004-14.

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