Over the last few years, Brazil’s growth has significantly decelerated. Accompanying this slowdown, a change in commentary on Brazil’s economic future has emerged, and is reflected in a recent ratings downgrade of Brazilian sovereign paper and an overall much-bleaker growth outlook both for the near and medium term.
In a new 'Economic Premise' note, Philip Schellekens and I examine three contributing factors to this change in sentiment: macroeconomic management, the external environment, and microeconomic fundamentals. Among these, we argue that the relative lack of progress on the microeconomic reform agenda has been far more detrimental to the growth outlook than either the credibility cost of recent macroeconomic management or the negative influence of a less supportive external environment.
Against this backdrop, Brazil's recent ratings downgrade is not inherently negative: while the country's economy is not about to slide down a slippery slope of macroeconomic mismanagement or on the verge of an externally powered economic meltdown, the downgrade can serve as a call to action for government to enact the necessary structural reforms to energize and sustain productivity growth.
Read our Economic Premise here, and also our post on huffingtonpost.com.