Change in the global scenario: Less tolerance towards emerging countries

BRAZIL ECONOMICS - Report 15 Oct 2018 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

​With the American economy in full employment and stimulated by a strongly expansionary fiscal policy to boot, the Federal Reserve will continue raising the interest rate. The yield on 2-year Treasuries, which at the start of 2017 had risen to 1%, is now approaching 3%, attracting capital that previously went to emerging markets and causing the dollar to appreciate. In the latest World Economic Outlook, the International Monetary Fund (IMF) traced out a less hopeful scenario for the global economy. The pattern of synchronized growth of mature and emerging countries that characterized the period from 2015 to 2017 is receding, and the international financial conditions are slightly tighter. In that period, the inflow of capital in emerging countries reflected the leniency of international investors, who tolerated large fiscal deviations, but the picture has changed. Brazil has a latent fiscal crisis, represented by unsustainable growth of its debt, which needs to be resolved. If the next government does not make progress on the agenda of reforms, the country will no longer enjoy this leniency of global investors, and will be punished with rising risk premiums and a weaker exchange rate. The positive side of this picture is that the looming punishment might force the next government to make a genuine effort to achieve fiscal consolidation.

The IMF revised the projection for world GDP growth in 2018 and 2019 downward. This revision is not large (only 0.2 percentage point in each year), but it is an additional factor to retard recovery of economic activity in Brazil. This is evident when observing world trade, which is the main force to promote Brazilian exports, and has been growing at a substantially slower pace than in the early 2000s.

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