Two million revellers descended on Rio for Carnival, the biggest party in the world. And now the city has six months to prepare for the next extravaganza, the 2016 Rio Olympics which kick off in August.
Brazil could do with a bit of cheer. As looking at the economy, there’s scant reason to celebrate. A decade ago it seemed the stars had aligned for Brazil, and it was full of promise. But the downturn in commodities – the country’s chief export – followed a long period of economic mis-management.
The economy was gripped by a deep recession last year, which has now morphed into the beginnings of a credit crunch.
“You can see that Brazil is in a credit crunch,” says Maarten-Jan Bakkum, senior emerging markets strategist at NN Investment Partners. “Brazil is clearly one of the countries where credit growth has contracted a lot.”
Debt has been piling up, and businesses are beginning to crack under the weight. Corporate bankruptcies have reached their highest rate since 2008, as 5,500 companies were declared bankrupt by Brazilian courts last year, according to reports from local credit agency Serasa Experian.
Mass defaults are yet to appear but companies large and small are struggling, says Craig Botham, emerging markets economist at Schroders. “Debt is pretty high and we are seeing the beginnings of stress in the system,” he adds.
The public purse too is under strain. Public debt to GDP stands at 70 per cent and “without an economic recovery or the necessary fiscal tightening, Brazil’s public debt to GDP could surpass 100 per cent by 2030,” says Thomas Smith, manager of the Neptune Latin America fund.
Now, there are fears a bank could collapse, partly because of the levels of poor quality loans on their balance sheets. “There has been nervousness about Brazilian banks... In the Brazilian system the lowest quality credit is held in state-owned banks,” Bakkum adds.
That issue has been exacerbated by a BRL87bn (£15bn) package of measures announced by the government to extend credit to troubled companies. BRL17bn has been earmarked to provide payroll loans for business and a further BRL5bn has been allocated for working capital. There’s BRL15bn set aside for refinancing certain existing loans and cash to encourage infrastructure investment.
“A lot of the problems are concentrated in the state-owned banks. They have been leaned on to do credit easing and it will get even worse now they are being leaned on to lend more to struggling small businesses,” says Botham.
He wouldn’t be surprised if a state-owned bank has to be bailed out sometime soon. “That’s a growing concern,” he adds.
The economy is sinking at a time of political gridlock. Dozens of politicians of all stripes have been embroiled in a corruption scandal at Brazil’s biggest company, state-run oil firm Petrobras. President Dilma Rousseff is deeply unpopular. There have been days of mass protest against her and the threat of impeachment has been hanging over Rousseff for a year. That’s a process which, if it ever does come about, would be lengthy, and Rousseff has no clear successor either.
It’s a wonder the government was able to get together a package of measures to stimulate the economy. But they have been roundly criticised, not just because they put more strain on indebted banks but because they don’t address the cause of the problems.
“For a start, most of the measures are aimed at easing the strain on existing debtors. They are designed to stop things getting worse rather than actually stimulate additional activity,” says Neil Shearing, chief emerging markets economist at Capital Economics.
The right medicine is sorely needed, but with recession underway the timing isn’t yet right for Brazil to swallow it. “With consumers and businesses being battered by a deepening recession, legislators have little appetite for the spending cuts and tax hikes administration officials say are needed to restore investor confidence. That’s especially true ahead of municipal elections in October,” says Neptune’s Smith.