Globalization Of Economy: Emerging Market & Economic Turmoil In Brazil (Essay Sample)

Emerging Market & Economic Turmoil in Brazil Azat Muhammedov Monroe College Globalization of economy has had numerous impacts among them the emergence of new markets. An emerging market is a country which has lower per capita income and lesser matured markets compared to the developed countries’ markets CITATION Man14 \l 1033 (Wallin & Manktelow, 2014). Brazil is among the largest emerging markets in the BRIC countries and the seventh biggest economy in the world as well as the biggest country in the South American continent. However, as an emerging market the country’s economy is affected by adverse social, economic and political factors that negatively affect its economic growth. The country is in a debt dilemma. In 2015 Brazil had a national economic debt of more than 10% of its GDP CITATION Bra16 \l 1033 (Trevisani, 2016). As at then the nominal GDP was $1.802 trillion with a nominal GDP per capita equivalent to $8700. It grew to $2.138 trillion and a nominal GDP per capita of $10,224. Like the GDP increase, the national economic debt has been increasing. As at 2018, the natioanl ecnomic debt is $1.629 billion. GDP shows the economic health of a country. And with such a huge GDP it is expected that Brazil has an outstanding economic growth. However In 2011, when Dilma Rousseff was elected as a president of Brazil, she increased public spendings which were improper and wrong measured. She raised minimum wages in the country which was beneficial for workers but an unmeasured decision. Then, state banks were pushed to give more loans. Therewithal, the discount rate was lowered by the central bank from 11.5% to 7.25%. However, these actions of the Rousseff, triggered inflation, and by cutting taxes, unnecesserily lowered prices on gasoline and food which made matters worse. A state-owned oil company, Petrobras, was hurt by price control because it reduced the profits of the company. So, because of interference the government, businessmen, and investors restricted their investments. Problems with the government actions, which were railway and road projects, aggravated the situation negatively. Besides, the intervention of government on banking and electricity industries brought together unwanted consequences in the economy (Amadeo, 2018). The growth rate was 7.5 percent in 2010, and in 2016, it decreased to -3.6 percent which was the beginning of the collapse in the economy, and public debt to GDP is rose to 74.04% which is seen in the chart. lefttopIt shows that the misleading government caused economic collapse. So, it was the first cause of the country leads in to default. Moreover, political and economic turmoil creates discredit for investors, because of the instability of government. In 2014, the scandal of corruption spread out in the world media, involving Petrobras, the state-owned oil company, eighty politicians and top business leaders, including former president, Lula. Scandal affected sovereign debt; it was downgraded to "junk" level by Standard & Poor’s. It was one of the causes for budget deficit which rose to 6.75% in 2014, and it triggered inflation. Petrobras was considered one of the ten biggest companies in the world worth $200 billion in 2007, and now it is valued at $56 billion. Thousands of workers of the company were unemployed from 86,000. And, currently government debt to GDP is 74%. Then, in 2015, Dilma Rousseff was impeached because of illegally manipulating government funds. (Brazil corruption scandals, 2018). Brazil lost their monetary level, and if these issues will not be solved, nobody wants to invest. Also, Brazil’s Central Bank is facing the difficulty of reliability, making hard for people in business to forecast when Brazil’s stability will be provided. This political instability, decreasing commodity prices, uncertainty policy of Central Bank and government conflict were one of the main risk factors for business leaders. According to Euromoney Country risk survey, the riskiest emerging market country is Brazil. So, Brazil’s economic collapse could create a domino effect that could shock other emerging market countries (Euromoney, 2017). Furthermore, interest rates on public debt are incredibly high in Brazil; in fact, the world's fourth highest interest rate on public debt among 187 countries. There is the highest interest burden in countries like Yemen, and Egypt because of civil conflict, so Brazil's interest rate similar to them. Besides, 7.6% of the country's GDP was paid on the public interest rate, and it explains how it can damage the balance of the economy. So, the interest burden of the country is not because of the debt size; it is due to high-interest rates. Also, 44% of public debt is connected to Brazil's central bank’s system which is called SELIC, so it adjusts by the central bank for short-term debt. It means that the central bank of Brazil makes decisions or keeps interest rates so high. The main reason for high interest is not due to market forces, the risk of default or low saving rate it is the independent decision of the central bank. In 2016, the central bank decreased interest rates for 1 percent from 11.25% to 10.25%. However, there is instability between interest rate and inflation because when the inflation rate is dropping faster, Selic interest rate is not reducing in the right way. These issues come from Brazil's financial sector which is more politically influential than Wall Street in the US. So, it punishes Brazil’s economy and taxpayers.Concl...