Brazil’s Government Unveils $66 Billion Stimulus

Brazil, one of the key emerging markets, has finally taken official action. Brazil’s government has launched a $66 billion economic stimulus.

From Globe and Mail,

Brazil is getting back in the stimulus business, underscoring the limits of emerging markets to drive growth in the global economy.

Facing a deteriorating economy, President Dilma Rousseff Wednesday announced an infrastructure investment strategy valued at about $66-billion (U.S.), the first of several programs that local media reports say could be coming in the weeks ahead.

The massive program, which includes private construction of toll roads and investment in rail lines, comes amid slowing growth in other emerging powerhouse economies such as India and China, which along, with Brazil and Russia form the BRIC group of nations.

Not so long ago, Brazil was an economic high flyer, turning its back on a history of financial crises and emerging as one of the world’s most dynamic economies.

But more recently, the country has been grounded, dashing hopes that Latin America’s largest economy would help offset weak recoveries in the United States and Europe…

Ms. Rousseff’s plan should accelerate construction. Loosening the government’s grip on public goods, she pledged to sell concessions that will clear the way for private contractors to build 7,500 kilometres of roads, and then collect the tolls.

The government also will hire private companies to build 10,000 kilometres of railroads and allow them to share in the profits.

Brazil’s state-run development bank will finance all the projects at subsidized rates.

In today’s world of fiat money based central banking system, boom bust cycles have become the main feature. Brazil has been no different.

Charts from tradingeconomics.com

Brazil’s interest rates fell in 2009 as her economy plunged into a recession having been contaminated by the US property-mortgage bust in 2008.

However Brazil’s version of (zero bound rates) or negative real rates fueled the recovery of Brazil’s stock market.

The ensuing stock market boom has also been reflected on the economy, as well as, in the inflation rates.

Signs of credit powered “overheating” prompted for a series of interest rate increases which drained liquidity from the system. This has prompted for the recent economic slowdown which has also been ventilated on a sluggish stock market.

So in order to avoid from having to endure the required market adjustments from previous malinvestments, Brazil’s government today resorted to policy maneuverings that focuses on a short term fix.

Of course, the major beneficiaries here would be the cronies of Brazil’s incumbent government who will likely be assigned contractors for such state directed spending binge.

Nonetheless short term fixes will accrue to even more misdirected investments that would mean the amplification of Brazil’s homegrown bubble cycles.

Yet it would be interesting to see if Brazil’s stimulus program would be enough to shield her economy from increasing evidences of a deepening downturn in the global economy.