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Brazil is not a Quick Fix

Brazilians love telenovelas, soap operas that air every evening in prime time. President Dilma Rousseff’s recent impeachment offered all the typical twists and turns. The show involved months of political infighting and media attention, with former president and mentor Lula da Silva turning against Ms Rousseff’s policies — while singers Caetano Veloso and Gilberto Gil took her side, offering unconditional support. In a final turn of events, parliament first nullified the impeachment motion, then nullified the nullification.

Millions cheered as Ms Rousseff left the Palácio, while parliament welcomed Michel Temer’s new government. But the drama is far from over, and in fact, I believe Brazil’s Caipirinha Crisis is just beginning. Mr Temer will inherit an economy suffering from a bad hangover, after years of growth fuelled by generous pensions and government subsidies like Minha Casa Minha Vida (“My House, My Life”). Mr Temer’s first objective should be reducing Brazil’s nearly double-digit deficit.

The good news is Brazil’s central bank is among the few with room for easing. Its newly-appointed head, Ilan Goldfajn, will probably lower the Selic rate from the current 14.25 per cent. The bad news is Brazil’s issues are structural and deep-rooted. Monetary stimulus will only be an anaesthetic, not the cure.

At the heart of the problem is Brazil’s broken growth model. By focusing on energy and mining, Brazil followed China’s investment train over the past decade. Today, however, it finds itself too geared to energy, mining and hard commodities, which account for more than 22 per cent of exports, up from 12 per cent in 2000. China’s demand for commodities is likely to decline in the second half of the year, after recovering on revamped credit stimulus, as policymakers worry about rising debt.

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