As Brazil's Recession Deepens, Spending and Business Investments Continue to Drop

Estimated reading time: 5 minutes

As Brazil’s parliament votes to proceed with the impeachment of President Rousseff, Brazil’s public sector deficit sits in the 10 to 11 percent range. After years of rising state spending, the deficit is at the core of Brazil’s economic problem. With public debt set to reach 100 percent of GDP before 2020, a return to fiscal prudence will be central to any recovery, according to new analysis from IHS, the leading global source of critical information and insight.

Brazil’s ability to return to peak growth rates achieved in the 2000s has been constrained by external shocks and lack of reform as well as economic mismanagement that led to high inflation and widened fiscal deficits.

“Without the abandonment of fiscal prudence, Brazil might only be in a mild recession. Now the country is paying a very high price in the form of two significant years of recession,” said Rafael Amiel, director of economics at IHS Global Insight.

While inflation is set to slow in the second half of 2016, Brazil’s recession is forecast to continue until the first quarter of 2018. Approximately 1.7 million formal jobs have been lost, household consumption is down 4 percent, and the falling value of the Brazilian real has depressed purchasing power. As one of the fastest growing economies in the emerging world during the early part of the decade, Brazil is under extreme pressure to cut spending.

Economic Contraction Forces 6.2 Percent Cut to Defense Spending

While Brazil is still by far the largest defense budget in South America, its decline since 2010 means that it no longer accounts for the majority of spending in the region. 2016’s defense budget of 82.1 billion reals, or 19.6 billion US dollars, represents the largest real spending cut seen in over a decade. Several other South American markets have also been affected by the regional economic slowdown and have reduced their spending in tandem. This brings regional spending down from over USD47.6 billion in 2013 to USD41.1 billion in 2016.

Brazil specifically has cut procurement spending by over USD700 million in 2016 alone, most notably across Army and Navy programs, whose acquisition budgets both fell by almost 50 percent in 2016. Brazilian Air Force procurement spending declined by more than 20 percent in real terms, despite being buoyed by the ongoing purchase of Saab Gripen multirole fighter aircraft.

Security along the Border Strip and the Blue Amazon

With low perceived levels of interstate war, the principal role of the Brazilian armed forces is to assist law enforcement agencies to combat organized crime and subsequent internal insecurity. The army is leading the effort by assuming a law enforcement role along the 10,492-mile border strip that the SISFRON border-monitoring program will provide the required surveillance capabilities. However, only 7.2 percent of the program budget has been invested so far, and according to Brazil’s army chief, it will take 60 years to fully implement the program at the current pace. The other major procurement initiative of the armed forces is procurement of armored vehicles to improve the army’s mobility capabilities. This effort is known as project Guarani. Originally, 2,044 units were supposed to be procured, but this number was axed to only 1,200 vehicles.

Another security concern is protection of natural resources in the Exclusive Economic Zone (EEZ) known as the Blue Amazon. As a significant source of financial resources to the Brazilian government, this large swath of territory requires robust naval patrolling capabilities for EEZ enforcement including integrated intelligence gathering. Attaining this strategic aim is improbable in the short term since “the navy is the most negatively influenced service since the key surface combatant and patrol vessel procurement program has been postponed indefinitely and coastal patrol and corvette procurement programs are delayed. As a consequence, the navy will not be capable of enforcing the EEZ when oil extraction in the presalt reaches peak levels, which could affect the security of potential drilling operations,” said Lucie Hruskova, military capabilities analyst at IHS Aerospace Defense and Security.

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