Will A $64 Billion Infrastructure Package Do Brazil Any Good?

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Includes: BRZU, BZF, BZQ, DBBR, EWZ, FBZ, UBR
by: Discount Fountain
Summary

A $64 billion infrastructure package has been proposed to stimulate economic growth in Brazil.

However, I see this as having limited effects.

Lower commodity prices continue to plague the Brazilian economy, and increased investment in infrastructure would do little to alleviate this.

As an economy that has struggled to achieve significant growth in the face of low commodity prices, Brazil has recently announced a $64 billion infrastructure package to boost economic growth in the country. The rationale for such a plan is to stimulate growth through creation of new jobs while concurrently reducing inflation. Moreover, as a major commodities producer the objective of investment in infrastructure is to facilitate transportation of commodities which is currently hampered by delays as a result of disrepair. However, is investment in infrastructure enough in the context of recovering Brazil's wider economy?

On a more general note, there is certainly a case for saying that stimulus packages on their own have little effect on an economy's economic growth. For instance, the Economic Stimulus Act of 2008 in the United States which was intended to increase economic growth actually had the opposite effect, with low performance in the credit markets resulting in aggregate output actually decreasing. Moreover, an infrastructure plan of this nature is not aimed at increasing domestic consumption; rather it appears to be specifically aimed at facilitating commodity exports through the enhancing of transportation facilities.

In this regard, I see this package as doing little to bolster economic growth, as investment in infrastructure will do little to boost consumer spending, which is the main growth driver of domestic growth. Even if such investment does manage to increase employment and consumption long-term, it could be a while before the effects of the same are reflected in GDP growth. Moreover, with a 1.5 percent decline in consumer spending in the first quarter of this year, the effects of increasing inflation may override any potential positive benefits from the stimulus package, as increased output is simply reflected in higher prices.

Moreover, it would appear that while infrastructure investment may have the effect of decreasing unemployment across an ailing construction sector, the primary purpose of infrastructure investment is to increase the volume of commodity exports. Long term, this is an ineffective strategy at best given that commodity prices are under threat. Moreover, Brazil's vulnerability as a result of lower commodity prices is presenting ample opportunities to countries such as China to provide financial assistance to Brazilian companies in return for an equity stake, which we are currently seeing across industries such as oil, financials and infrastructure. In this regard, a stimulus may simply be ineffective since such companies are gaining a more permanent form of financing from Chinese companies as a result of various mergers and acquisitions. In contrast, a government stimulus is simply seen as a temporary fix.

In conclusion, I see the proposed stimulus package as having limited effects for Brazil's economy, and threats from inflation could override any potential benefits presented by increased employment as a result of increased infrastructure projects.

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