Following the recently released OECD’s composite leading indicators signaling a turnaround in growth for Brazil, Joseph Hogue wrote at Emerging Money that the picture painted by the OECD could not be farther from the truth. In fact, he says, Brazil’s issue is a classic problem in Latin American economics, with lots of government intervention and red-tape policies that don’t fix the structural issues.

Here’s an excerpt from the original article and the reasons why Hogue rates the country “underperform”:

“… the Brazilian economy strikes me as a classic problem case in Latin American economics. Faced with an uncertain global economy, the government turns to a series of heavy-handed policies influenced by populist sentiment and industrial cronyism.

Despite default rates hitting record levels, the government is leaning on banks to increase lending. Instead of addressing issues in productivity in the auto industry, the government is threatening a tariff on Mexican auto imports. Instead of addressing issues in global competitiveness, the government supports weak sectors with on-again, off-again capital controls and taxes on foreign investors.

Heavy intervention by the government can mean big gains for investors that are able to call the timing and industrial favorite correctly. Unfortunately, policies have a way of growing beyond the government’s control and causing unintended consequences in the Brazilian economy. This often leads to greater intervention, market panics and eventually some form of financial reset (aka devaluations and expropriations).

The Brazilian economy may indeed pick up over the next two quarters but long-term structural issues remain. Higher default rates and forced credit growth will eventually require banks to write off loans. The government’s heavy handed currency intervention could end up importing inflation. Other Latin markets, notably Chile and Colombia, will continue to modernize while the Brazilian economy will be stuck in a continuous boom-bust cycle.

My outlook for Brazil remains at underperform versus Latin American peers Mexico, Chile, Peru and Colombia.”

Source: Emerging Money

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