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Economic crisis rattles Brazil as Olympic year starts

Brazil hoped to start 2016 making itself pretty for its turn on the world stage when its hosts the summer Olympics. Instead attention has turned to its deepening economic crisis.

[SAO PAULO] Brazil hoped to start 2016 making itself pretty for its turn on the world stage when its hosts the summer Olympics. Instead attention has turned to its deepening economic crisis.

The world's seventh largest economy tipped into recession last year - official figures show that 1.5 million jobs were destroyed.

The downturn is due to last throughout this year, the International Monetary Fund says.

That would be the first two-year recession since the 1930s in Latin America's economic powerhouse.

"This year started with very bad news," said Manuel Enriquez, an economist at Sao Paulo University.

"The economic outlook for Brazil is very bad for 2016 and also for the year after." The IMF said it expected Brazil's economy to contract 3.5 per cent this year and remain stagnant in 2017. It shrank by 3.8 per cent in 2015, according to the fund.

A finance scandal that sparked impeachment proceedings against leftist President Dilma Rousseff has aggravated the crisis.

"There is no confidence in the government. Businesses are mistrustful and people are afraid of losing their jobs," said Mr Enriquez.

"The banks are afraid that loans won't be paid back. All this is creating a negative atmosphere in which there is no way to stimulate demand."

Ratings agencies Fitch and Standard & Poor's have downgraded Brazil, criticizing its failure to clean up its public finances.

Aside from the political chaos swirling around the president, state oil firm Petrobras was engulfed in a corruption scandal last year.

That and the plunging oil price battered the giant company, which has dragged down the Sao Paulo stock market.

"Petrobras shares are cheaper than a cup of coffee," said Mr Enriquez.

When commodity prices were high, Brazil shined for a decade as an emerging star. The glow however faded last year as the price of oil and other raw materials that Brazil exports plunged.

Foreign investors have pulled out of the country, and over 2015 the real currency lost a third of its value against the dollar.

On Thursday the real hit its weakest point ever at 4.166 reals to the dollar, after Brazil's central bank held off from raising interest rates.

Inflation is running at more than 10 per cent, which had raised expectations of a rate rise to rein it in.

The conflicting pressures of inflation and high interest rates put the government and central bankers in a bind.

Analysts said the government feared a rate hike would squeeze the domestic economy at a painful time.

During the bank's deliberations the IMF released its dire economic forecast - and the bank soon after held off on raising rates.

"By setting the market up for a hike in interest rates but then failing to follow through, the Central Bank of Brazil has shot itself in the foot," wrote Neil Shearing, an analyst with financial consultancy Capital Economics.

"The obvious conclusion is that policymakers have bowed to government pressure not to increase rates in the face of rising inflation." Jose Luiz Pimenta Junior, a specialist trade consultant, said Brazil must diversify its exports beyond minerals and grain.

"The internal situation is complicated. The slowdown in China and the rise in US interest rates will take away capital and investments. How will we survive?" he said.

"We should think not only in terms of quantity but also quality, and go looking for growth abroad." The question of whether the impeachment against Ms Rousseff will proceed is likely to be resolved next month when Brazil's legislature reconvenes. That could be a turning point.

"There is a recession, the public accounts are in deficit and inflation is high," said Antonio Madeira, an analyst with consultancy MCM.

"On the other hand, apparently the impeachment drive is losing steam. Perhaps that can help the government recover its strength and concentrate on economic recovery."