Cash-Strapped Brazil Taps into Sovereign Wealth Fund

December 24, 2015Brazilby EW News Desk Team

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The Brazilian government withdrew $255 million from its sovereign wealth fund to finance public accounts, according to Newsmax. The fund was created in 2008 out of the commodities boom, but harder times forced authorities to withdraw money in 2012 to meet budget obligations. The latest withdraw comprised a third of the fund's overall worth.

Brazil is one of the worst performing economies on the world market, and the government lives on borrowed time, as dipping into the wealth fund becomes a necessity. The wealth fund also stands the risk of running dry, especially as a low-priced commodities market fails to bring substantial revenue. The economy remains overly reliant on commodities, and revenue from Petrobras failed to yield a steady income stream as the state-run energy firm deals with fallout from a major political scandal and low energy prices. Petrobras lost $1.01 billion in the third quarter, notes CNBC.

Moreover, Brazil's political infighting poses as much of a threat to the economy as the commodities slump. President Dilma Rousseff's popularity has plummeted since the economy went south, and she lacks the political capital to make meaningful reforms. Former Finance Minister Joaquim Levy, who resigned his post last week, also found himself at odds with the president, but his measures proved insufficient to propel the economy. Levy, a fiscal conservative, failed to make enough cuts over the course of the year to create a real impact. Congress must approve a majority of cuts, but this is unlikely given the contentious political climate.

Rousseff also faces opposition from the populace. Recent polls show that most people do not support the government's plan for another tax increase to bridge fiscal gaps, and the Congress echoed this sentiment by refusing to approve an additional tax increase. Voters are understandably hesitant in regards to tax hikes, as many struggle with rising costs and diminished disposable income. Many people find themselves paying off debts rather than contributing to the economy through the purchase of goods and services, and the problem is compounded by rising joblessness. According to the latest figures, the unemployment rate rose to 7.9 percent.

However, Brazil's currency decline will benefit outsiders in the form of foreign investors and tourists. Visitors will be able to buy goods for cheaper prices, and investors can take advantage of Brazil's lower property values. While this may fuel foreign investment in Brazil, the economy will remain depressed for the foreseeable future, and not much will change in an atmosphere of lacking economic diversification and political gridlock.

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