Mohamed El-Erian’s bet on Brazil before President Luiz Inacio Lula da Silva’s election in 2002 was rewarded by a surge in the nation’s assets in the following years. More than a decade later, he says Latin America’s largest economy must seize the opportunity to undertake deep reforms.Brazil is facing the worst recession in a century amid a corruption scandal that’s ensnared some of its biggest companies and prevented Congress from focusing on measures to stimulate growth. After a selloff in 2015, the Ibovespa and the real are posting the best gains in the world this year, with bonds climbing more than twice the average for emerging markets and credit risk tumbling amid wagers that President Dilma Rousseff would be impeached and a new government would take over.
“Brazil now finds itself in a delicate situation, and one that threatens the well-being of both the current and future generations,” Mr. El-Erian, the chief economic adviser at Allianz SE, said in an e-mail to Bloomberg. “If the political class does not respond with a comprehensive set of policy measures, the country will be vulnerable to a prolonged recession, inflationary pressures, worse and spreading poverty, and gradually increasing internal and external financial pressures.”
While Brazil’s consumer and investor confidence levels have rebounded recently, they’re near historic lows as borrowing costs remain at the highest since 2006 to curb above-target inflation. Economists including Alberto Ramos of Goldman Sachs Group and former Brazil central bank director Alexandre Schwartsman have said the country needs to reform its social security and pension system as part of measures to shore up fiscal accounts.
Should the needed reforms happen, either at the hands of Ms. Rousseff’s government or the next administration, the real could rise beyond what analysts are now forecasting, Mr. El-Erian said. The currency will fall 11% to end the year at 4.15 per dollar, according to the median estimate of 51 strategists surveyed by Bloomberg. The real lost 0.2% or 3.6910 per dollar as of 11:18 a.m. EDT Thursday.
Mr. El-Erian, who previously worked as the co-chief investment officer of Pacific Investment Management Co., added to the firm’s Brazil holdings in 2002 as the country’s benchmark bonds plunged amid concern Ms. Rousseff would default after taking office. While the strategy put him at odds with investors including billionaire George Soros, it gave PIMCO’s Emerging Markets Bond Fund its best year since it was created in 1997 as Brazilian notes surged after the election.
In December, Mr. El-Erian said that the nation was going through a “house cleaning” that could hamper growth in the short term. Brazil’s economy is poised to shrink 3.5% in 2016, according to a central bank survey, adding to a 3.8% contraction last year.
“Brazil has an enormous potential, absolutely enormous”, Mr. El-Erian said. “What is missing is the political context that enables sustained policy implementation, coupled with broad-based understanding and support.”