MercoPress. South Atlantic News Agency

Brazil, a giant but with “a lot of fat and much in the way of muscle”

“We need to reduce the tax burden, more competitive interest rates, huge investment in infrastructure” says Andre Gerdau

Brazil, Latin America's largest economy is in dire need of structural reforms and reduced government bloat to fuel sustainable growth, analysts say. And this will not happen overnight and will take massive political will. A giant but it carries “a lot of fat and not much in the way of muscle”.

“Brazil's problem is that it carries a heavy load: the State,” said economist Pedro Tuesta of the 4Cast consulting firm in Washington. “There needs to be a radical change in the role of the State. Prioritize the country's infrastructure more than control the private sector,” he argued.

In 2010, the economy posted 7.5% GDP growth after contracting 0.2% in the wake of the 2008 sub prime crisis. In late 2009, influential British weekly The Economist, projecting a Brazilian economic rebound, posted a picture of Rio's iconic Christ the Redeemer statue on its cover, taking off like a rocket.

But two years later, the country grew a paltry 2.7% and an anemic 0.9% last year. This year the economy is projected to expand by only 2.5%.

The world's top producer of coffee, sugar and orange juice and one of the biggest producers of meat, soybeans and iron ore, Brazil has benefited from high commodity prices on world markets.

“This price increase was artificial, fuelled by zero interest rates in the United States and the huge demand from China,” said economist Enrique Alvarez of New York-based IdeaGlobal.

Brazil, now the world's seventh largest economy, also boosted domestic demand. Its middle class expanded and improved its purchasing power amid a continuing low jobless rate. With the domestic currency, the Real, appreciating against the dollar, Brazilians increasingly traveled and shopped abroad, a trend that is continuing although now the Real is depreciating.

Yet now the commodity price boom is over. And stimulus packages could be phased out at any time in major economies.

Faced with chronically inadequate domestic infrastructure, Brazil is now trying to stimulate private investment to finance ports, highways and multi-million-dollar oil projects by state-run energy giant Petrobras to tap the country's huge deep-water oil reserves.

”We see positive initiatives, infrastructure concessions (...). But for the country to grow 2.5%, we need structural reforms. We need to reduce the tax burden, have more competitive (interest) rates, huge investment in infrastructure,“ Andre Gerdau, president of the steel group Gerdau, told the economic daily Valor.

The government recently held two auctions for highway construction, but one did not attract any bidders. In a recent meeting with entrepreneurs in New York, Rousseff vowed to respect the rules of the game for investors.

But analysts believe that the so-called ”Brazil Cost,“ the excessive operational costs associated with doing business in this country, is a barrier to increased growth through private sector investment.

For Alvarez, the issue is still how to restructure state machinery and in turn stimulate business creation and job creation.

The World Cup, which Brazil will host next year, can provide a welcome boost, with market analysts expecting a 2.2% expansion of GDP as a result. But in the short term, the country will still reel from problems associated with the global economic instability.

”Brazil is a giant in terms of natural resources. And being a giant, it can move powerfully at times. But it carries a lot of fat and not much in the way of muscle,” Alvarez said.