Economic History of Brazil - 1994-present (Post "Real Plan" Economy)

1994-present (Post "Real Plan" Economy)

The Plano Real ("Real Plan"), instituted in the spring 1994, sought to break inflationary expectations by pegging the real to the U.S. dollar. Inflation was brought down to single digit annual figures, but not fast enough to avoid substantial real exchange rate appreciation during the transition phase of the Plano Real. This appreciation meant that Brazilian goods were now more expensive relative to goods from other countries, which contributed to large current account deficits. However, no shortage of foreign currency ensued because of the financial community's renewed interest in Brazilian markets as inflation rates stabilized and memories of the debt crisis of the 1980s faded.

The Real Plan successfully eliminated inflation, after many failed attempts to control it. Almost 25 million people turned into consumers.

The maintenance of large current account deficits via capital account surpluses became problematic as investors became more risk averse to emerging market exposure as a consequence of the Asian financial crisis in 1997 and the Russian bond default in August 1998. After crafting a fiscal adjustment program and pledging progress on structural reform, Brazil received a $41.5 billion IMF-led international support program in November 1998. In January 1999, the Brazilian Central Bank announced that the real would no longer be pegged to the U.S. dollar. This devaluation helped moderate the downturn in economic growth in 1999 that investors had expressed concerns about over the summer of 1998. Brazil's debt to GDP ratio of 48% for 1999 beat the IMF target and helped reassure investors that Brazil will maintain tight fiscal and monetary policy even with a floating currency.

The economy grew 4.4% in 2000, but problems in Argentina in 2001, and growing concerns that the presidential candidate considered most likely to win, leftist Luis Inácio Lula da Silva, would default on the debt, triggered a confidence crisis that caused the economy to decelerate. Poverty was down to near 16%.

In 2002, Luis Inácio Lula da Silva won the presidential elections and was re-elected in 2006. During his government, the economy began to grow more rapidly. In 2004 Brazil saw a promising growth of 5.7% in GDP, following 2005 with a 3.2% growth, 2006 with a 4.0%, 2007 with a 6.1% and 2008 with a 5.1% growth. Due the 2008-2010 world financial crisis, Brazil's economy was expected to slow down in 2009 between a decline of -0.5% and a growth of 0.0%. In reality, economic growth has continued at a high rate with economic growth hitting 7.5% in 2010.