Is Brazil entering the economic trap?

Is Brazil heading into the eye of a storm?

Brazil, the media-darling of the world financial press and the poster child for emerging-markets investing, is heading directly into the eye of the storm. Brazil was a great country to invest. Returns were equivalent of 160%. But, this famous forward looking growing economy faces problems, if immediately not rectified.

Will Brazil remain a favourite of BRIC countries...?

Brazilian government brought in changes in its business approach. The Parliamentary and Presidential election is due soon. Official government spending was budgeted to grow by a moderate 10.7%, and was subject to further trimming to accommodate more spending. Brazil’s state owned Companies, which has been accelerating in recent years (119), is set to increase further by 32%. Brazilian Development Bank’s exposure in lending expected to touch US $ 87billion, while housing lending for the first half grew stealthily by 51% (over the same period of 2009). Government has proposed US $ 886 billion Infrastructure Investment Plan for the next seven years. State lending has increased from 1% of Brazilian GDP to 7%. This would further the deficit in its budget.
Brazilian government passed a Law to wrest control over Oil firms. The increase in oil price fixed by the Government will force Peteroleo Brasilerio to raise $ 65 billion in equity to pay the Government and to finance capital investment needed for exploiting its sub salt Tupi Oil resources. The difference of amount of US $ 42.5 billion received by overcharging is accounted as revenue, but would constitute 2.8% of the GDP. This covers up the fiscal deficit to the extent of 2.8% of GDP.
The lending of money by the state owned banks and Petrobras cash subsidy would make Brazilian deficit postulation at 10-12% of the GDP.

Yet, unlike the U.S. and British economies that have suffered under deficits of this magnitude, the Brazilian economy is in the middle of a roaring boom, with projected GDP growth of 7.8% for this year.
It's not as if Brazil was under-indebted, either; the excessive public debt nearly sent the country into bankruptcy in 2002, and the leeway before debt repeats the process is less than Brazilian commentators seem to think.
The road economic policy will take in Brazil would culminate with the election results which are due in October. If Centrist come to power, a favourable private sector policy without prolifigating public spending will be the central theme of the Economic policy. However, if a Socialist were to be elected to power, they could carry the country to high government spending and income redistribution. The Road map to peruse the current policies has been already set out. Monetary policy would quickly change if an inflationist comes to power.
However, with a true public-sector deficit of 10% of GDP and public spending that's already the highest in Latin America, there isn't much room to expand the state sector before the country runs into big trouble. While commodity prices keep rising, the commodity-dependent Brazil will at least be able to borrow the money it needs.
But if commodity prices falter, a crisis of confidence would be more or less inevitable.

There are positives. Brazil's central bank continues to maintain an admirably sound interest-rate policy, which has kept the short-term rate - currently 10.75% - far above the current inflation level of roughly 5%. That has prevented the inflationary spiral that would otherwise be well underway.

Brazil has had these bursts of growth before, and they have always been ended by a debt crisis followed by a period of forced austerity that has wiped out the previous boom's income gains and worsened the country's huge inequality.
For Brazilian investors and citizens alike, that will certainly be a pity after such a strong run. . But Brazil is currently regarded as one of the world's four great growth economies, and under current policies, that "high fashion" image that has buoyed its economy needed tinkering, if it has to continue to be the ‘Country to Watch tommorrow’