Brazil needs deep reforms, El-Erian says

Brazil has great potential but needs a political environment that allows the country to make a sustained push for economic reforms, according to one of the most well-regarded economic commentators.

“The economy has an enormous potential, absolutely enormous,” Mohamed El-Erian, chief economic adviser at Allianz SE told Bloomberg.

“What is missing is the political context that enables sustained policy implementation, coupled with broad-based understanding and support.”

However, he warned South America’s largest economy was a facing a “dire” situation that would impact both the current and future generations of Brazilians if politicians - from both sides of the political spectrum - did not carry out the structural reforms which the country so sorely needed.

In 2002, when El-Erian was at PIMCO, the world’s largest bond fund manager, he correctly bet that incoming left-wing president Lula Inacio Lula da Silva would not put the country’s macroeconomic stability at risk.

Lula adopted a relatively prudent approach to his social reforms after coming to power, allowing the country to both grow strongly while addressing the large economic divide between its social classes.

However, in part as a result of the Chinese-commodity induced economic boom much-needed structural reforms were curtailed, further postponed or shelved even as public sector spending continued to soar.

At last count, the country’s public sector government deficit was running at close to 11.0% of gross domestic product.

“Brazil’s war of parties and personalities obscures some of the most important lessons of the crisis. Both the Petrobras scandal and the economic crash have their origins in misconceived laws and practices that are decades old. Getting Brazil out of its mess requires wholesale change,” The Economist wrote in its latest weekly edition.