Crisis Puts the Brakes on Brazil's Go-Go Economy
Friday, November 14, 2008
SAO PAULO, Brazil -- The go-go outlook that propelled Brazil onto the world stage in recent years has crashed into hard economic realities. The financial meltdown that began in the United States has pummeled the stock exchange, battered commodity prices, weakened the local currency and squeezed credit, putting large-scale private and public projects on hold in the world's 10th-largest economy.
The $200 billion that Brazil has accumulated in foreign reserves, coupled with prudent economic policies, mean the country is better prepared than many emerging economies to weather the financial storm. And analysts here say the economic clout Brazil has won will embolden President Luiz Inácio Lula da Silva when he joins President Bush and other world leaders in Washington this weekend to discuss solutions to the crisis.
But business leaders and Lula's government, which just a few weeks ago suggested that the country would be largely spared, have come to realize that Brazil is in for a rough ride. After five years of robust growth, the economy will cool, putting on hold Brazil's long-held aspiration of joining the elite ranks of the world's richest, most influential countries.
"I think the effect will be severe," said Rubens Ricupero, a former finance minister and diplomat whose policies helped tame inflation in 1994. "Not to the point of generating a technical recession, but it will force a considerable, considerable de-acceleration, a slowing down of the Brazilian economy."
Brazilian officials are scrambling to generate confidence in the economy in a bid to ensure that foreign investment is not lost and that capital flight is controlled. The central bank is spending $50 billion to shore up the currency, the real, and the government is committing billions more to help key industries.
It is not the first time Brazil has been buffeted by external crises beyond its control.
The oil shocks of the 1970s helped staunch spectacular growth rates in a country dependent on crude imports. In the 1990s, the collapse of the Russian ruble and the Asian economic crisis also hit Brazil hard. Hyperinflation and low growth rates were perennial problems in the not-so-distant past.
But economists and political analysts say Brazil is a far different country from the one that was repeatedly hammered. Juan Jensen, chief economist in macroeconomics for Tendencias, a large Sao Paulo consulting firm, said the government has lowered debt, kept inflation in check and increased tax revenue. Its economy is more diverse now, generating growth not just from soybeans and cattle but also from manufacturing and oil production.
Brazil trades with the United States, but it also sells to other Latin American countries and exports much of its resources to China and India. Mexico, in comparison, sells most of what it produces to the United States, ensuring that it will be hit hard as U.S. demand falters.
And Brazilian banks, like other financial institutions in Latin America, did not invest in the securities that imploded in the United States and Europe.
Among those bullish about Brazil is Bruno Miranda, 37, a hedge fund manager.
On a tour of Brazil's stock exchange, Miranda recalled how he got his start in "the pit," where runners and brokers buy and sell at a fevered pace. Brazil's commodity-heavy stock exchange has grown dramatically in recent years, to the point where the market value of shares traded on the benchmark index reached a high of $1.58 trillion in May, dwarfing other exchanges in South America. Analyzing the new economic trends, Miranda has been stunned by market volatility that has seen the value of companies traded on the stock index plummet by 63 percent since May 30, to $572 billion Thursday.