Crisis Puts the Brakes on Brazil's Go-Go Economy

By Juan Forero
Washington Post Foreign Service
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 InĂ¡cio 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.

But he said that Brazil's fundamentals remain strong and that innovating industries, such as biofuel production, abound.

"Overall, in the long run, Brazil is going to come out stronger from this crisis," Miranda said.

Still, Brazilians are well aware that growth will slow, perhaps below 3 percent next year, according to some economists.

Brazilians have reacted to the new economic prognosis with a mix of despair and irritation, mainly because the meltdown that is affecting them originated in U.S. financial institutions.

Lula, once a leftist labor leader, has been a responsible fiscal manager whose policies have attracted foreign investment and increased trade. Under him, Brazil's economy has enjoyed its best sustained growth in 30 years, averaging about 4.5 percent a year.

With his economic credentials winning him positive reviews from entrepreneurs, Lula is in a position to scold the Americans for failing to enact reforms that could have prevented the crisis. "Those that spent the last three decades telling us what to do did not do what they had to do," he said.

The new realities could be hard on the poor, whose lives have improved during the recent economic expansion. Working-class families have begun to buy cars and homes with credit, once an out-of-reach dream. Poverty has fallen, and 52 percent of Brazilians are now considered middle class, up from 44 percent in 2001.

The improvements were readily apparent on a busy street, filled with small businesses, in the poor neighborhood of Paraisopolis in Sao Paulo.

Larisa Karina Leite, 22, said she and her mother, new to Sao Paulo, live much better than they did in a poor northeastern region. Jose Santos de Oliveira opened his own supply store.

Across the street, Maria Eliza Silva, 31, recently expanded her hair salon, and bought a car and a home. "My salon has improved and my life, too," she said. "And if I want more improvements, I have that opportunity."

Yet, when asked whether she has felt the impact of the U.S. financial crisis, she said unequivocally: "It's here."

She said that credit will be much harder to obtain and that people are spending less.

Mauro Arruda, who runs the Macrotempo consulting firm in Sao Paulo, said big companies, like the multinational oil firm Petrobras, face new obstacles getting credit from international lenders. And small and medium firms, which depend on Brazilian banks, will also have difficulty securing loans. One entrepreneur, Arruda said, used to have a monthly budget of $32 million, in today's dollars. Last month, the budget was less than $3 million.

"Why is that?" he asked. "Because there isn't credit."

Among the most worrisome consequences of the crisis is the expected blow to huge infrastructure development programs. Through its private-public growth acceleration plan, Brazil is building highways, airports, dams and ports -- all necessities if the economy is to advance. This year, investment was estimated at $50 billion.

At Brazil's biggest port, in Santos, along the southeastern coast, an ambitious expansion of rail lines, docks and shipping lanes is proceeding. Paulino Vicente, director of infrastructure, said the port is under intense pressure "to have investments concluded by 2010."

But the Santos port may be one of the few projects that will progress quickly.

The Brazilian Association of Infrastructure recently called on the government to guarantee emergency loans for the completion of projects. Paulo de Godoy Pereira, the president of the trade association, said reestablishing a sound credit line is a vital objective if Brazil is to reach its full potential.

"I have taught in conferences around the world that Brazil will be among the five big economies in the world," he said. "We don't know how long we'll take to get there, but we will be there."

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