By Glauco Arbix
(This article was received from Project Syndicate, an international not-for-profit association of newspapers dedicated to hosting a global debate on the key issues shaping our world)
SÃO PAULO – Less than a decade ago, Brazil’s economy faltered at the first sign of instability in international financial markets. Today, by contrast, the country seems immune from global market turbulence – or so Brazilian officials believe.
“The sub-prime crisis hasn’t yet reached the beaches of Copacabana,” Finance Minister Guido Mantega recently proclaimed. “We are growing free of imbalances and, in fact, gradually reducing our dependence on inflows of foreign exchange – that’s key.” Indeed, the government has emphasized that Brazil will be even more insulated as efforts to cut spending reduce dependence on external capital flows.
But Brazil’s ability to escape the effects of a recession in the United States depends on the scale of the crisis. Brazilian officials do have some reasons to boast that Latin America’s largest economy may be stronger than ever: macroeconomic indicators are healthier, solvency ratios have improved, and a mix of exports, investment, and domestic demand has been stimulating economic activity.
During the recent years of abundant global liquidity, the real grew stronger and the central bank was able to pile up foreign reserves, creating a cushion that totalled roughly $185 billion in late January, an amount sufficient to cover the entire foreign debt for the first time in history. With foreign direct investment still flowing in, Brazil’s lower external vulnerability leaves the country in a much better position than ever before to weather the global storm – at least for now.
Nevertheless, government officials admit, off the record, that the impact of an expected US recession will not be insignificant, because Brazil is not fully protected from external events. Beyond the sub-prime crisis, concerns about the US financial system’s stability carry serious implications for the global economy.
Moreover, a recession or a slowdown in the US and Europe would hit Brazilian exports, narrowing Brazil’s trade surplus considerably. In fact, although America’s trade significance has diminished, accounting for only 16% of Brazilian exports last year, Brazilian trade and growth typically go hand in hand with the US and Europe; historically they have never decoupled. At the same time, an extended US slowdown could reduce foreign demand from other markets.
The scenario could worsen if there is a breakdown in commodity prices – one of the most serious threats to Brazil from a global economic slump. Deceleration in India and China would lead to further cuts in prices for raw materials, weakening markets whose strength has underpinned Brazil’s powerful trade performance in recent years. In any case, the central bank has already projected that Brazil’s trade surplus will disappear this year, with a small deficit expected.
Fortunately, Brazil’s stock exchange has suffered less than other emerging-market bourses from the financial turbulence in the US and elsewhere. Recently, the exchange has become the prime source of financing for Brazilian companies, ahead of the state-owned National Development Bank, which grants loans at below-market rates.
But Brazil’s financial markets are much more sensitive than trade to international disturbances, and monetary flows could decrease in the long term. Indeed, should the global economy deteriorate further, outward portfolio investment could accelerate, reducing the financing available to Brazilian corporations and eventually affecting their ability to invest.
So far, business confidence is still high in the industrial sector, according to internal surveys conducted by the São Paulo Association of Industries, and inward FDI hit a record-high US$34.6bn last year. Optimistically, Brazilian officials believe that the government’s Growth Acceleration Program will serve as a vaccine against global turbulence and help reduce bottlenecks in the economy. The positive growth outlook, following an estimated 5.1% GDP gain in 2007, is presented as a reliable defense against external contagion.
Nevertheless, the devil is in the details. Global turmoil could derail Brazil’s expansion. New obstacles for the Brazilian economy could lead to softening domestic growth and the internalization of inflation, bringing the crisis home.
Consequently, although the current crisis is expected to have a relatively minor effect compared to past upheavals, the possibility of contagion from turbulence in the US cannot be disregarded.
It is therefore essential that Brazil’s private and public sectors do their utmost to sustain long-term growth by making the economic environment more business-friendly.
Beyond that, one can only hope that current external economic disturbances do not lead to a global disaster.
