Nerves Of Steel

As the global downturn tightens its grip, John Rumsey looks at how Brazil is placed to weather the financial storm

Just a few months ago, Brazil was patting itself on the back for having side-stepped the worst of the global crisis. President Lula da Silva even quipped back at a reporter’s prescient call in September for a comment on the crisis. “What crisis? Go ask Bush,” in a line that has ricocheted on his reputation. Months later, jokes about the shoe-flinging incident in Iraq went down well with a Brazilian public still relaxed about the crisis. Now the shoe is firmly on the other foot.

Brazil’s economic numbers started to flash red in the last two months of the year as industrial production in some sectors plunged by more than 20% in one month. “The biggest surprise in Brazil has been just how quickly the crisis spread here and how fast the contraction is. No-one saw the depth of it,” says Marcelo Salomon, chief economist at Brazilian retail bank Unibanco, which is being merged with competitor Banco Itaú. Brazil is used to balance of payments crises, but this time the country has been hit by a triple whammy: a contraction of credit, falling GDP and a weaker exchange rate, Salomon notes. “We keep having to revise our forecasts down,” he sighs.

The halcyon days of 2005–07 seem long ago. Back then, Brazilian GDP was simmering at South Korean levels of more than 5% growth and foreigners were pouring money into the Bovespa stock market, feeding a rise of close to 75% in dollar terms in 2007. 

Lenders fell over themselves to provide funds to companies — in particular to commodity businesses, spanning everything from agribusiness to mining, and to steelmakers, whose output was supporting the car and white goods expansion. 

All that cash was helping bankroll ambitious expansion projects and funding acquisitions abroad. Firms that were unheard of overseas jumped into leading positions in their industry: JBS, for example, carried out a string of acquisitions in the Americas and Australia to become the world’s biggest meat processor in 2007. Meanwhile, executives, such as Roger Agnelli, CEO of the world’s second largest mining company, Vale, became celebrities — at least in the world of business — commanding dedicated features in magazines such as Forbes. 

Brazil was also emerging as an energy power to be reckoned with, pulling off the neat trick of offering both dirty and clean sources. State-oil company Petrobras confirmed huge oil discoveries and the government pronounced an imminent boom, estimating 100 billion barrels of reserves, a figure yet to be corroborated. On the flip side, Brazil’s world-leading, sugar-cane based ethanol programme, often praised at the expense of America’s corn version, suggested the country could be a moral leader in the coming clean-fuel revolution as well. 

Finally, a wave of new, better-paying jobs within the official sector rather than the black economy and a confident banking sector led to a domestic credit surge. Brazilians splurged, many for the first time in their life, on cars, fridges, washing machines, cameras and state-of-the-art mobile phones. They shopped till they dropped in spite of interest rates that are among the highest in the world and eye-watering bank charges that, when combined, can double the size of an unsecured loan in less than a year. 

Recent months have seen a cautious mood taking hold, although not the pea-souper gloom you find in the developed world. 

Economists are still predicting growth, but of 2% or less. The stock market is a shadow of its former self and São Paulo investment bankers, some of whom were on bigger salaries than their New York counterparts, sit idle. The key index has fallen 45%, as foreigners return to home markets. 

The slowdown will also hurt the government machine. It has key roles in supporting poorer families through direct payments and is a huge, and growing, employer, says Ilan Goldfajn, founder of Ciano Consulting in Rio de Janeiro. Brazil’s tax revenues shot up thanks in part to the hot stock market, which created billionaires and attracted investment, just like in the US under the last days of the Clinton surplus, he notes. This paid for big increases in government spending; that’s now over, he says. 

Some areas of the economy have been particularly badly affected. The huge downdraft in global car manufacturing has rippled down the supply chain. That hurts badly in Brazil, whose large steel industry has grown up around access to cheap iron ore. The abrupt reversal in global car production has crushed steel and iron ore prices and seen mining and steel firms mothball projects. 

Even the double-whammy energy revolution looks less certain. The realisation is dawning that extracting oil buried beneath a huge layer of rock and salt will cost an arm and a leg and require cutting-edge technology and techniques that are unproven. Meanwhile, ethanol investors and producers are facing a hangover as the domestic car market, which was churning out ethanol-fuelled vehicles, slumps. As foreign markets have remained resolutely closed to ethanol imports, there’s nowhere for it to flow. 

To cap it all, in line with the rest of the world, the credit binge has fallen victim to rabbit-in-the-headlight banks and increasingly concerned consumers, who now fret about salary freezes and unemployment. 

Yet Brazil is used to riding out storms and this may be teacup-sized compared to earlier crises: after all, the country had inflation of 114% in 1992 and recent history is littered with devaluations. Brazil has many advantages: it is a fast-growing BRIC market; it has more people than the rest of South America (south of Panama) combined; and it is the biggest economy in the Americas south of the US, and the world’s 10th largest. These should help drive a swifter recovery than in the developed world. 

Long-term trends look favourable. The wealth spurt in emerging markets suggests demand will grow for Brazil’s commodities. A eco-friendly president in the White House may yet spur an ethanol revolution. And while Brazilian banks have slowed, they do not suffer from exposure to the toxic gunk that is blocking up credit in the developed world. If 2009 is a whimper, the next decade may enter with a bang.

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