Brazil Sits on the Cusp of Recovery

Stephen DeAngelis

August 27, 2009

Recently Japan, France, and Germany reported that their economies had once again started to grow. The growth rates weren’t high, but the fact that their economies were no longer shrinking indicated that they were starting to recover from the global recession. A number of analysts believe that Brazil is also poised to make a recovery. They claim, however, that Brazil’s recovery will likely be more dramatic than those experienced by developed countries. The Brazilian bandwagon began with an article in The Economist [“Ready to roll again,” 13 June 2009 print issue]. The article listed some of the indicators that show Brazil is on the road to recovery.

“On June 10th the [Brazilian] central bank cut its benchmark SELIC rate to 9.25%, the first time the figure has been in single digits since the 1960s. A host of measures, from the value of the stockmarket to the creation of credit, are now nearly back to their level before the collapse of Lehman Brothers in September last year. The economy performed less badly than expected in the first quarter: GDP shrank by only 0.8% compared with the last three months of 2008. Many analysts believe that Brazil is now starting to grow again, and will return to annual growth of 3.5% to 4% next year. If so, that would mean that the country has escaped with only a brief recession.”

That is not just good news for Brazilians, but for the rest of the world as well. I have noted in several other posts that global economy is likely to recover on the backs of emerging nations. Brazil is one of the so-called BRIC countries (Brazil, Russia, India, and China) that is predicted to become an economic powerhouse. The article goes on to detail some of the reasons that Brazil may escape from having to suffer through a longer recession.

“The financial system is sound, and domestic demand has remained robust. Brazil’s changing trade patterns have also helped to shield it. This year, for the first time, China overhauled the United States to become Brazil’s single biggest trading partner.”

Brazil’s relatively strong economy has meant that its currency, the real, has also been strong. While this has helped keep inflation in check, it has also meant that exporters are having more difficulty finding clients for their products. Another worry for economists is that Brazilians may save too much. The reason is the existence of “a popular savings account (called caderneta de poupança), which offers an 8-9% guaranteed interest rate.”

“As the Central Bank’s headline rate approaches this level, the government frets about a flood of money into these accounts from investors, draining liquidity from the market for government bonds. It is mulling over whether to limit the number and size of poupança accounts, but tampering with this familiar product is politically difficult. Some opposition parties are stoking fears by unfairly reminding voters about a notorious bank raid by a previous president, Fernando Collor, in 1990 when the nation awoke to find much of its savings frozen.”

Despite these concerns, the article notes that Brazilian banks are demonstrating “an uncharacteristic outbreak of long-termism” by offering 30-year mortgages — “something that would have been unthinkable a short time ago.” The article concludes that negative events abroad could have an impact on Brazil’s recovery, but that the recovery will nevertheless come. Joining The Economist in predicting a rosy future for Brazil is BusinessWeek [“Brazil’s Coming Rebound,” by Geri Smith, 17 August 2009 print issue]. Smith begins her report by relating the story of a Brazilian man who is taking advantage of the availability of 30-year mortgages.

“For years, Edilson dos Reis Rodrigues dreamed of owning a home. But the public school teacher and his wife together earn just $710 a month, so he could never set aside a down payment. Now, he’s finally getting the chance. Thanks to a new government program called My House, My Life, Rodrigues will soon own a two-bedroom apartment near São Paulo. He’ll get a cash grant covering a quarter of the $52,000 price and a discounted 30-year mortgage, so he’ll pay just $220 a month—half what a conventional loan would have cost. ‘This is an incredible opportunity,’ the 31-year-old says, smiling broadly as he hands in paperwork to seal the deal.”

Smith also sees Brazil’s economy growing “by as much as 4.5% in 2010, helping lift millions of Brazilians out of poverty.”

“Veteran Brazil watchers say the country’s resilience is due to a combination of abundant natural resources, an embrace of globalization after decades of looking inward, and resilient businesspeople and policymakers who have learned to survive difficult times. So as soon as the economy started to contract last year, Brasilia trimmed income taxes and cut levies on key consumer goods, helping manufacturers boost sales and avoid layoffs. ‘Brazil has proved it can govern itself and keep the economy on track in very difficult times,’ says Riordan Roett, a professor at Johns Hopkins University’s School of Advanced International Studies. Although the economy fell into recession in the first quarter, consumer confidence and spending quickly rebounded owing to the stimulus and sound domestic finances. A comfortable $212 billion cushion of foreign reserves and a decade of budget surpluses have allowed the central bank to slash interest rates to a record low of 8.75% from 13.75% in seven months while pouring liquidity into the market to keep credit flowing. And private banks are well regulated and have healthy balance sheets. ‘Brazil’s fundamentals are very strong—we don’t have any of the problems that created the bubble in the U.S.,’ says central bank President Henrique Meirelles. Just as important, though, is Brazil’s huge domestic market. While outsiders focus on the country’s shipments of iron ore, steel, and soy to China, exports are just 12% of Brazil’s $1.5 trillion economy. It’s the 190 million people and the fast-growing middle class—now more than half the population—that drive growth. In the past seven years a government program called Bolsa Família has helped nudge 24 million Brazilians above the poverty line. And 8 million jobs have been created since 2003, while the minimum wage has increased 45%.”

Brazil could well be the example for other developing nations to use in the years to come. Brazilian leaders, both government and business, understand that a growing and sustainable economy requires a robust middle class. This is a point I make repeatedly in my discussions of Development-in-a-Box™. Although things are going to get better, Smith goes on to point out that not everything is rosy in Brazil. Look around, Smith observes, and it’s still easy to find signs that Brazil is a developing country.

“Its highways, railroads, ports, and electric grid are outdated and congested. The government collects 36% of gross domestic product in taxes, similar to Europe, but delivers Third World services. Political corruption and a nightmarish bureaucracy can hobble growth. And government spending is starting to rise in the runup to next year’s elections.”

It’s not what remains the same that enthuses Smith, however, it what is changing in Brazil. She notes that Brazilians have always joked that theirs is a country of the future — meaning that better times have always been promised but have remained elusively over the horizon. Smith believes, however, that Brazil’s better future is now within sight. One of the reasons for this renewed optimism is that Brazil is about to become an oil powerhouse.

“Last year the company discovered vast deepwater reserves that it is developing with a five-year, $174 billion investment program. The goal is to double Brazil’s production, to 3.5 million barrels a day, by 2012, making the country a top oil exporter. ‘Our deepwater discoveries didn’t just fall from the sky. They’re the product of a very long-term development program going back 30 years,’ says Petrobras CEO José Sergio Gabrielli de Azevedo. ‘It’s the Brazilian equivalent of sending a man to the moon.’ The country’s improving prospects create huge opportunities for entrepreneurs small and large.”

Long-time readers of this blog know that I believe that countries that foster an environment in which entrepreneurs can flourish are countries that are likely to succeed in achieving sustainable development. If Smith is correct about Brazil’s improving prospects and rising opportunities for entrepreneurs, she will also be correct that in predicting that Brazil sits on the cusp of recovery. The recession has given Brazilian leaders plenty of negative examples of how to botch economic growth and they seem to be taking those lessons to heart. One area that does concern analysts, however, is Brazil’s oil sector. Although it provides hope for a better future, analysts are worried that it won’t be developed optimally because the government is taking a more nationalistic approach to development [“Brazil Seeks More Control of Oil Beneath Its Seas,” by Alexei Barrionuevo, New York Times, 18 August 2009]. Barrionuevo reports:

“The Brazilian government is seeking to step back from more than a decade of close cooperation with foreign oil companies and more directly control the extraction itself. The move is part of a nationalistic drive to increase the country’s benefits from its natural resources and cement its position as a global power. But it could significantly slow the development of the oil fields at a time when the world is looking for new sources, energy and risk analysts said. … The oil lies beneath about 20,000 feet of water, shifting sand, and a thick layer of salt. This so-called pre-salt region, stretching hundreds of miles, is the biggest oil reserve being developed in the world today, especially given the lack of headway in gaining access to Iraq’s extensive deposits, said Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, an energy research consultancy. It is also expected to be among the most complicated sets of projects in the history of the oil industry. ‘The timing and scale of the development of the pre-salt will be one of the most significant factors for the global oil balance in the next decade, and even more so after 2020,’ when Brazil is expected to ramp up production even further, Mr. Yergin said. ‘If it doesn’t happen it will be a big setback for Brazil in terms of revenue, and a significant loss for the world in terms of new oil supplies.’ or Brazil, the stakes are high. Many here see the oil as a magic bullet for tackling the country’s biggest social challenges.”

Brazilian politicians have gone to great lengths to assure oil companies that it is not on a path similar to that followed by Venezuela. They continue to welcome foreign assistance, but want to make sure that the windfall they expect from oil revenues helps create the conditions necessary to make Brazil a fully functioning member of the world’s elite nations. Barrionuevo observes that nationalism is rising in Brazil, but believes it reflects a pride in the country rather than a hatred of foreigners. I share the optimism about Brazil’s future reflected in the articles cited above. Brazil will undoubtedly to take its place on the world stage (in something other than soccer) and it seems well-suited for the role.