Brazil and The World Crisis: Ten reasons for optimism
“Veja”, leading Brazilian weekly newsmagazine, has recently performed an in-depth research supported by some of the best economists in the country on the subject.
It is undoubted that Brazil has suffered the effects of the world crisis but it is equally true there is consensus that it will be one of the least affected countries.
The conclusions of the research have been summarised under the cover story of a recent issue of “Veja”, named “Ten Reasons for Optimism”. The reasons are listed herebelow and classified according to their st
rength.1. US$ 200 billion reserves untouched after 6 months of crisis
After the worst period of international financial crisis, the Brazilian hard currency reserves have kept at actually the same previous level. A small portion of the financial resources has been used by the Central Bank has been used up to now, while other countries have massively spent their reserves in an attempt to defend their currencies. Just to quote an example, Russia’s reserves have shrunk something like US$ 100 billion.
One of the main reasons for stability is the safety net kept by the Central Bank, as stated by José Júlio Senna, former Central Bank Director and currently a senior partner in a financial consulting firm.
Because of its reserves, the public sector has already put an end to the old drama of foreign debt, which has been historically the major national weakness in moments of financial unrest.
It suffices to remind that at the 1998 and 2002 crises, the Government had to make emergency loans granted by the International Monetary Fund (IMF) in order to restore market confidence and close its foreign accounts.
Alexandre Schwartsman, the Santander Bank Chief Economist and likewise a former Central Bank Director, adds: “Reserves create another essential benefit. Being a creditor, instead of a debtor, the country has had its foreign indebtedness reduced. The very opposite used to happen in the past. One more strong evidence that this time the country will not go bankrupt.”
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It should be further mentioned that the Central Bank currently controls domestic reserves in the region of R$ 186 billion arising from the mandatory deposit required from banks to be made with the Central Bank (prior to the crisis, it amounted to R$ 270 billion).
In the event of a new credit restriction phase, as was the case from September through November 2008, it will still be possible to use a portion of such reserve for strengthening the financial system.
2. Competent and regulated banks with low exposure to risk and with significant provisions against default
In the event of a new credit restriction phase, as was the case from September through November 2008, it will still be possible to use a portion of such reserve for strengthening the financial system.
2. Competent and regulated banks with low exposure to risk and with significant provisions against default
The U. S. Government, as widely publicised, has very recently announced that it will become Citigroup’s biggest shareholder to preventing it from collapsing altogether, something unthinkable until recently.It is generally recognised that this it is highly improbable that a crisis like the one which currently plagues the U. S. financial system will ever be seen in Brazil. American banks become highly indebted in an irresponsible way upon lending fortunes to those who could not possibly repay their loans.
The Brazilian financial institutions, or at lest the largest, much to the contrary, have always owned, and still do, healthy assets and are known for being cautious. Such prudent approach, which is fundamental in protecting the country against the crisis, arise from historic financial dramas Brazil has suffered and from the Central Bank praiseworthy actions, mainly at the time of set-up and enforcement of the so-called Restructuring and Strenghtening National Financial Programme (PROER) which ran from 1995 through 2000. PROER is currently regarded, although highly criticised at the time, as one of the most successful plans in Brazilian economic history.
Former Central Bank Chairman Gustavo Loyola says that PROER was the most visible face of a process which changed Brazilian banking regulations. Ever since, the Central Bank has kept an effective attitude in inspecting and overseeing the financial system.
On the other hand, the larges banks have complied with caution as one of the fundamental criteria of financial management. An example is provided by the fact that the five larges national banks have raised bad debt additional provisions for the amount of approximately R$ 7 billion during the last quarter of 2008.
Unlike Brazil, in the United States the level of loans granted by banks kept growing even when default clearly showed that thing could (as they actually) run out of control.
Sound banks, such as the Brazilian, in a world where the financial system seems to be melting down, account for the whole difference. Another difference, not less vital, is that derivatives (precisely the financial instruments which have run entirely out of control and thus destroyed century-old investment banks) are settled in Brazil at a specific Stock Exchange, namely, the
Sound banks, such as the Brazilian, in a world where the financial system seems to be melting down, account for the whole difference. Another difference, not less vital, is that derivatives (precisely the financial instruments which have run entirely out of control and thus destroyed century-old investment banks) are settled in Brazil at a specific Stock Exchange, namely, the
Goods and Fitires Stock Exchange (“BMF”). This ensures adequate control and adjustments as and required.
3. No credit or real estate bubbles and, at the same time, potential of effective growth of both sectors
The financial status of families and of most companies remains under control. Brazil has not experienced the same process of formation of credit bubbles which seriously affected the economy of countries as Iceland, Ireland, Hungary and England, and particularly the United States. Brazil has not even come close to facing a real estate boom.
Cláudio Haddad, Chairman of IBMEC Business School, states: “The country turned out to be lucky for being a latecomer to the strong international credit expansion. The only bubble we actually had to face was concentrated in the S. Paulo Stock Exchange and it has been deflated by now.
3. No credit or real estate bubbles and, at the same time, potential of effective growth of both sectors
The financial status of families and of most companies remains under control. Brazil has not experienced the same process of formation of credit bubbles which seriously affected the economy of countries as Iceland, Ireland, Hungary and England, and particularly the United States. Brazil has not even come close to facing a real estate boom.
Cláudio Haddad, Chairman of IBMEC Business School, states: “The country turned out to be lucky for being a latecomer to the strong international credit expansion. The only bubble we actually had to face was concentrated in the S. Paulo Stock Exchange and it has been deflated by now.
The total amount of credit currently available in the Brazilian economy is equal to 40% of GNP, a volume much lower than that of develop countries and even in a significant number of emerging countries. In the United States, the country which gave birth to the greatest financial upheaval ever, the credit v. GNP ratio is six times as much as of Brazil.
José Júlio Senna, here again, mentions that the current “advantage” of the Brazilian economy also arises from structural shortcomings. He refers to additional low leverage of companies and families, heavy taxation of financial transactions and artificial credit rerouting of credit regarded by the Government to enjoy a priority status.
In economist Edmar Bacha’s views, there are vices which at this point of time have become virtues. Under a normal situation, he states that they will have to be dealt with by reforms, meaning the concentrated banking system with a substantial participation of slow-moving public banks, high interest rates and (according to his personal opinion) what he calls extravagant mandatory deposits required from banks to be transferred to the Central Bank.
4. Strong domestic market currently growing in purchase power and proportionate to the population
As a result of decline in poverty, the so-called “C” class (meaning family income between R$ 1.105,00 and R$ 4.807,00 per month) stands for the greater portion of Brazilian economy and has remain almost untouched by the crisis. It has become the dominating class in the country formed by emerging consumers.
4. Strong domestic market currently growing in purchase power and proportionate to the population
As a result of decline in poverty, the so-called “C” class (meaning family income between R$ 1.105,00 and R$ 4.807,00 per month) stands for the greater portion of Brazilian economy and has remain almost untouched by the crisis. It has become the dominating class in the country formed by emerging consumers.
The potential expansion rate is enormous. As India and China, Brazil is one of the few countries with a significant portion of its population not yet integrated into the consumer market, which is a key factor for attracting investment.
According to a survey conducted by Marcelo Neri, of the Getúlio Vargas Foundation, the decline of the misery process has proceeded during 2008, even after the crisis worsened, which means that the consumer market keeps expanding. Inflation under control and Government assistance policies have contributed for this.
André Torretá, senior partner in a firm which has focused on lower class marketing, remarks that, if the housing programme for low income citizens takes off, then class “C” will earn even more.
5. Greenest energy pattern in the world, independent from imported oil
One half of fuel used by the Brazilian economy originates from renewable sources, such as hydraulic energy and sucar cane ethanol.
André Torretá, senior partner in a firm which has focused on lower class marketing, remarks that, if the housing programme for low income citizens takes off, then class “C” will earn even more.
5. Greenest energy pattern in the world, independent from imported oil
One half of fuel used by the Brazilian economy originates from renewable sources, such as hydraulic energy and sucar cane ethanol.
Brazil still has an enormous hydraulic potential to be explored in the Northern Region. Such renewable sources do not pollute the environment, are cheaper and compatible with a modern sustainable economy.
Carlos Langoni, former Central Bank Chairman and Director of the Getúlio Vargas Foundation World Economy Centre, stresses the fact that Brazil is one of the few countries in the world to combine hydraulic resources, control of renewable energy technology and, last, but not least, now has the benefit of oil megareserves recently discovered which only depend on an update of the regulatory legislation and a stronger private sector participation. The discovery of such megareserves 6,000 m. deep will both consolidate oil self-sufficiency and will turn Brazil into an oil exporter.
6. Stable political scenario under which democracy has been enshrined as a national asset
It is well known that a country predictability provides the crucial grounds for long-lasting development, beginning with political predictability. Both pillars make the whole difference between Brazil and problem countries such as Venezuela, which has torn contracts and has caused foreign investment to flee from the country.
It is well known that a country predictability provides the crucial grounds for long-lasting development, beginning with political predictability. Both pillars make the whole difference between Brazil and problem countries such as Venezuela, which has torn contracts and has caused foreign investment to flee from the country.
Carlos Langoni once again says that there is a perception, both at domestic level and from foreign investors’ viewpoint, that Brazilian democracy is fully consolidated. This will be the great Lula Government legacy. Irrespective of who will be elected President, there will be no dramatic changes in policy, but rather a gradual process of institutional modernization and implementation of basic reforms, such as, amoung others, the tax, Social Security and labour reforms.
The changes have actually pre-dated Lula and have been upheld during his term of government. Brazil is today the result of a process which has been ongoing for the last 15 years.
7. Stable economy and imperfect, though predictable, regulatory framework
It may look unimportant to accept a 10 centavos coin coined in 1994, the year the Real Plan was launched. But this shows the maturity of a country that has had four different currencies between 1986 and 1994.
The changes have actually pre-dated Lula and have been upheld during his term of government. Brazil is today the result of a process which has been ongoing for the last 15 years.
7. Stable economy and imperfect, though predictable, regulatory framework
It may look unimportant to accept a 10 centavos coin coined in 1994, the year the Real Plan was launched. But this shows the maturity of a country that has had four different currencies between 1986 and 1994.
Nowadays, Brazil keeps operating in compliance with the rules of a framework which, although imperfect, is predictable. The country has just completed 10 years under the same regulations of floating exchange rates and inflation targets, which have supported the primary surplus targets and have ensured the predictability of economic management, an essential requirement for attracting productive investment, a key factor which established the growth potential of a country.
The evolution Brazil has had from the mid-80’s and the courageous resolution made by Lula to keep the previous Government economic policy have placed the country on a privileged position at this point of time. The longer the country does not suffer any significant setbacks in management of the economy, the lesser the risk of bearing any harm, states former Minister of Finance Mailson da Nóbrega.
8. Largest food exporter in the world ensuring foreign market sales on a significant scale under any scenario
In times of crisis, it is likely that families will reduce the purchase of durable goods more dependent on credit, while they will increase, or at least keep it at the same prior level, consumption of basic products, such as foodstuff. There is a simple explanation for this: people will just not refrain from eating. Therefore, even though quotations of Brazilian exports have generally dropped, the sale of foodstuff such as soya beans and meat is expected to earn at least US$ 50 billion in hard currency during 2009.
The evolution Brazil has had from the mid-80’s and the courageous resolution made by Lula to keep the previous Government economic policy have placed the country on a privileged position at this point of time. The longer the country does not suffer any significant setbacks in management of the economy, the lesser the risk of bearing any harm, states former Minister of Finance Mailson da Nóbrega.
8. Largest food exporter in the world ensuring foreign market sales on a significant scale under any scenario
In times of crisis, it is likely that families will reduce the purchase of durable goods more dependent on credit, while they will increase, or at least keep it at the same prior level, consumption of basic products, such as foodstuff. There is a simple explanation for this: people will just not refrain from eating. Therefore, even though quotations of Brazilian exports have generally dropped, the sale of foodstuff such as soya beans and meat is expected to earn at least US$ 50 billion in hard currency during 2009.
Brazil has the greatest agriculture in the world, and this without occupying one inch of the Rain Forest. There are 355 million tillable hectares, out of which only 20% have been used for agriculture. These areas are equal to 10 times the territory of Germany or 12% of all land which can be occupied by agriculture in the whole world.
A recent study prepared by the Ministry of Agriculture makes a bet on the agribusiness growth potential during the next years. The Government’s enthusiasm is justified by the need for replacing stocks in a world which will require a growing consumption of agricultural products.
9. Diversified foreign market with buyers in the whole world, while exports of goods and services with added value are growing
Brazilian exporters sell their products to customers in the whole world, which protects them and the country against the most acute effects of a crisis as the current one. Just for the sake of comparison, about 80% of Mexican exports are addressed to the U. S. market, 20% of Mexican GNP being estimated to depend on the humours of the big Northern neighbour now admittedly facing a recession.
9. Diversified foreign market with buyers in the whole world, while exports of goods and services with added value are growing
Brazilian exporters sell their products to customers in the whole world, which protects them and the country against the most acute effects of a crisis as the current one. Just for the sake of comparison, about 80% of Mexican exports are addressed to the U. S. market, 20% of Mexican GNP being estimated to depend on the humours of the big Northern neighbour now admittedly facing a recession.
Brazil instead addresses only 17% of its exports to the American market and this rate equals only 2% of its GNP. Customers of Brazilian exports are relatively well distributed worldwide.
A necessary remark should be made: diversification reduces the adverse foreign effect, but not safeguard the country against the effects of a meltdown in foreign trade. However, economist Eliana Cardoso, who teaches at the Getúlio Vargas Foundation, puts emphasis on the fact that Brazil has a diversified list both of products and customers, which provides the country with at least some degree of flexibility, enough to offset the losses arising from a general decrease in world demand.
10. Stagnation on a worldwide scale v. forecasted growth of the Brazilian GNP in 2009
Brazilian economy has grown at a speed greater than 5% along the two last years, and has accordingly surpassed the world average, something which did not happen for more than two decades. In 2009, notwithstanding the crisis, the country will still grow faster than the rest of the world for at least one more year.
A necessary remark should be made: diversification reduces the adverse foreign effect, but not safeguard the country against the effects of a meltdown in foreign trade. However, economist Eliana Cardoso, who teaches at the Getúlio Vargas Foundation, puts emphasis on the fact that Brazil has a diversified list both of products and customers, which provides the country with at least some degree of flexibility, enough to offset the losses arising from a general decrease in world demand.
10. Stagnation on a worldwide scale v. forecasted growth of the Brazilian GNP in 2009
Brazilian economy has grown at a speed greater than 5% along the two last years, and has accordingly surpassed the world average, something which did not happen for more than two decades. In 2009, notwithstanding the crisis, the country will still grow faster than the rest of the world for at least one more year.
This is no small feat, having in mind that during the 1990 decade the country was the first to feel the impact of the crisis. It is now estimated Brazil will grown around 1.5% under the most conservative forecasts, as compared to the predictable average of 0.5%, here again on a worldwide scale.
Pamela Cox, World Bank for Latin America and the Caribbean Vice Chairman, has recently stated that Brazil and Chile will be the countries which will less feel the effects of the crisis in the region.
Pamela Cox, World Bank for Latin America and the Caribbean Vice Chairman, has recently stated that Brazil and Chile will be the countries which will less feel the effects of the crisis in the region.
Under this token, a recent report of the OCDE (which congregates the world’s most industrialised countries) has indicated that most of the economies that most of the economies subject to its survey will have a strong setback, ever greater than the oil crisis three decades ago. However, Brazil is the only one that, at lest for the time being, has not deserved the qualification of experiencing “a strong brake” in its economy.
Brazil, it should be again stressed once again, is still on the blue for the third consecutive year, and its growth rate will exceed the world average, as follows:
Eurozone (2.0%)
United States (1.6%)
Russia (0.7%)
Rest of the world (0.5%)
Brazil 1.5%
India 5.1%
China 6.7%
Brazil, it should be again stressed once again, is still on the blue for the third consecutive year, and its growth rate will exceed the world average, as follows:
Eurozone (2.0%)
United States (1.6%)
Russia (0.7%)
Rest of the world (0.5%)
Brazil 1.5%
India 5.1%
China 6.7%
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