Resilience is not a word that has been used to describe much of Brazil’s post-war economic experience – but it’s creeping into current vocabulary. In past economic cycles, Brazilian volatility was legendary, and its effects on the economy, severe. Today’s experience seems to be a lot different.
Consider economic growth. Brazil averaged annual increases of 4% from 2003 to 2007, and growth surpassed 5% in both 2007 and 2008. True, a decline of 0.9% is forecast for this year, a sizable deceleration by any measure. But the decline is still far from the three-year funk experienced in the early 1980’s, and the 5%, three-year drubbing the economy sustained in the 1990-92 period. This time, Brazil is forecast to get back to growth in a year, with a 2.2% increase expected in 2010.
Why the change? Economic management is one reason. Monetary policy is far more disciplined than in the past, keeping inflation in check. And while the central bank has eased credit conditions by lowering reserve requirements and cutting interest rates to record lows, inflation is expected to be right on target this year at 4.5%. This has also helped to maintain a more stable currency.
Public spending is also helping to smooth out economic performance. Prudent fiscal management in the good times reduced public debt to around 40% of GDP from 60% in 2002, a considerable achievement. This has created enough fiscal room to permit substantial, broadly-based stimulus measures ranging from business tax reductions to aggressive spending measures for the housing and auto sectors. Public spending is expected to add 0.8% to overall growth both this year and next.
Brazil’s banks are another key factor. Return on assets remains high. Capital adequacy is in good shape. And significantly, Brazilian banks have virtually no exposure to US sub-prime mortgage instruments, thus avoiding the early-cycle battering that Western banks took. Other aspects of the financial sector have been volatile in recent months, as seen in stock market, bond spread and currency fluctuations. However, in each case there has been a considerable rebound to date.
External performance has also been more stable. Booming imports and profit repatriation swung Brazil’s current account into deficit last year. Collapsing exports threatened to worsen the picture this year, but imports also beat a hasty retreat, keeping the balance of trade intact. Although the deficit remains, inward FDI flows will cover the shortfall this year, and international reserves are a substantial buffer, amounting to a full year of import cover. As trade accounts for just 25% of GDP, the impact of the drop in export and import activity is more limited than in most emerging markets.
These features are bearing fruit. Two key ratings agencies consider Brazil to be investment grade. Business confidence is strong. Brazil is poised to rebound along with the world economy – good news for Canada’s exporters, who saw sales jump 24% yearly in the good years, and Canadian investors, who increased their Brazilian footprint by 12.5% annually at the same time. And with Brazil’s potential to be a new world oil power, prospects for Canadian involvement in the economy are even greater.
The bottom line? Structural improvements have increased Brazil’s economic resilience, and together with promising new opportunities, they make Brazil a hot prospect for future trade and investment.