Dessa vez tudo será diferente

http://www.economist.com/world/la/displaystory.cfm?story_id=10534864&CFID=3582704&CFTOKEN=254d18f9476a59e-90254E16-B27C-BB00-0143F7BD4A93CCA4

Brazil's economy

This time it will all be different

From The Economist print edition

Why Brazil is better placed than it used to be to cope with a world slowdown

BRAZILIANS know about economic and financial crises. The squalls afflicting
America and threatening Europe look like a gentle breeze when compared with
the frequent and violent blow-ups that litter Brazil's economic history.
Much of the problem has been Brazil's vulnerability to shocks imported from
around the rest of the globe. So what might happen if the economies in the
rich world stumble again this year?

Recent precedents do not look good. Since the introduction of a new
currency, the real, in 1994, which serves as the year zero for economic
policy, growth has picked up to a reasonable rate three times. Each time,
points out Eduardo Giannetti da Fonseca, an economist, people have
speculated that Brazil was at last on the road to a bright new future. And
each time something has come along to puncture this optimism: in 1998 it was
the Asian financial crisis, in 2001 Argentina's bond default and in 2005 a
rapid rise in inflation.


Now bullishness is abundant once again. The economy grew at an estimated
annualised rate of 6% in the final quarter of last year (which is probably
too fast). The Bovespa, Brazil's stockmarket, jumped by 60% in value during
2007. And yet even though recent history counsels caution, there are reasons
to believe that the economy should cope better with whatever the world
throws at it.

?Brazil has never been so well placed to face a downturn,? says Mailson da
Nobrega, finance minister from 1988 to 1990, a period that coincided with an
inflation crisis. He now works for Tendencias, a consultancy. Arminio Fraga,
who was in charge of the central bank during the Argentine collapse and the
bond market's swoon at the prospect of Luiz Inácio Lula da Silva's election
as president, cautiously agrees. ?A lot has been driven by favourable
winds,? says Mr Fraga, who now runs Gavea, an investment fund. ?If they
stop then we are not in a position to blow up, but it won't be irrelevant.?

What changed? First, domestic demand is strong. Brazil's headline real
interest rate is just below 7% which, as Alexandre Bassoli of HSBC bank
points out, would tip most countries into recession, but is low by Brazilian
standards. The result has been a flowering of credit, which helped domestic
demand grow by an annualised rate of almost 7% in the third quarter. It
would take a sharp rise in rates to kill this off, and that looks unlikely.

Second, Brazil is fairly well integrated into world markets. It is not
overly dependent on America, which accounts for less than a fifth of
exports. The remaining four-fifths are reasonably well spread between
Europe, Asia and the rest of Latin America. Admittedly, most of what Brazil
produces for foreign consumption is in the form of primary goods (from
orange juice to footballers), which means that export growth correlates
strongly with commodity prices. But exports are not made up of any single
commodity (unlike oil-rich Venezuela's, for example). ?Even if China buys
less Brazilian iron ore, the hope is that Chinese people will keep eating
Brazilian protein,? says Jose Mendonca de Barros of MB Associados, a
consultancy.

Third, Brazil is less vulnerable to financial shocks than it once was. A
large part of this is due to a combination of a central bank that acts
independently and transparently, publishing minutes of meetings promptly on
its website; and a floating exchange rate, adopted in 1999. Before then,
whenever the current account deteriorated, the central bank was forced to
hike rates, killing growth.


Brazil has retired its dollar-denominated debt, which has been a source of
trouble in earlier financial crises. In the past, when the currency
depreciated this debt ballooned, causing further problems. Now that
government debt is denominated in reais, a similar move in the exchange rate
reduces government liabilities. This was tested in August last year, when
the real lost 11% of its value in a couple of weeks, and the government debt
effectively shrank. Foreign direct investment is strong, and Brazil now
holds more dollars than it owes, a happy development that has led to
misguided suggestions of setting up a sovereign wealth fund.

Even so, Brazil is clearly far from immune to what happens in the rest of
the world. The economy also seems to be moving into a less benign phase.
After years of big surpluses, the current account looks set to run a small
deficit this year. Inflation, which had been falling, picked up toward the
end of last year to give an annual inflation rate in December of 4.5%. That
is right on the central bank's target, and forecasters expect inflation to
increase only slightly this year. But markets have been wrong on this
before.

Moreover, the economy still suffers from problems that make growth above 5%
look like a stretch. Government debt is still too high, Brazil invests too
little, and the government takes too much for itself, spending it on things
that do little to raise the economy's potential. ?The easy part of growth is
over,? says Mr da Fonseca. But if Brazil is able to sustain steady growth
without being blown off-course by events elsewhere, the country will look
very different in ten years' time.


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