Confident Brazil not immune to credit crisis fallout

Tue Sep 23, 2008 3:23pm EDT
By Stuart Grudgings and Ana Nicolaci da Costa - Analysis
RIO DE JANEIRO/BRASILIA (Reuters) - "What crisis?" was Brazil President Luiz Inacio Lula da Silva's dismissive response to questions last week about the country's vulnerability to the global financial meltdown.
It succinctly expressed the new-found economic confidence of a country scarred by previous crises.
With more than $200 billion in foreign reserves and a commodity-rich economy that has thrust millions into the middle class in recent years, Brazil feels far better prepared to weather this storm than previous ones in 1999 and 2002.
Lula, a leftist whose own ascent to the presidency caused panic among foreign investors in 2002, felt relaxed enough to poke fun at the big U.S. banks that have hit the rocks.
"It's sad to see these know-alls going broke and filing for bankruptcy," he told reporters in Brasilia last week.
But analysts do see serious risks from the crisis that could at least put a brake on Latin America's largest economy, whose recent boom has been driven by surging consumer credit backed by high prices for the country's commodity exports.
With commodity prices now sliding and U.S. dollar inflows drying up, two important props for the economy have been weakened.
The central bank raised its 2008 current account deficit forecast to $28.8 billion from $21 billion on Tuesday, and saw the deficit widening to $33.1 billion next year, reversing a $1.7 billion surplus in 2007.
Imports have been growing faster than exports, putting pressure on the trade surplus. The latest central bank survey shows analysts expect the trade balance will ease to $13 billion in 2009 from an expected $23.7 billion this year.
"Depending on the severity of the crisis, global demand for Brazilian products could be affected," said Rubens Ricupero, a former finance minister, noting that the United States represented just 15 percent of Brazil's exports last year.
"Everything suggests that this crisis is already spreading to Europe, Japan and other countries."
Jose Augusto de Castro, vice-president of the Brazilian Foreign Trade Association, said exports could fall both in terms of quantity and price in 2009.
NO PANIC
U.S. bank Morgan Stanley sees the real weakening to below 2.0 per dollar next year, from around 1.8 now, with GDP growth falling to 3.0 percent from its expected pace of 4.3 percent this year. The economy grew a hefty 6.1 percent in the second quarter from a year earlier.
"It's not a meltdown scenario at all. We're not going to see a repeat of 2002, but we do think that Brazil is more sensitive to global conditions than most observers realize," said Marcelo Carvalho, an economist at Morgan Stanley.
Alexandre Schwartsman, chief Brazil economist at Banco Santander, said falling commodity prices would put more pressure on the balance of payments and push the central bank to dampen domestic demand. The global credit crisis could also prompt Brazilian banks to tighten their lending through higher borrowing rates, he said.
"Whichever way you look at it, borrowing has become more expensive," said Schwartsman, a former central bank official.
The president of state-run oil firm Petrobras, Jose Sergio Gabrielli, voiced concern last week that tight global credit could make it more difficult to raise the funds needed to tap huge new oil finds off Brazil's coast.
Brazil's relative stability is a sharp contrast to 1999, when it was forced to devalue its currency in response to a collapse in international confidence. That vulnerability was shown again in 2002, when fears that Lula would introduce socialist policies sparked frenzied selling of Brazil assets.
Brazil's high-flying stock market and currency have been battered in recent weeks as investors yanked money from emerging markets.
The Sao Paulo Stock Exchange .BVSP has fallen 32 percent from its high in June and the real is about 15 percent weaker that its peak early in 2008 against the dollar.
But this time there is no panic that the crisis could uncover deeper weaknesses in Latin America's largest economy, which this year won upgrades to coveted investment rating.
Brazil also became a net creditor this year for the first time, meaning it amassed more reserves than all of its foreign debt.
"It's a completely different story this time," said Zeina Latif, chief Brazil economist at ING in Sao Paulo.
"Now we have a floating exchange regime, we have reserves, lower debt, fiscal policy has improved a lot, and the central bank has de-facto autonomy."
Latif said while the crisis could hit Brazil's exports, it could equally have a positive impact by cooling a credit boom that has been threatening to get out of control as Brazilians buy cars and take out mortgages at unprecedented rates.
Credit grew by more than 30 percent in July from a year earlier, a pace Latif said was unsustainable.