Brazil's low exposure may dilute turmoil

Financial Times
By Jonathan Wheatley in São Paulo
Published: October 15 2008 03:00 Last updated: October 15 2008 03:00
At Fábio Marangoni's printing works in São Paulo, pages of glossy magazines emerge almost silently from modern printing presses imported from Germany.
Asked how much he borrowed to install the presses, Mr Marangoni replies with an air of self-satisfaction.
"Nothing," he says. "We used our own capital." His family-owned business will be 50 years old next year. "During that time we've seen the currency go wildly up and down. Our raw materials and machinery are priced in dollars, so we've always taken care to use our own money. It means we have grown more slowly than otherwise. But it's worth it. Look what's happening now."
Mr Marangoni's caution has not shielded him entirely from the chaos in the world's financial system. Credit conditions have tightened and consumers and businesses are putting spending plans on hold.
Nevertheless, Brazil should emerge relatively unscathed. Economists who previously expected growth of between 4.5 and 5.5 per cent next year now expect between 2.5 and 3.5 per cent - by no means bad compared with the global outlook.
Not all companies have been as conservative as Mr Marangoni's. Grupo Votorantim, an industrial conglomerate, said on Friday it had paid R$2.2bn ($958m) to liquidate positions in currency derivatives. It was the third large company to announce big losses on currency bets and is unlikely to be the last.
Local media are talking of "the Brazilian subprime". Some observers expect to see bankruptcies as more exporters are forced to admit that they exposed themselves beyond sensible limits to currency contracts that worked in their favour during the real's long rally from R$3.95 to the US dollar in October 2002 to R$1.56 in May this year but which turned against them during its subsequent fall.
On the whole, however, Brazilian companies are much less indebted than their foreign competitors. The total amount of credit in Brazil was equal to 38 per cent of gross domestic product in August, much less than in many developed countries. where credit reaches multiples of GDP.
Economists and business leaders have long been calling on the government to enact spending reforms to release more money to finance investment and consumption through credit. There has indeed been a consumer-led acceleration of growth in the past few years, as lower interest rates, rising employment and enduring economic stability have encouraged borrowing.
But interest rates are still very high by international standards. Anefac, an association of finance executives, says rates offered to consumers by retail outlets averaged 105 per cent in August, while the average credit card rate was 230 per cent. Companies were paying an average of 60 per cent for working capital. At the international level, too, Brazil is relatively unexposed.
The government has paid down much of its foreign debt and is now a net creditor to the rest of the world. Less than 10 per cent of bank credit is raised overseas. Imports are equal to just 9 per cent of GDP and exports, about 12 per cent.
"Usually it is bad but in the current circumstances very fortunate that Brazil is relatively isolated from the rest of the world," says Nathan Blance of Tendências, a consultancy in São Paulo. "If this crisis had happened 10 years from now we would have been much more leveraged."
Brazil's good fortune is not all down to luck. The banking system is solid following a state-sponsored restructuring in the 1990s, with conservative rules on lending. Risky activities such as short selling are rigorously controlled - although the "Brazilian subprime" suggests tighter rules might have been needed for over-the-counter derivatives trades.
But the central bank has generally been alert to danger and quick to respond. It has repeatedly relaxed Brazil's stringent reserve requirements, allowing banks to lend more of their deposits and provide relief to companies short of credit.
"I'm not saying we won't get hit or even only marginally hit," says Jean-Marc Etlin of Itaú BBA, a São Paulo investment bank.
"But when the dust settles Brazil is going to come out of this better than a lot of other places."