Oct 2, 2011

Impact of the global crisis in Brazil

One of the main global results of the crisis of 2008 was the general increase in government spending, or to increase de domestic demand or to save specific sectors, such as banks. However, this rise in spending had its cost, and the result is very dire, in terms of economic growth. In Europe, the crisis of sovereign debt should trigger a risk in the banking system. In the U.S., households are highly indebted and there is no prospect of recovery of consumption in the short term. In China, there are growing rumors that the exceptional growth occurred in the last 30 years should not be sustainable in near future.

Brazil, will suffer the effects of global crisis, but differently from that of other crises. Studying the recent crises (2001 and 2008), we can try to understand how the country might be impacted.

A deepening of global crisis may affect Brazil as follows:

a) Increasing the risk aversion and devaluation of the exchange. Despite the high level of international reserves, history shows that assets movement has mainly driven the exchange rate, and it is likely that a capital outflow will lead to currency depreciation.

b) Restriction of credit for foreign trade. In the crisis of 2008, the Central Bank used its reserves to guarantee the credit and could do it again. It is unlikely that this type of restriction will bring some harm to the economy.

c) Falling in commodity prices. Today Brazil is an important exporter of commodities, and much of today's trade surplus is related to rise in terms of trade. The fall in commodities prices should affect the current account in the short term, but given that the currency should also depreciate, in the medium term is likely that balance of trade should be recovered.

d) Restriction on domestic bank credit. Banks should be more selective in granting credit, and delinquencies are expected to increase. The main risk of the tide in credit is its contribution to economic activity slowdown. The volume of credit in Brazil is low, in terms of GDP, and the large banks are capitalized. There is some risk to the smaller banks, but the government has tools, such as reducing the volume of reserve requirements, to ease the sector.

e) Drop in level of confidence. In 2008, the industry reduced production expecting a drop in consumption, and the result was an unsupplied market, and the country had to import to meet the domestic market. It is unlikely to occur again.

On the other side, there are some positive points that should contribute to ease the crisis effects. We can mention:

a) Relative sustainable fiscal deficit. The ratio of net debt to GDP has been falling continuously over the past 10 years. However, the cost of this debt is high due to high interest rate. On the other hand, it is worth considering that both revenues and expenditures have been growing well above inflation, and there is no guarantee that this move is sustainable in the medium and long term.

b) High international reserves, currently at USD 350 billion, enough for 1.6 years of imports.

c) Economic Growth: The country's GDP should grow 3 to 4% in 2011, with trend growth in coming years, which should reduce the risk in case of an international crisis more intense.

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