Economy & Trade, Headlines, Latin America & the Caribbean, North America

ECONOMY-BRAZIL: US Crisis Expected to Have Moderate Impact

Mario Osava

RIO DE JANEIRO, Jan 31 2008 (IPS) - Brazil will not be heavily affected by the U.S. mortgage crisis which may lead to a recession in that country, according to economists and the government of President Luiz Inácio Lula da Silva.

The national economy will not feel the impact, because it is now less dependent on exports to the United States. The strength of the Brazilian economy is more reliant on the expansion of the domestic market and sales to emerging markets like China and India, which are still growing strongly, Lula said when he met East Timor’s President José Ramos-Horta in Brasilia on Wednesday.

The U.S. share of Brazilian exports declined from 25.7 percent of the total in 2002 to 15.8 percent in 2007, while over the same period exports to the European Union increased to 25.2 percent of the total, and sales also grew to China and the rest of the Southern Common Market (Mercosur), made up of Argentina, Brazil, Paraguay and Uruguay.

It is not yet clear whether the U.S. will fall into a recession, but if it does, it will be mild and short, since the present slowdown of the economy is concentrated exclusively in the housing market, said Marcelo Nonnenberg, coordinator of the Analysis and Forecasts Group of the Institute for Applied Economic Research (IPEA), a Planning Ministry agency.

In the unlikely event of a U.S. recession, it might affect Brazil in two ways: a drop in exports to the U.S., and a fall in capital inflow, Nonnenberg told IPS.

The impact of reduced exports to the U.S. would be limited, in any case, because Brazil has diversified its markets in recent years, and due to the predicted brevity of the U.S. economic downturn, he said.

Of greater concern is the effect of the credit crisis in the U.S. which might reduce capital flow to developing countries. “This already seems to be happening this month,” Nonnenberg said.

Capital flight from Brazil could force devaluation of the real, the national currency, and cause inflation, feared for its well-known consequences, such as interest rate increases, economic slowdown, job cuts and declining internal consumption, as well as other secondary effects, the economist said.

Contagion by this route is more likely, but again would have moderate effects if the reduction of capital inflow is limited in intensity and duration, without impacting long-term expectations and without provoking capital flight, as has happened in the past, he said.

In any case, Brazil’s foreign reserves are at an all-time high, valued at nearly 190 billion dollars. The Central Bank could use these to contain devaluation in a short-term capital flight situation, and this is one of the factors that is keeping the market calm.

Other economic indicators, such as a healthy trade surplus of over 40 billion dollars in 2007, inflation that is under control in spite of the upward pressure of rising food prices, and improved tax revenue compared to previous years, are also contributing to optimism in the face of external turmoil, even among economists who are critical of government policies.

Brazil’s currency is overvalued, which many people take as a sign of economic strength. The exchange rate is presently 1.78 reals to the dollar, whereas in mid-2002, fears that Lula and his leftwing Workers’ Party (PT) would win the elections pushed the exchange rate to nearly four reals to the dollar. The overvalued real means that foreign companies operating in Brazil have greatly increased their profits and dividends, which were worth 21.2 billion dollars in 2007. Imports have also grown by 32 percent, compared to export growth of 16.6 percent.

Even so, the country achieved a high trade surplus, due to earnings from agricultural and mineral commodities, and foreign direct investment reached a record 34.6 billion dollars, contributing to the large build-up of foreign reserves and increasing the pressure to revalue the real.

Gross domestic product (GDP) is estimated to have grown by close to 5.3 percent in 2007, in spite of the high interest rate, set by the Central Bank in September at 11.25 percent, one of the highest in the world.

A good part of the country’s economic growth can be attributed to the expansion of credit, which in 2007 alone grew from 30.7 to 34.7 percent of GDP, driving domestic consumption. This performance is unlikely to be repeated in 2008, when most economists expect economic growth to slow down moderately.

Taking everything into consideration, the atmosphere in Brazil is unruffled, in spite of the possibility of a recession in the United States. But it is a different matter for Latin American countries that are highly dependent on the U.S. market, such as Mexico, Central American countries and some of the Andean nations.