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ECONOMY-BRAZIL: Relative Calm Despite Plunge in Shares

Mario Osava

RIO DE JANEIRO, Sep 18 2008 (IPS) - In spite of the plunging value of shares on the Sao Paulo stock exchange this week due to the financial crisis in the United States, the Brazilian economy is relatively calm, although worse effects are expected in the years to come.

Gross domestic product (GDP) is expected to grow by 5.3 percent this year, and 3.5 percent in 2009, while 2010 could be a critical year, according to Sérgio Vale, an economist with the consultancy firm MB Associados.

Presidential elections are due in 2010, and the political uncertainty will aggravate the effects of the current U.S. financial crisis, at a time when Brazil’s fiscal deficit and balance of payments will be at their worst, the expert told IPS.

Brazil’s external current accounts will have a deficit of approximately 50 billion dollars in 2010, and the fiscal deficit will be swollen by the expansion of expenditure adopted by the government of President Luiz Inácio Lula da Silva, while government revenues will tend to be reduced by the slowdown in the economy, creating “the worst of all possible scenarios,” Vale predicted.

Brazil had a current account surplus until mid-2007, but overvaluation of the real, the national currency, turned this around, by stimulating imports, which grew more rapidly than exports.

In 2007 the country still had a trade surplus of over 40 billion dollars, 13.8 percent lower than in 2006.

But Brazil accumulated a current account deficit of 19.5 billion dollars from January to July 2008, according to Central Bank statistics, which is greater than the initial forecasts for the entire year.

The real has depreciated by 14 percent this month in response to the worsening crisis in the United States, to 1.86 against the dollar at the close of trading on Wednesday – the same exchange rate as one year ago.

This devaluation may stimulate exports, thus limiting the current account deficit, but Vale said he believes that after the volatility of the present moment, the real will appreciate again in coming months. Furthermore, the trade surplus depends on commodities exports, whose prices are falling.

Marked devaluation of the real would also exacerbate the inflation rate, which is already above an annual six percent and is forcing the Central Bank to take added measures that slow down economic growth.

However, President Lula and Finance Minister Guido Mantega have reiterated their confidence in the “solidity” of the Brazilian economy, protected by foreign currency reserves of over 200 billion dollars. The leftwing president has said that the impact of the international crisis will be “almost imperceptible.”

An economy that relies more on the domestic market than on exports is another reason for confidence. In addition, the country is still riding the euphoria from six percent GDP growth in the first half of this year, and the discovery of huge offshore oil reserves in Brazil’s territorial waters in the Atlantic ocean.

There is consensus among economists that the Brazilian banking system is not in danger, after the adjustments made during the 1990s economic crisis. On the financial side, there is no immediate risk of contagion, although credit will become scarcer and more expensive, as Minister Mantega himself acknowledged.

The flight of foreign capital, however, has dealt a blow to the Sao Paulo stock exchange, where the BOVESPA index fell by 6.74 percent on Wednesday, following a drop of 7.59 percent on Monday.

International economic difficulties are expected to have slower repercussions in Brazil, where they will limit exports and curb prices of agricultural and mineral commodities, while the country’s fiscal problems deepen.

Some economists criticise the Lula administration for what they regard as a large increase in public sector current expenditure, with the hiring of thousands of new public employees, the award of wage increases well above the rate of inflation, and financing for social programmes, without any changes having been made to alleviate the fiscal deficit.

“During the last few years of a favourable environment in the global economy, the opportunity was not taken to make necessary reforms,” such as in the pension system, said Vale.

In the agricultural sector, “the economic slowdown is a cause for concern because consumption will fall in many countries,” negatively affecting the volume and prices of exports, but Brazil’s “situation is more comfortable than that of some other countries” because of its strong internal demand, said Flavio Turra, economic manager of the Organisation of Cooperatives of the State of Paraná (OCEPAR).

Soybeans and meat, Brazil’s principal export products, may suffer the worst impact of the crisis derived from the turmoil in the United States, because of the sheer magnitude of their foreign sales, but there will also be very negative repercussions on maize, which is “harder to export,” he said.

Brazil managed to produce a surplus of maize for export when international prices soared. But now they have fallen, causing frustration among the small and medium farmers who were lured by the export market.

But the fall in prices and the potentially lower growth of exports will be at least partially compensated for by the devaluation of the real against the dollar, Turra said.

The farming sector, which “exports some 60 billion dollars and imports about 10 billion dollars” worth of goods a year, would benefit from depreciation of the real, although this is unlikely to happen, said the cooperative organisation expert.