Brazil, Latin America hit by Asia, Europe crisis

RIO DE JANEIRO—For more than a decade, Brazil has been one of the developing world's great hopes, outpacing the growth of Western Europe and the US many even predicted it would soon become an economic superpower. Now, as the world economy teeters, Brazil is looking less like a global golden child and more like a Latin American laggard.

Prices for exported commodities such as iron ore and soybeans are drooping due to concerns over Chinese growth. Economic turmoil in Europe is cutting into demand for manufactured goods such as aircraft. Meanwhile, Brazil's still-strong currency makes its exports less competitive. Investors are pulling billions of dollars out of Brazil and other developing countries.

Similar pressures are starting to hurt most of the so-called BRICS countries — including Russia, India, China and South Africa — whose fast growth has been turning them into this century's top players. Now Brazil is instead looking more like neighboring Argentina, which is frantically trying to protect its economy from runaway inflation and dollar flight.

For Brazilians, government measures to halt the slowdown are bringing momentary perks such as cheaper credit and lower taxes, but analysts generally believe the big boom is past. Projections by the International Monetary Fund indicate that every major Latin American economy, save Paraguay, is likely to outpace Brazil this year.

“The model that served so well in the last few years has started to unravel,” said Neil Shearing, chief emerging markets economist with Capital Economics LTD, a London-based consultancy. “The days when the economy could grow 5 to 6 per cent a year forever more ... that was a bit of a stretch, and might be behind us.”

Shearing said Brazil's economy is growing slower than its neighbors for a number of reasons, but that in general the country historically has been “more sensitive to global economic gyrations” due to structural factors such as a stronger dependence on money flowing in from foreign investors to finance spending, flows that quickly reverse in times of uncertainty.

Brazil's economy, Shearing added, also is more broadly linked to China's than other Latin American nations, so the slowdown in Chinese growth and that nation's demand for commodities hits Brazil harder than its neighbors. Analysts do believe the country will continue to grow, albeit at lower levels.

“This is a cyclical response,” said William R. Cline, senior fellow at the Peterson Institute for International Economics in Washington. “The general expectation is that growth will begin to revive and will be at reasonable levels for the next few years.” Brazilian President Dilma Rousseff is ramping up bullish rhetoric. The straight-talking technocrat recently stepped out of character to do a little cheerleading about Brazil's ability to weather the global crisis.

“I can assure you, Brazil is 100 per cent, 200 per cent, 300 per cent ready,” Rousseff said. In 2010, Brazil's economy expanded by 7.5 per cent, but it only managed 2.7 per cent growth in 2011, out of league with fellow BRICS nations, which managed to grow by 4.3 per cent to 9 per cent that year.

Brazil's success before the current crisis had inspired imitation by Latin American countries such as Peru and Mexico, which adopted a more conservative fiscal approach and amassed enough foreign reserves and flexibility to likely ride out the storm, Shearing said. Now, Brazil is even better prepared than it was in 2008, Rousseff said, with some US$370 billion in international reserves.

Oil reserves have helped some countries resist global headwinds, as crude prices remain high despite financial woes. But most of Brazil's vast, recently discovered oil reserves are still years from production. Countries that have built much of their economies around exporting commodities to China are vulnerable, and several of them have prepared themselves for the eventual commodities downturn.

Strong sales of metals and private investment helped Peru grow at China-like rates in past years, and foreign companies have pledged another US$15 billion in investment since President Ollanta Humala took office almost a year ago. In spite of lower commodity prices, Humala said this week that Peru's relatively low debt levels and high international reserves would help the country ride out the crisis. Economists project growth of 5.5 per cent this year, down from 6.9 per cent last year.

So far, Brazil has responded to the slowdown with measures such as reducing its benchmark interest rate and taking measures to weaken the Brazilian real, which helps exporters. Finance Minister Guido Mantega has also announced measures to boost domestic consumption: targeted tax cuts on Brazil-made products, interest rate reductions and an extension in the time allowed to pay back loans. The measures will make local cars about 10 per cent cheaper, and reduce taxes on financial transactions. These measures have had some immediate impact.

Their enthusiasm didn't last long, said Euro Barra general manager Antonio Carlos Maciel Junior. Within two weeks, movement in the dealership was back to normal. That's because it's still hard to qualify for a car loan in Brazil, he said. Buyers have to put down half a new car's total cost to benefit from the lower rates. Others still pay 10 per cent to 12 per cent interest a year, he said.

Even as the world warily watches Brazil and the rest of Latin America, Rousseff says her country has indeed turned a corner and is not about to go back to the bad old days of hyperinflation and economic meltdowns.        (AP)