Financial Crisis and Brazil Essay
Financial Crisis and Brazil
The economic crisis that has swept the world since 2008 has wrought havoc in national economies all over the world. As a group, one of the more particularly hard-hit groups of nations has been the Latin American countries of Central and South America. One notable exception to this trend appeared to be the nation of Brazil. The gloomy projections appeared not to apply to Brazil. According to Mauricio Cardenas of the Brooking institute: This doom and gloom has not infected Brazil, however, where President Luiz Inacio Lula da Silva is showing unprecedented self-assurance.
Speaking in Madrid, Lula said somewhat rhetorically that “this idea that markets can do everything is over,” and more fundamentally “The times in which emerging countries depended on the IMF are over. ” This is not Hugo Chavez speaking, but the president of Latin America’s largest economy, who enjoys 80 percent popularity in his country. (Cardenas, 2008) Although Brazil weathered the early months of the financial crisis better than its Latin American neighbors, the longer the crisis has continued, the more the Brazilian economy has weakened.
One of the factors that prevented an immediate collapse of the Brazilian Economy in the wake of the 2008 Crisis was the relative lack of foreign banks in the country. (Cardenas, 2008) Unlike many Latin American nations that have a high percentage of foreign banks (i. e. Mexico: 80% foreign banks), Brazil has only 30% foreign banks. (Cardenas, 2008) In the short term, this allowed Brazil to assume that a contraction in foreign lending would not have as deep an impact on their economy than that of other nations.
Brazilian banks, in times of previous economic prosperity, had built reserves, rather than engaging in profligate loaning, leading to the hopes that these reserves were sufficient against the day that foreign banks severely restricted credit. (Cardenas, 2008) By September of 2008, this theory seemed to erode in the face of certain economic indicators. The Bovespa index, a market indicator similar to the Dow Jones industrial Average, lost half of its value from May to September of 2008.
(Cardenas, 2008) 10% of that drop occurred in the second half of September. More strikingly, the value of Brazil’s currency, the Real, fell 32% against other world currencies. (Cardenas, 2008) These factors show that Brazil may still be prone to suffer in the economic crisis. Other analysts, such as John Williamson of the Peterson Institution of international Economics, have been less sanguine about the prospects of Brazil’s economy. Wiliamson stated:
Moreover, the markets decided that while many of the emerging economies might no longer have any need for an inflow of loans, many (like Brazil) are still significant net debtors to the rest of the world and therefore still vulnerable to a sudden withdrawal of foreign credit. Compounding this is the fact that one may have a balanced overall position and still be vulnerable because debts are concentrated at short maturities. Hence one read, for example, of the Bovespa index falling by over 10 percent in a day (it has cumulatively halved in value since the peak in May).
Likewise, the real has fallen by a cumulative 32 percent in the past month. The markets clearly do not believe that Brazil has been made invulnerable… (Williamson, 2008) The world market contraction has had a significant effect on Brazil’s foreign trade. (Williamson, 2008) The export economy has relied upon raw materials for 50% of exports, and the prices of these materials have dropped dramatically in the face of world-wide declines in demand. (Williamson, 2008) The other half of Brazil’s exports, differentiated manufactured goods have also decreased in the face of reduced demand.
Ironically, the weakness of the real against foreign currencies has softened the negative effect of these factors. (Williamson, 2008) The soft real will inspire increased purchase of manufactured goods from Brazil. This will soften, but not eliminate, the negative effects of low demand. The decrease in foreign capital that these commodity price decreases have reflected, will rapidly eat through Brazil’s trade surplus, and put strain on lending institutions in Brazil. (Williamson, 2008) The future of Brazil’s economy has been reported with varying degrees of optimism.
The GDP of Brazil is projected to contract anywhere from 1. 5 to 20% in 2009 after growing 5% in 2008. (Williamson, 2008) An increase in the shift of agricultural exports to China has also contributed to the overall positive projections of the Brazilian economy. (Xinhua, 2009) The increase from March of 2008 (8. 5%) to March of 2009 (12. 5%) amounts of agricultural exports to China reflect this phenomenon. (Xinhua, 2009) The president of Brazil claims that the crisis has passed, and that Brazil has weathered the worst part of the economic crisis of 2008.
(Xinhua, 2009) The longevity of the world-wide recession will determine if this is in fact a true prediction. (Xinhua, 2009) Brazil weathered the economic crisis of 2008 comparatively well, but suffered great financial repercussions late in the year. The economy seems to be in a stage of recovery, but its continued well being will rely on the recovery of other nations that control lending power and demand for Brazil’s exports. Work Cited Cardenas, M. (2008) “Global Financial Crisis: Is Brazil a Bystander? ” Retrieved June 4th, 2009 from Brookings Institution website:
http://www. brookings. edu/opinions/2008/1015_financial_crisis_cardenas. aspx Williamson, J. (2008) “The Impact of the Global Financial Crisis on Brazil” Retrieved June 4th, 2009 from Peterson Institution of international Economics website: http://www. iie. com/publications/papers/williamson1008. pdf Xinhua (2009) “Brazil’s agricultural exports to China up 52. 5 percent in March” Retrieved June 4th 2009 from China’s people’s Daily website: http://english. people. com. cn/90001/90778/90857/90861/6634356. html