Brazil: The Samba Economy

Rio de Janeiro, Brazil, 14 August 2009. Aah. Brasil. Endless sandy beaches. Beautiful boys juggle footballs, the girls sun their perfect bodies, ready for carnival. A place of pleasure, certainly, but not a place where money is invested wisely, surely? [br]

Rio de Janeiro, Brazil, 14 August 2009. Aah. Brasil. Endless sandy beaches. Beautiful boys juggle footballs, the girls sun their perfect bodies, ready for carnival. A place of pleasure, certainly, but not a place where money is invested wisely, surely? [br]

In the world’s imagination, Brazil is the country of Carnival, Football and City of God. Sex and drugs and rock’n’roll don’t seem to fit the bill with fuddy-duddy economists. And yet, samba and economics make strangely suitable bed fellows, reminiscent of Paula Abdul and a certain Cartoon Cat.

Back in the good old days when Brazil was swinging, the economy was a basket case. In 1980, inflation was above 80%. In 1990, it reached a high of 2,974.73 per cent. That is a difficult number to comprehend, but it means that every month prices more than doubled.

It took a few years of pain and resolve, but by 1996, inflation was under 7 per cent. Still, Brazilians joked that Brazil was the country of the future – and always would. It would never quite get there. [br]

The experience of almost continuous crisis led to 2 things. ‘Brazilians became almost impervious to their economic surroundings, and their leaders become convinced that they must be free of the IMF and all other foreign diktat’, says Fernando Imanuel de Silvo d’Feliciatad Incantanto De Marco Pavilion, head of the Rio de Janeiro think tank Free Brasilia.

The savvy moves of its leaders, particularly former musician and current President Luiz Inacio ‘Lula’ da Silva, have led to the epithet Samba Economics, first coined by EconomyWatch.com Chief Economist Hosni Afleck in 2003.

Rather than default on its loans, as Argentina did in 2001, Brazil buckled down, re-signed its agreements, and paid down its loans in 2005, two years ahead of schedule.

From spending decades as the world’s largest emerging market debtor, in January 2008 Brazil became a net creditor. Both S&P and Fitch have raised its ratings to investment grade.

In addition to its inflation-busting and budget-controlling chops, Brazil also has strong banks. Most banks retain capital reserves of 11 per cent to 16 per cent, well above their peers. They are also required to keep 30 per cent of their deposits with the Central Bank, which then has the ability to pump liquidity into the system literally overnight, as it did in 2008 to keep banks well funded.

Although the economy has slowed down, thanks to the global Financial Crisis, Brazil is in better shape then most. True, GDP contracted 0.8 per cent in Q1 2009, analysts believe it has grown 2.2 per cent in Q2 2009. Nelson Barbosa, Economic Policies Minister for Brazil, has said ‘we expect growth of 4-5 per cent for the full year of 2009, despite a Q1 contraction.’

Inflation is under control, interest rates are dropping, consumer spending is up and exports continue to show growth. Good news – and not surprisingly Brazil’s benchmark Bovespa index is up over 50 per cent for the year, compared to gains of 5.8 per cent for the DJIA and 11 per cent for the S&P 500. It may be time to mothball our Brazil pre-conceptions and bring out a whole new Samba Economics costume to get comfortable in.

Juan Abdel Nasser, EconomyWatch.com