Eighteen months ago many analysts expected the Brazilian economy to be severely battered by the global economic downturn. Indeed, Brazil's President Luiz Inacio Lula da Silva was widely ridiculed when he said that he was expecting 'no tsunami' but 'a little wave' to lap against Brazil's beaches.
But President Lula, it seems, is having the last laugh. Although the Brazilian economy received a nasty jolt from the global slowdown in 2009, with GDP declining slightly (-0.22%) in 2009, it is expected to bounce back strongly this year. 'I expect the economy to grow by 5.8% or even a bit more in 2010', Planning Minister Paulo Bernardo told The Wall Street Journal on 29 December 2009. Many governments in the world would be very happy to be in Brazil's position.
Record Return on Stock Market
Moreover, investors in the stock market are already receiving record returns. The Sao Paulo stock market grew by a remarkable 82.7% in 2009. Because the Brazilian currency, the real, appreciated strongly during the year, foreigners did particularly well. According to the Folha de S. Paulo newspaper on31 December 2009, taken together, the stock market surge and the appreciation in the real meant that dollar investments on the Sao Paulo stock market in 2009 had a return of 142.7%, the highest rate of profit in the world. By comparison, stock investments in Russia gave a return of 113.2%, in India of 87.2% and in China of 79.2%.
Because economic prospects in Brazil are seen to be good, particularly in comparison with the gloomy outlook for Europe and the USA, foreign investment has been flooding in. According to figures from Brazil's Central Bank, by the middle of December 2009, almost US$46bn had entered the country, an all-time record for a single year.
Yet few expect the stock market to perform so strongly this year. The stock market has boomed because it has been recovering from a massive decline of 41.2% in 2008. At that time, many investors fled the country, believing (despite President Lula's reassurances) that the economy was heading for a nasty recession.
In many ways, it was a rerun of history. Six years earlier the stock market had experienced an even stronger surge - of 97.3%. This was because 2003 had been the first year of the Lula government and many investors had feared that the President, a trade unionist who had led the mobilisation against the military government in the late 1970s, would live up to his radical rhetoric and carry out radical left-wing reforms that would hurt investors. In any event, these fears, too, proved groundless and investors piled back into the stock market in the following year.
Clouds on the Horizon
Although 2009 was undoubtedly a good year both for the Brazilian economy and for President Lula himself, who has emerged as a powerful Third World leader on the world stage, serious problems remain. The big influx of foreign capital means that Brazil, whose exports have not managed to keep pace, is heading towards a balance of payments crisis. Brazil's Central Bank is predicting a current account deficit of US$40bn in 2010.
This would be the largest deficit since records began in 1947, an even largest deficit than the ones recorded in the run-up to the Latin American debt crisis in the late 1970s. The Bank does not foresee a crisis in the short term because foreign investment is expected to remain high. But some analysts are already recalling that historically Brazil's economic weak point has almost always been its vulnerability to balance of payments crises. This should not be forgotten.
Sue Branford - I have worked as a journalist, specialised in Latin America, development and the environment, for over 30 years. My first job, as a ...
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