Investors may be forgiven for
thinking that Guido Mantega is an incurable optimist. True, the
Brazilian finance minister has been presiding over a period of
lasting economic recovery, and the Latin American powerhouse is
now in a much better position to weather external shocks than
it was a few years ago, even though such threats come from the
worlds largest economy.
In the midst of the
turmoil, Moodys gave us an upgrade, Mantega tells
Emerging Markets. We are pretty close to
investment grade. I believe that we will be able to get it next
On the domestic front,
traditional bottlenecks on the supply side will not create
inflationary pressures, he says. President Lulas
long-trusted economic aide has also rejected the need to curb
public spending, even though some critics (such as the former
president of the central bank Arminio Fraga) have argued that
Brazil would have to foot the bill sooner or later.
Mantega admits that the
magnitude of the current financial crisis has been a cause for
concern. The recent turmoil has already moved more assets
than during the 1998 Long-Term Capital Management crisis in the
US. Its a test to check the strength of various
countries, and Brazil is coming out really well, he says.
There is no involvement of Brazilian banks in the
sub-prime mortgage market. There is no demand for liquidity,
unlike in the US and in the UK. Banks are solid, and there is
no capital flight.
Mantega calls the Fed decision
to cut its prime rate by half a percentage point on September
18 a wise move, which will soften the impact of the
international crisis. Moral hazard is not part of his
vocabulary, but he has argued that emerging market countries,
such as Brazil, which have been the focus of instability during
past crises, may now contribute to a return to some sort of
Brazil and other countries
with current account surpluses can indeed help the most
industrialized countries that have deficits. The US is already
getting some help from China. Its a kind of compliment
from emerging markets to industrialized economies. Such
economies undoubtedly have to adjust more than emerging
markets, he says.
Meanwhile, president Luiz Inacio
Lula da Silva hammered a tough message during his European trip
last month: The United States needs to resolve the
problem of its own crisis. It is a problem of economic policy
in the US, of the greed of a few investment funds that wanted
to buy risky assets as if they were in a casino, he
We will not agree to bear
on our back the losses of a game in which we are not
playing. A few days ahead of his meeting with George W
Bush in late September, he publicly teased the US president:
Bush, sort this crisis out, because we will not let it
cross the Atlantic ... We will not stand as victims
Brazilian central bank chief
Henrique Meirelles often reminisces that during previous
crises, when other countries were catching colds, Brazil was
typically on the verge of pneumonia. Not any longer, he says.
The greater resilience of the economy has largely been the
result of a combination of cautious monetary policy and
proactive debt management, while the central bank has been
capitalizing on abundant liquidity to boost foreign reserves.
Those have shot up from around $15 billion in 2002 to more than
$160 billion last September. Such a level of reserves, coupled
with a robust annual trade surplus (around $40 billion), has
removed any possibility of insolvency on the foreign debt
Furthermore, the nominal deficit
was down to 2.1% of GDP in July, and the domestic public
debt-to-GDP ratio has been reduced to 44%. The debt profile has
also continued to improve: dollar indexed securities have been
all but removed (they accounted for only 1% last August); the
proportion of the benchmark Selic rate-linked debt fell from
52% last year to 35% in August (and may fall to around 20%,
according to Bradesco, a large local bank); while the share of
pre-fixed securities increased from 28% to 36%.
The IMF too has embraced this somewhat sanguine take
on Brazil. I dont see Brazil being particularly
affected by the crisis, says Anoop Singh, the Funds
western hemisphere director. Its possibly the only
country in Latin America that is revising its growth forecasts
Brazils GDP grew 4.9% in
the first half of the year compared to the same period last
year, while the quarter-on-quarter growth reached 5.4% last
June. The central bank has forecast a 4.7% GDP growth in 2007,
although many market analysts think it may well hit 5%.
Mantega insists that Brazil has
enjoyed 22 consecutive quarters of uninterrupted growth.
It is a sustainable cycle; it is not a spasm
anymore, he says. According to his worst scenario, the
international turmoil could cost up to 30 basis points from
next years GDP (the official forecast stands at 5%).
This year the performance has
been pushed by consumer credit, which in turn has fuelled
industrial activity, and investment, which is the key to
boosting productivity and keeping inflation under control.
Construction has been booming; the mortgage industry is finally
getting off the ground, but, at a net worth of less than 2% of
GDP, it can hardly be called a bubble. Annual sales of
computers rose from 3 million units a couple of years ago to 10
million PCs and notebooks, which are being sold at much lower
prices than before, thanks to the strengthening of the local
currency, the real, on the foreign exchange market (imported
components are cheaper than in the past). Foreign investor
confidence is also strong, and the level of FDI has reached an
all-time high of $35 billion in the 12-month period leading to
the end of August (even without privatization).
Meanwhile, corporate financing
has undergone a quiet revolution thanks to the deepening of the
domestic capital markets. Within the past 18 months, private
companies have been able to raise more funds from the stock
exchange and the bond market than from the national development
bank (BNDES), the state-owned institution that used to be the
sole domestic source of long-term financing at a decent cost
(Brazils market rates and spread have usually been much
higher than in most other countries). Significantly, Brazil has
accounted for 10% of the worlds IPOs during the first
eight months of the year, according to Thomson Financial, with
46 transactions. Current market jitters may slow the IPO fever,
but merger and acquisition activity are expected to remain
brisk for some time.
As some investors were feeling
the impact of a credit squeeze, the Brazilian steel-maker
Gerdau managed to complete its $4.2 billion acquisition of
Chaparral in the US in mid-September via its local subsidiary
Gerdau Ameristeel. The deal agreement had been unveiled on July
10, but the sub-prime crisis delayed the final arrangements, as
financial institutions demanded greater guarantees. A
consortium of international banks (ABN Amro, JP Morgan Chase,
and HSBC) finally agreed to finance two loans (a $1.15 billion
six-month bridge loan facility and a $2.75 billion five- and
six-year term loan facility) on September 12.
Yet, not all is rosy. The credit crunch may still
bite, warns Luis Oganes, head of Latin America research at JP
Morgan Chase. A fall in global economic activity may eventually
take its toll on commodity prices, and reduce Brazilian
Furthermore, many investors have
remained critical of the lack of appetite of the Brazilian
government towards structural reforms. The infrastructure
programme, which was unveiled at the beginning of the year, has
so far fallen short of expectations, and no federal
private-public partnerships have materialized since Lula came
to power almost five years ago.
The investment rate has
increased to around 18% of GDP, but is still small, says
Arminio Fraga, now a private equity investor. Lingering
bottlenecks on the supply side may lead to inflationary
pressures, while the government has increased public spending
by some 10% every year. Many critics consider that such
dynamics represent a serious risk.
Yet, Mantega is unrepentant:
A 10% increase in public spending every year is not a big
deal, because if you have 4% inflation on the one side and 5%
growth on the other, you get 9%. Economic growth also boosts
tax collection, as well as initiatives against tax evasion and
the increase in the number of formal jobs. As a result, our
primary budget surplus has been higher than the target (3.8% of
GDP this year). Public funds, he says, are needed to
finance the government social programmes to reduce inequality,
and they are not designed to feed a bloated administration (as
some critics argue).
Mantega is taking some comfort
from the fact that the Brazilian government is able to
implement what he called a social-developmentalist model (as
opposed to neoliberal policies) in the midst of the
global uncertainty. When there was an excess of liquidity
in the market, there was no differentiation among countries.
Now Brazil is on the side of safer countries. When the crisis
ends, we may actually be in a better shape than when it
started. We are better positioned, and maybe investment grade
will come sooner rather than later, he says.
For an exclusive interview with Brazilian president
Lula da Silva, please see "
I did it my way".