NEWS/BLOG

Brazil - The New China?

Emerging markets aren’t immune to the difficulties spawned by the U.S. credit crunch. It now appears that a bear market began in October of 2007, and no one is sure when it will end. But while emerging economies such as China and India plunged in recent weeks, Brazil, which had lagged behind the other BRIC countries since the term was coined in 2003, has recently experienced only mild dips.

Overall, Brazilian’s stock exchange, the Bovespa, is up 535% since 2003, almost nine times the gains made by the S & P 500 over the same period. This is quite a surprise for a country which received a $40 billion bailout from the International Monetary Fund as recently as 2002. The same year as the bailout, Luiz Inácio Lula da Silva, a former labor leader with strong socialist leanings, took over as president.

Brazil has now paid back its debt to the IMF, and Brazil’s state owned businesses have benefited from partial privatization. In fact, the combination of state and investor ownership has proven to be good for business.

Petrobras, the state-owned oil company was partly privatized with shares offered on international financial markets. Brazil is now virtually self-sufficient as far as energy is concerned. This is partly because of offshore oil finds. But also Brazil is the world’s largest exporter of ethanol, which is based on sugar rather than corn, making it cheaper to produce than U.S. ethanol. Autos made in Brazil run on any mixture of gasoline and ethanol, and Petrobras stations throughout the country sell both.

Most of Brazil’s government debt is denominated in local currency. This reduces the country’s vulnerability to exchange-rate fluctuations. The International Monetary Fund estimates that Brazil is on track to grow 4.8% this year, following 5.4% growth in 2007, when the country had a $40 billion trade surplus. Brazil’s long-term foreign currency sovereign debt was recently upgraded by Standard & Poors to investment-grade.

For more on Brazil and Brazilian companies, see our blog entry for December 2, 2007, Brazil: Big and Getting Bigger.