Battered Europe looks to Brazil, which has its own problems

McClatchy NewspapersDecember 2, 2011 

SAO PAULO — The visit by International Monetary Fund head Christine Lagarde to Brazil this week was the latest sign that while Europe's financial crisis deepens, Brazil remains a rare bright spot in the battered global economy.

Lagarde, who was examining possible Brazilian participation in a financial bailout package for Europe, lauded the country's economic management and said that "as the balance of economic power shifts, emerging economies are a key part of the solution to the global problems."

Brazilian officials say that any aid would go through the IMF and in coordination with other emerging economic powers. Carlos Marcio Cozendey, a senior official at the Brazilian Finance Ministry, told McClatchy in a recent interview that Brazil would first like to see Europe provide more leadership because it "is still a rich continent."

The prospect of Brazilian aid to Europe — which officials say would come only through the IMF and in coordination with the other emerging economic powers — offers the latest indication that the financial world as Americans have known it has been turned on its head. Developed nations are producing financial crisis and political paralysis while emerging markets are widely seen as sources of uplift and stability.

However, Brazil isn't immune from the crisis, as an influx of capital from investors looking for safe harbor has driven up prices and cooled industrial production. Experts say that Brazil has too much on its plate to be able to contribute to rescuing European economies right now, and some say that offering a bailout would be counterproductive.

"This Western idea that you can just bamboozle emerging markets into giving money away is a massive conceit," said Jerome Booth, the head of research at London-based Ashmore Investment Management.

"This is a time when global markets should be moving currencies from those of developed countries to those of emerging markets."

Certainly, one can't blame the West for looking to Brazil.

Over the past month, the credit rating agency Standard & Poor's upgraded Brazil's sovereign debt rating for long-term foreign currency to BBB, and the country issued $1 billion of new debt to international investors at low interest rates.

Elsewhere, there are signs of newfound confidence and an appetite for risk-taking. Two weekends ago, more than 200 young Brazilians attended Startup Weekend at a Sao Paulo university, where they developed business plans for new Internet companies.

"Brazil might be oversold here and there, but its overall strength is pretty positive," said Dave McClure, an American investor who attended the event and has funded at least three Brazilian companies. He runs 500 Startups, a business incubator in Mountain View, Calif.

"It easily has 20 years of growth ahead of it."

Over the past two decades, Brazil has posted robust economic growth, stabilized inflation, reduced its debt and accumulated hefty reserves. Its middle class has expanded, poverty has dropped and Brazilian expatriates are returning home.

In an indicator particularly important to this soccer-mad nation, Brazilian soccer star Neymar recently rejected offers from top teams in Europe and decided to remain at home to continue playing with the Brazilian club Santos.

Brazilian tourists to the United States — who've grown by double digits for the past five years — ranked fifth last year in terms of money spent, ahead of visitors from France, Germany and China.

U.S. businesses are cashing in on Brazilians' growing consumption. Paccar, a truck manufacturer based in Bellevue, Wash., is building a $200 million factory in the southern city of Ponta Grossa. Contours Express, an operator of women's fitness chains based in Nicholasville, Ky., has locations in 18 Brazilian states.

General Electric expects to invest $550 million in Brazil through 2012, while Boeing signed an agreement in October with Embraer and the Sao Paulo State Research Foundation to develop bio-fuels for airplanes.

Brazil's leftist leaders might be tempted to rejoice in the reversal of fortune, after enduring decades of lectures from wealthy nations about responsible fiscal management. However, they're deeply concerned about how the U.S. and European economic troubles will affect Brazil's still-incomplete transformation.

One major concern here is the flip side of too much growth: an excessive influx of capital that's driving up Brazil's currency, increasing the costs of basic goods. This is compounded when advanced economies are foundering, because investors can obtain capital at all-time low interest rates in the U.S. and pump it into Brazil, where rates remain high.

Amid the skyrocketing costs, industrial production has dipped; it's often cheaper to import products, particularly from China, than to make them here. This has affected everyone from aluminum and steel producers here to Brazilian bikini makers, whose exports have fallen precipitously.

A bad sign for Brazil, which depends heavily on exporting commodities such as iron, soybeans and crude oil, was when the mining giant Vale scaled down its investment plans as iron ore's price dropped.

Brazil is also likely to face greater competition from China in foreign markets, particularly in Latin America and Africa, two regions where Brazil is seeking growth. Brazil's trade minister, Fernando Pimentel, visited Africa recently for the second time in as many months.

Tatiana Prazeres, Brazil's foreign trade secretary, told McClatchy in an interview: "We are watching very carefully the EU and U.S. economies, not just for their markets but their impact on China. And not just the impact on China's growth rate but the role it could play in third party markets."

Brazil's economy also faces numerous systemic challenges: high taxes, often impenetrable bureaucracy and poor competitiveness.

Rubens Ricupero, a retired Brazilian diplomat and economist, faults the government as not doing enough to tackle these problems.

"The government is very reluctant to do what it should be doing. Brazilian industry is not benefiting from the boom in consumption," he said.

(Sreeharsha is a McClatchy special correspondent.)

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McClatchy Newspapers 2011

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