Been there, done that
Been there, done that
Steeled by past economic woes, Brazilians are both upbeat and prepared for global calamity
Paul Vieira, Financial Post
Published: Friday, November 14, 2008
Like nearly every country, Brazil is sustaining its share of collateral damage from the credit crunch. Lending terms are less favourable; the currency has been sideswiped; and public and private projects, involving infrastructure refurbishments or new factories, have either been delayed or, worse, halted.
Even as this transpires, it is tough to sense panic among the men and women who work and play in the country’s financial hub. If anything, there’s a spring in the step of most Paulistas, as the residents of Sao Paulo are called.
Restaurants near the financial district, in particular the quintessential churascarias, or steak-houses, are bustling at lunchtime as blue-and grey-suited businessmen discuss cash flows while waiters with skewers of picanha walk around offering patrons a slice of the premium cut of meat, cooked to a perfect medium-rare.
The Iguatemi shopping centre, among the oldest and most famous in the city, is teeming with shoppers on this late Tuesday morning. An employee at high-end jewellery maker H. Stern shrugs off talk of a credit crisis and reduced business. Gucci, the Italian fashion and leather-goods label, plans to open another Sao Paulo outlet in coming weeks on Iguatemi’s second level, next to the Burberry and Louis Vuitton shops.
Luciano Araujo, a Sao Paulobased financier, says Brazilians — including himself — find it odd that the economic troubles this time are the United States’ doing and not self-inflicted. That, he says, represents a turning point on the global economic stage. “I think all the conditions are there for Brazil to take off,” says Mr. Araujo, a partner at Hampton Solfise, a financing firm that helps raise cash for corporate clients through structured products and securitizations.
“Our consumer market is still growing, and we have a long way to go before we see problems with leverage among households and corporations. What’s spoiling this beautiful picture are the liquidity problems we are facing.”
Eduardo Klurfan, chairman of the Brazil-Canada Chamber of Commerce, says he’s not at all surprised by the quiet confidence of the Brazilian business community.
“Brazil has the resiliency to withstand this crisis that we have seen,” says Mr. Klurfan, who is also Bank of Nova Scotia’s vice-president of global transaction banking. “Brazil’s businesses have been tested through the previous years, with hyperinflation, to the point that they are more prepared than businesses in many other countries for changes.”
Brazil is among a group of large developing economies ready to use their economic might to bring about changes to the global financial system as a result of the credit crisis. Brazil’s president, Luiz Inacio Lula da Silva, called for an overhaul of the system last weekend when the finance and central bank officials from the Group of 20 nations met in Sao Paulo, and he is expected to repeat his demand at this weekend’s meeting of G20 world leaders in Washington.
Despite the upbeat mood, stresses on financial markets have economists looking for weaker growth in Brazil in 2009, as feeble global demand drives down the price of Brazilian export. Economists at Merrill Lynch & Co. suggest Brazil would grow 5% this year but tail off to 3.1% next year.
To date, the Brazilian government has made up to US$102-billion available to get the country’s financial system through this crunch, through measures such as easing banks’ capital requirements, extending the lending capacity of its state-owned financiers and suspending, for now, certain corporate taxes.
The government has also paved the way for consolidation in the banking sector so strong players can pick up struggling lenders, and has given authorization to state-owned chartered banks to buy equity stakes in private-sector banks. The biggest deal so far was announced last week when Banco Itau and smaller rival Unibanco Holdings agreed to create a US$265-billion financial services company.
Perhaps the credit crunch has had its most significant impact on Brazil’s currency, the real. Capital has flowed out of Brazil, either to meet fund redemptions, cover investors’ short positions or in search of other havens, namely the U. S. dollar. All three, plus falling commodity prices, have led to a nearly 30% drop in the Brazilian currency over the past three months.
The rapid depreciation badly burned some big-name Brazilian export-oriented companies that locked into foreign-exchange hedges in the belief that currency would climb further. They now sit with billions of losses on their balance sheets at just the wrong time. “Everyone is panicking with this flight to safety via the U. S. dollar. It is, frankly, a flight to insanity,” says Andre Perfeito, an economist with Sao Paulo-based brokerage house Gradual Corretora.
Brazil’s central bank has sold U. S. dollars on the spot foreign-exchange market and held currency swap auctions to defend its currency. Zeina Latif, chief Brazilian economist for ING Bank NV, adds that the real’s plunge also keeps Brazil’s central banker, Henrique Meirelles, from lowering the bench-mark interest rate of 13.75% for fear of devaluing the currency more.
Interest rates remain high because of the country’s sensitivity to inflation: Brazilians have had to cope with triple-digit inflation rates. Plus, inflation could hit the growing middle class — the key driver of Brazil’s growth — hardest as it tries to preserve its newfound wealth. Mr. Meirelles has signalled he has no plans to veer off the central bank’s current inflation target of 4.5%, midway point between a 2.5%-to-6.5% band the bank targets. As of Sept. 30, year-over-year inflation stood at 6.3%.
Ms. Latif says the fallout of the credit crisis could have the “favourable” effect of decreasing inflation, which would give the central bank room to cut rates, perhaps starting next year. Then businesses and households may see some relief on lending terms.
Until recently, consumers could get a loan to cover the full value of a car, with the condition it be repaid over six years. Now, lenders will provide no more than 80% of a car’s value on a maximum three-year term. As for corporate financings, big-name firms can still tap capital markets but must make due with short-term corporate paper, as opposed to long-term debentures, on which spreads have widened.
“What is happening right now in Brazil is not that people are afraid of lending money. It is just that people have no reference point as to what to charge,” Mr. Araujo says.
Some blame, however, is being assigned to Brazil’s banks. When the government loosened banks’ capital requirements, freeing up US$43-billion in the process, some banks used that money to purchase high-yielding government-backed bonds as opposed to pushing it into the marketplace through loans. The government stepped in and said it would stop paying interest on the banks’ reserve requirements — in essence, forcing them to lend.
Mr. Perfeito, for one, is not too worried about the impact the global crisis is having, for the moment, on Brazil. Over lunch at a churascaria preferred by Sao Paulo’s financial crowd, he explains investors will return with their cash because growth in Brazil will outpace the developed world as more people join the middle class and more cash is needed to refurbish ageing, or non-existent, infrastructure.
“Pension fund managers need somewhere to [send] money where you can get a good yield. That won’t be in the developed countries. Why? Interest rates are very low, for one. Another? The developed world has built all the factories, roads, schools and railways. In Brazil, we haven’t come too close to doing that. Even though we are a country of football [soccer], we don’t have good stadiums yet.”
Mr. Araujo has a similar take, and suggests Washington may be forced eventually to “swallow some medicine” from the International Monetary Fund — something Brazil and other developing economies have had to do. “The United States must become an export-oriented economy because it needs a positive balance of payments. The reason it has one now is because everyone still invests in the United States — and that’s to no avail because all it will do is make credit available to people who already owe a lot.
“The U. S. will have to find new buyers for their production — which must be abroad, in places like China and Brazil,” the financier says. “We will see the U. S. dollar devaluating strongly against the yen and real because otherwise the Americans won’t be able to export to Brazil or China. They have to export to who has the money.”
pvieira@nationalpost.com
Autor: André Perfeito - Categoria(s): Sem categoria Tags: canada, crise, economia, entrevista, G-20