Development & Aid, Economy & Trade, Financial Crisis, Headlines, Latin America & the Caribbean

ECONOMY-BRAZIL: An Island in Stormy Waters

Mario Osava

RIO DE JANEIRO, Jan 5 2009 (IPS) - Brazil is not immune to the current global financial crisis, but there are many indications that it will remain largely safe from the recession shaking the world’s rich countries and that economic growth will stay at reasonable levels if the meltdown is neither deeper nor longer than expected.

The slowdown will be reflected in GDP growth, which is projected at 2.4 percent by conservative financial analysts or 3.2 percent by the Central Bank, which differs with Brazilian President Luiz Inácio Lula da Silva’s optimistic “goal, not forecast,” of four percent.

That is a sharp fall from the 2008 growth rate, estimated at 5.6 percent by the Central Bank. In the first three quarters of last year, growth stood at 6.4 percent, but figures from the last quarter showed that the effects of the crisis were felt by Latin America’s giant.

Production of motor vehicles, for example, fell 34.4 percent from October to November, and the November figure was 28.6 percent down from the same month in 2007.

High-value durable goods have been hit hardest by the crisis, because sales depend almost completely on credit, which suddenly dried up.

The government attempted to boost sales with a Dec. 11 decree that freed up credit and reduced taxes on purchases of smaller cars, which initially extended the effects of the crisis to the used car industry. President Lula has promised to announce new bailout measures on Jan. 20, which will also apply to other sectors like construction and agriculture.

In November, 40,800 formal sector jobs were lost in Brazil, according to the Labour Ministry – the first negative figure for the month of November in the six years since Lula took office. New jobs are usually generated in November as a result of the pre-end-of-the-year holiday rise in consumption.

Analysts predict that unemployment will continue to go up in 2009 if economic growth dips below three percent. That could bring down Lula’s extremely high popularity ratings, which stood at 80 percent in mid-December in spite of the crisis.

The question of making labour laws more flexible has once again been brought up as a result of pressure from business, which proposes greater flexibility for hiring and firing as a means of keeping the number of dismissals down. The trade unions’ rejection of such a proposal could be weakened if the prospect of mass layoffs looms.

The government, in which the president himself and many officials are former trade unionists, is in favour of negotiations.

The crisis has cast into relief a key aspect in which Brazil differs from other nations. While central banks around the world have slashed interest rates, almost to zero in the case of many industrialised countries, the Brazilian Central Bank has kept its benchmark rate at 13.75 percent, considered the highest in the world in real terms.

The fear is that the more than 30 percent devaluation of the local currency, the real, since August will be transferred to prices, driving up inflation, which is estimated at six percent for 2008.

But critics of the Central Bank argue that this effect would be offset by the major drop in international prices of food, oil and other commodities.

The Central Bank, known for its conservative policies, has also come under growing fire for the extreme volatility of the exchange rate, which has gone from 1.5 reals to the dollar in early August to 2.5, and back to 2.3, with sharp day-to-day swings.

The depreciation of the real, however, corrects the exaggerated overvaluation of the last few years, which has hurt exports, especially of industrialised products. The drop in exports as a result of the crisis will be partially compensated by higher returns in reals, at least for companies.

The impact of the slowdown in foreign trade should not be too heavy for Brazil, since its export markets are diversified, and because it exports many food products, which are generally hurt less by the reduction in imports.

Despite the grimmer outlook for 2009, Brazilians are celebrating the end of an excellent year in economic terms, one of the best in three decades. Besides strong growth and the generation of nearly two million new formal sector jobs, the discovery of enormous offshore oil reserves, which could turn the country into a major oil producer, was announced in May.

Although the cost of extracting the subsalt oil will be high, and the recent plunge in oil prices tends to postpone production plans, there is little concern, because the deposits are seen as a guarantee for the future, which will not become reality for some years, thus giving Brazilians time to discuss how best to use the newfound oil wealth.