globoTRENDS blog (from Summit Global Education)

Brazil has many macro-economic challenges hitting at the same time, some of which are external, but one of which is home grown.

Global concerns:

1. Global credit crisis:  will make international borrowing more difficult for states, municipalities, and for Brazilian companies.  The first impact on Brazil from the credit crunch came as exporters found it incredibly difficult to arrange trade finance (the bankers acceptance rate for trade finance tracks international LIBOR, which shot up during the credit crunch).  The Brazilian government had to step in to help relieve pressure on export finance.
2. Global recession:  a slow down in demand for both manufactured goods and for commodities will result in less quantity of exports.
3. Collapse in commodity prices:  with a global recession, there is also a global collapse in many of the commodities that Brazil exports (such as soy, iron ore, etc)
4. Sharp fall in the currency value:  the Brazilian Real has fallen in value, and fallen fast over the past month.  While this should be good for exporters (a weaker local currency makes Brazilian products more competitive), it might cause trouble for the Brazilian central bank (who might want to cut interest rates to help spur growth, but will be fearful to do so because of inflationary concerns associated with the weaker currency).   This sudden change in currency value has been the main trigger point for the following “home-grown” troubles…

Home-grown problems

• Bad currency bets:  Some of the most important and most powerful companies in Brazil are in deep trouble due to ill-advised currency bets gone wrong at the height of the credit crisis.  Companies such as Sadia, Votorantim, and Aracruz have recently lost millions of dollars by betting that the dollar would continue to depreciate.  When the dollar suddenly moved the other direction (big time), many Brazilian companies lost lots of money.  So much in fact, that the Brazilian government has stepped in to protect the BANKS for fears that losses will mount and banks will be brought down by these bad currency bets.  It is expected that up to 300 companies could be in trouble.
• So, not only does Brazil have to face the global environment outlined above, but they have to do it at the same time fighting against a home-grown crisis at the same time.

Positives:

On the other hand, many analysts think that Brazil’s banks should be insulated from the global credit crisis, due to two important factors.  (1)  In 2008, Brazilian banks “only” had 40% of GDP in domestic loans…relatively low, and a good indicator that Brazil’s banks were not overly exposed to the global credit crunch.  And (2), Brazil’s banks only relied 10% on foreign funding.  Another good sign.

Please feel free to add your comments here…

Links for further reading:

• https://globotrends.pbwiki.com/Banks-in-Brazil
• http://us.ft.com/ftgateway/superpage.ft?news_id=fto102020081908107420
• http://us.ft.com/ftgateway/superpage.ft?news_id=fto102220081631367841

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