Tuesday, October 07, 2008

More on the Brazilian Economy in the Global Credit Crisis

Apparently, I jumped the gun on the volatility post below. As remarkable as the 16 cent jump in the Real-Dollar exchange rate was yesterday, early reports in Brazil today are saying it closed at 2.31 reais to the dollar, another 15 cent jump. So in the last two business days, the real has dropped an incredible 15%.

In response to asdfhja's question below, it's a little trickier. To be perfectly frank, I don't really know much about the "why's" of currency exchange in the world today. While I'm familiar with why the real has performed as it has in the past (1990s, Brazilian currency in the 1980s), I don't really understand the "why's" so much currently as the "what's".

That said, my understanding is that when economies in the U.S. or Europe do poorly, the exchange rate drops (i.e., goes up in absolute number to the dollar) in Brazil because investors pull money out of emerging markets to prop up the already-established markets. As Brazil is one of the biggest emerging markets in the world right now, they've been hit particularly hard in the past few days, as foreign investors have pulled out in order to try to conserve money and preserve the American, European, and Asian markets. In short, foreign investors are pumping their money into their own markets rather than foreign markets, in order to shore up the "homefront" first, which in turn leads to a plummet in foreign investment in Brazil. To my understanding, then, that is the most basic reason why the dollar-real exchange rate has jumped so radically over the last two days; I'm sure there are other factors involved too, but right now, all the articles and journalists writing about this (and there aren't many) are still in the panic phase, without really getting at the roots of why the exchange rate has been so volatile (and to be fair, it is probably too early right now to explain this - it's only been two days, after all).

In what's an extremely bizarre situation, though, despite this plummet in the dollar-real exchange rate and the Brazilian stock markets, Brazil's economy is not in trouble. I realize that that may sound impossible, or that I'm schilling for the Brazilian government as propaganda, but that's not the case.

Again, as I mentioned below, Brazil's economy simply is not being devastated in the way the American economy is for a number of reasons: while credit is increasingly important in Brazil, it is not a credit-dependent society like the United States (and indeed, many people still do not even have bank accounts there); the housing market in Brazil, where apartment ownership is the norm, works in a radically different way than in the U.S. (among other things, high-risk lending is not nearly as common); there was no housing bubble that was ready to burst at any moment; and Brazilian banks are not suddenly collapsing because they put all their money into a housing market that was so susceptible.

What is more, Brazil has diversified its economy radically over the last 20 years, exporting everything from automobiles to soy to ethanol to oil (thanks especially to the large oil deposit recently discovered off the coast of Sao Paulo state), and it is far more self-sufficient in terms of energy than many places in the world.

What is more, Brazil is not indebted anymore to the IMF or World Bank, so it has been free to invest its money in infrastructure as it deems fit, without having creditors come calling or having other institutions dictate how Brazil should spend its money, an issue that's still extremely sensitive in Brazilian politics. Just today, Lula asked why the IMF doesn't bail out the US and Europe with large, long-term, high-interest loans that give the IMF the right to determine how those countries should spend their money, just as the IMF did to Latin America in the 1990s, a point that's not without a sense of truth and fairness behind it from a region that the IMF did everything to destroy 10-20 years ago, all in the name of "neoliberalism." (He rhetorically answered his question by saying it's because the US and Europe are pretending they aren't in a major crisis the way Latin America was in the 90s, when the US and Europe had no problem insisting Latin America was and that only the US and Europe knew what was good for Latin America, something which Latin American presidents too readily agreed with, to the detriment of their own economies).

At any rate, what this freedom from debt to the IMF and World Bank has done is allow Brazil to invest in its own economy, rather than relying on foreign investors, and so when the foreign investors pull out, while Brazil's stock market suffers a hit, the rest of the economy can and has been remaining strong. And finally, as Randy points out in the comments thread below, the lower real value actually helps Brazil in its overall trade income, and the $200 billion in reserve do not hurt in any way, even as the dollar suffers.

All of this is not to say that the Brazilian economy is not going to suffer ill effects from this global crisis sometime in the future; anything is possible. Yet as Randy rightly says, "Brazil is in far better shape than most of us."