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Sound economics, smart politics

Brazil is no more immune to the current global economic crisis than any other country. GDP growth projections for 2009 have been revised downwards to something below 4 per cent. Secondly, international investors have sold Brazilian holdings so as to cover losses in developed economies. Thirdly, a fall in commodity prices in 2008 has worsened Brazil’s trade terms — the Brazilian real has also declined by 30 per cent since June — and put inflationary pressu re on the economy; the Vale company, the world’s largest iron ore exporter, has halted production in the face of declining demand. One result is a slowdown in the real economy. Small and medium-sized banks have reduced credit, thereby further retarding the consumer goods market; and the corporate sector, which faces problems in the money markets, has been adversely affected by the relative slowness of the central bank’s intervention.

Nevertheless, Brazil is better placed than many other developing countries. Aggregate credit is below 40 per cent of GDP, which was itself up by 6 per cent in the year to November 2007, with debt and inflation just below the 6.5 per cent target. The central bank maintains the basic interest rate at 13.75 per cent. The petroleum giant Petrobras, which is 55 per cent state-owned, has confirmed discoveries estimated at 11 billion barrels of oil in the Tupi and Iara oilfields; Petrobras’s plans for the next few years are wisely founded on cautious estimates of future oil prices. Brazil’s current situation owes much to the interventionist policies of its president, Luiz Inácio Lula da Silva, or Lula. In September 2008, his government and the central bank injected liquidity, issued directives on the use of the freed cash, and allowed the central bank and two public sector banks to buy shares in troubled private banks. Unsurprisingly, Brazil has been internationally assertive, for example calling for an early World Trade Organisation (WTO) meeting. In this context, Venezuelan President Hugo Chávez’s proposal for an 8000-km oil pipeline in collaboration with Brazil shows economic and political acuity. The pipeline will serve most of Latin America, potentially protect it in the energy markets, and confirm the strength of Latin America’s two most progressive leaders. Brazilian businesses want oil-rich Venezuela to become a full member of Mercosur, the Latin American Regional Trade Agreement. The main opposition to this move is likely to come from outside and be more ideological than economic. Neither Brazil nor Venezuela should let that be a deterrent.

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