Brazil unfazed by U.S. market crisis

ThyssenKrupp’s towering steel factory going up near Rio de Janeiro resembles a medieval cathedral -- and stands as a latter-day shrine to the belief that Brazil’s economy will withstand U.S. financial turmoil.

Brazil’s stocks and currency whipsawed wildly last week along with U.S. markets, recalling the gyrations that preceded financial crises in the 1990s when meltdowns in Mexico, Russia and Thailand sucked this country’s economy down with them.

But as the U.S. financial system seemed to teeter on collapse, few here seemed too concerned. Like other emerging countries that learned the bitter lessons of the 1990s, Brazil’s economy is much stronger this time around, more diversified and better able to withstand global shocks -- including the economic ups and downs of its powerful neighbor to the north.

President Luiz Inacio Lula da Silva in fact felt confident enough Friday to take a few pokes at the United States, saying in effect that in terms of financial crises, the shoe is on the other -- meaning American -- foot.

“A few years ago, if the United States coughed, Brazil got pneumonia,” Lula said at a gathering in the northern city of Mossoro. “Now we have diversified, we don’t depend so much on one or two countries. . . . Ask [President] Bush about the crisis because it’s his, not mine.”

Brazil’s growing appeal to investors from around the world is a convincing endorsement of his confidence.

In addition to Germany’s ThyssenKrupp, two other international steel companies, Baosteel of China and Dongkuk of South Korea, are building multibillion-dollar steel plants in partnership with Brazilian iron ore producer Vale. They are investing to produce steel for export to Asian markets -- but also to supply Brazilian manufacturers struggling to meet accelerating domestic demand for motor vehicles, appliances, housing and public works.

They are at the vanguard of foreign companies rushing in to position themselves for what many see as a structural change in Brazil’s economy. That change, already underway, centers on the emergence of a middle class, booming consumption and reduced poverty.

Amid last week’s market panic, for example, Hyundai of South Korea, Suzuki of Japan, Whirlpool and Sheraton Hotels of the United States each announced new large-scale projects or expansions here. Chinese, Portuguese and Scandinavian wood pulp manufacturers are all contemplating major factories.

HBO unveiled a new cable television series and said it could triple the number of subscription-based programs it produces in Brazil over the next two years.

All this economic activity doesn’t mean that Brazil is immune from global contagion. As the world’s leading exporter of iron ore, sugar, soy and several other farm products and raw materials, it is still highly dependent -- though less so -- on global commodity prices, which have declined across the board in recent weeks.

“If the past has taught us anything with respect to a crisis, it’s that anything is possible,” former central bank Director Alexandre Schwartsman said in an interview Friday in the Gazeta Mercantil newspaper. “And what makes me most worried is exactly that.”

High taxes, along with inadequate judicial and pension systems, make for a costly and bewildering business climate in Brazil.

But few doubt that the improved economic fundamentals have made Brazil less vulnerable to prevailing economic ill winds. The hyperinflation, devaluations and backbreaking indebtedness that kept this resource-rich nation of 190 million from realizing its potential for so long seem distant memories.

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Economic strides

First, the banking system is better capitalized and has little exposure to the credit problems currently shaking U.S. institutions, said central bank President Henrique Meirelles, citing a “liquidity cushion.”

Second, the economy overall, boosted by expansion in jobs, incomes and credit, is on a four-year tear and grew 6.1% during this year’s second quarter.

An explosion in loans is helping push consumption to a growth rate of 6.7% year on year, according to economist Paulo Levy of IPEA think tank in Rio de Janeiro, faster than the economy overall. The loans are also fueling pent-up demand for housing, with prices still rising and unit sales doubling since 2004.

Job growth, coupled with Lula’s expanded social welfare program called Bolsa Familia, has steadily whittled away at poverty, with the number of poor Brazilians falling to 18.1% of the population in 2007 from 19.8% in 2006. Income inequality, although still extreme, fell in 2007 for the 12th straight year.

Under Lula, Brazil has kept government spending and inflation under control, boosting investor confidence. Perhaps most important, the country boasts $208 billion in foreign reserves, compared with only $16 billion during the last crisis. That was in late 2002 when the prospect of Lula, a socialist, as the incoming president caused investors to head for the exits.

The stockpile of foreign reserves means Brazil now has a cushion with which to defend its currency, the real.

“We won’t let the country fall victim to speculators,” Lula said Friday.

Also on Friday, the central bank sold $500 million in U.S. currency to strengthen the real, without cutting deep into its reserves. In fact the Brazilian stock market rose more than 9%, part of the global market surge that followed the announcement by the Bush administration that it would intervene in the U.S. banking system.

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Consumer boom

Optimism that Brazil’s economy is strengthening is evident in booming appliance sales at retail chain Casas Bahia, and in home sales at Cyrela Brazil Realty, the nation’s leading residential home builder. And an expanding entertainment industry is attracting cable and movie producers from the United States and Mexico.

That optimism has also lifted Lula’s approval rating to 64%, according to a poll released last week. That was the highest since he took office.

“The economy is red hot at the moment,” said economist Edmar Bacha of Banco Itau in Rio de Janeiro. He said Brazil is strong because it is no longer holds significant dollar-denominated debt, as was the case in the 1990s.

Bacha is concerned that rising interest rates -- the central bank raised them to 13.75%, an increase of 0.75%, on Sept. 10, the fourth hike this year -- could choke off consumption.

But it’s a sign of the roll that Brazil is on that every bit of bad news seems countered by good tidings, such as the news this month that a new oil field had been discovered off Brazil’s coast by the state-controlled oil company Petrobras. The find could turn the nation into a major oil exporter over the next decade and keep its coffers full, experts said.

The possibility of extended good times is eliciting comparisons with the United States and shedding light on the things the two countries have in common: a vast geography, a population built on immigration, and federal-style governments.

Judging from interviews, there seemed to be little sympathy among Brazilians for the United States’ predicament, from Lula on down.

“The affinity that Brazilians always felt for America has changed a lot over the past seven years, after Afghanistan, Iraq and Guantanamo Bay,” said Roberto Troster, former chief economist for the Brazilian bankers association.

“Now we are only interested in how things impact Brazil. And for the short term at least, we are safe against the American crisis,” Troster said. “Longer term we have to keep working on the fundamentals.”

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chris.kraul@latimes.com