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The Impact on Brazil of The Impact on Brazil of the Global Financial the Global Financial
CrisisCrisis
John WilliamsonJohn WilliamsonSenior FellowSenior Fellow
Peterson Institute for International Peterson Institute for International EconomicsEconomics
Finance versus the Real Economy?Finance versus the Real Economy?
Gloom and doom in the financial sectorGloom and doom in the financial sector Versus continuing prosperity in major parts Versus continuing prosperity in major parts
of the real economyof the real economy Export sectors in the USExport sectors in the US Emerging marketsEmerging markets Primary product exportersPrimary product exporters Brazil as an exampleBrazil as an example Reverse-coupling thesisReverse-coupling thesis
Strengthened Fundamentals in Strengthened Fundamentals in BrazilBrazil
Low inflation countryLow inflation country Large primary surpluses and an expected Large primary surpluses and an expected
overall fiscal surplusoverall fiscal surplus Falling public sector debt/GDP ratioFalling public sector debt/GDP ratio Elimination of dollar-denominated debt Elimination of dollar-denominated debt
from the public sectorfrom the public sector Current account surpluses for 5 yearsCurrent account surpluses for 5 years Low ratio of external debt to exports or Low ratio of external debt to exports or
GDP.GDP.
September 2008: Financial CrisisSeptember 2008: Financial Crisis
Sudden change of viewSudden change of view Loss of US housing wealth since end-2006: c. Loss of US housing wealth since end-2006: c.
$6 trillion $6 trillion Loss of world equity wealth since the end of Loss of world equity wealth since the end of
2007: c. $20 trillion2007: c. $20 trillion Assuming 4% spending from wealth, and US Assuming 4% spending from wealth, and US
has half the world’s housing wealth, this will has half the world’s housing wealth, this will reduce demand by about $1,300 b.reduce demand by about $1,300 b.
AndAnd demand is cut by lack of access to credit, by demand is cut by lack of access to credit, by an unknown sum.an unknown sum.
Impact on BrazilImpact on Brazil Principal channel for world recession to impact Principal channel for world recession to impact
Brazil is via current account:Brazil is via current account: Lower prices of primary productsLower prices of primary products Lower demand for differentiated productsLower demand for differentiated products
About 50% of Brazil’s exports are primary About 50% of Brazil’s exports are primary products and the rest differentiated products and the rest differentiated (manufactured) products(manufactured) products
How large and how permanent will the decline in How large and how permanent will the decline in primary product prices prove?primary product prices prove?
Decline in Decline in realreal likely to temper the loss of likely to temper the loss of markets for manufactured exports.markets for manufactured exports.
Two Measures of the History of the Two Measures of the History of the Brazilian REERBrazilian REER
Brazilian Real REER, Citigroup measure1980 - September 2008
0
20
40
60
80
100
120
140
160
180
Jan-
80
Jan-
82
Jan-
84
Jan-
86
Jan-
88
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
Jan-
08
Brazilian Real REER, JP Morgan measure1970 - September 2008
0
50
100
150
200
250
Jan-
70
Jan-
72
Jan-
74
Jan-
76
Jan-
78
Jan-
80
Jan-
82
Jan-
84
Jan-
86
Jan-
88
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
Jan-
08
Contagion via the Capital AccountContagion via the Capital Account
Brazil still a major net debtor, especially short-Brazil still a major net debtor, especially short-term, even though it has not recently had to term, even though it has not recently had to borrow muchborrow much
So a capital outflow is still possible and still has So a capital outflow is still possible and still has major consequences:major consequences: Less FDI—modest and delayed effect on investmentLess FDI—modest and delayed effect on investment Portfolio equity outflow—large, rapid effect in reducing Portfolio equity outflow—large, rapid effect in reducing
Bovespa, thus Brazilian consumption, and reducing Bovespa, thus Brazilian consumption, and reducing realreal, thus increasing inflation, thus increasing inflation
Fewer loans for Brazilian companies—threat to Fewer loans for Brazilian companies—threat to investment, exports, production.investment, exports, production.
PolicyPolicy
Accept the decline in the Accept the decline in the realreal but aim to limit but aim to limit overshootovershoot
Don’t ditch inflation-targeting, but reformulate Don’t ditch inflation-targeting, but reformulate objective to prevent objective to prevent second-round effectssecond-round effects of the of the depreciation on inflationdepreciation on inflation
Replace missing foreign credits by an expansion Replace missing foreign credits by an expansion in domestic creditin domestic credit
Join (if invited) in a concerted fiscal expansion Join (if invited) in a concerted fiscal expansion with with temporarytemporary measures. measures.