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Is there a Brazilian bubble going on?

By Edited Oct 15, 2015 0 0

After decades of struggling, a miracle is happening in Brazil. Millions and millions of poor people have ceased to be so due to the impressive economic growth of Brazilian companies, bringing along enormous opportunities and greater prosperity. While the problems are still huge (poverty, crime, corruption, inequality…), so is the country’s optimism, too. The Brazilians, almost always cheerful, are now happier than ever. And with a good reason: things are going very well. But how long will the party go on? Could the economy derail this train to prosperity? That’s what even Brazilians are asking.

Paradoxically, the reasons for success are also the source of all anxieties. In the past five years, credit has grown to reach 45% of the size of the economy. Thus, Brazilians have found who will provide them with the money to buy new homes, motorcycles, refrigerators and everything else, many for the first time. And apparently it is not important that interest rates on these loans are the second highest in the world; Brazilian families today must devote 20% of their income to pay their debts.

This credit boom and the associated consumption are due, in part, to millions of new jobs and higher wages, spawned by the recent economic expansion. While wealthier economies fell by 2.7% during the 2008 crisis, Brazil grew over 5% and reached 7.5% in 2010. Unemployment has fallen to the lowest levels in decades and many business sectors can’t find workers to fill the production needs. The international panorama is a godsend: soaring prices of minerals and agricultural products, which Brazil exports in large quantities, only contribute even more to its advance.

International investors are also elated with Brazil; foreign direct investment grew by 90% last year. The flood of foreign money that is falling on the country, attracted by high interest rates, is forcing the government to consider imposing stricter limits on speculative capital. Foreign capital flows and income from exports have filled Brazilian coffers with overseas money, which makes the national currency, the Real, trade at a very high level these days. The exchange rate (adjusted for inflation) is now 47% more expensive than last decade’s average. The Real is now the most overvalued currency in the world.

Inevitably, the combination of a lavish market, the euphoria of foreign investors, an increased consumption plus infrastructure bottlenecks makes everything more expensive. Brazil, which remains a very poor nation, is now one of the most expensive countries in the planet. The housing prices of São Paulo have almost doubled since 2008. Renting an office in Rio is now more expensive to do than in New York, and executive salaries are higher than in London or Manhattan. And prices are rising for everyone, up to the point that the current president, Dilma Rousseff, declared inflation to be its main concern. No doubt that the economy is overheated.

But is there a financial Brazilian bubble? The answer is NO. Brazil's progress and potential are not an illusion. They are based on concrete achievements and real strengths. But the Brazilian economy does have some unsustainable aspects. For example, the giant credit growth and public spending cannot continue at current rates. There are still many important structural reforms that have been postponed by Lula da Silva, the former president, that the current government is struggling to approve (Brazil has some of the youngest retirees in the world.)

The Chinese government invests around 12% of its economy annually in infrastructural public works (roads, airports, hospitals etc.) Brazil invests only 1.5%. This explains, in part, the reason behind the Brazilian's economy heat even though it grows “only” at 4.5%. What would happen if it grew more than 10% for several years in a row? Its decrepit infrastructure wouldn’t be able to handle it. However, if you were the CEO of a construction company, that sounds like a land of opportunity to find new projects.

At the moment the priority is to stabilize the economy. This involves taking politically unpopular measures: slow down consumption, for example. But there are many other options. Therefore, president Dilma Rousseff may be the only one to lower the volume of the party in a controlled manner, or else the forces of the free market could do it in a socially painful way when the morning comes. Ironically, exhilaration and complacency are the only enemies threatening the successful Brazil of today. But relax: in Brazil everything turns into Samba.

Rio de Janeiro
Credit: roger borges


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