What has been the effect of the financial crisis in Brazil?

Five years into the financial crisis, we are in a transition period. Indeed, the global economy is beginning to show some signs of recovery in the United States and Japan. Of course there are still many uncertainties, some are due to local political economy issues in the US. The Eurozone countries, although with still almost no growth, are going rather successfully through a difficult period of macroeconomic adjustment. China is managing to slowly change its model with a shift of its source of growth toward consumption and Japan is experiencing a long overdue policy change that is affecting business and consumer confidence.

 

Brazil in particular will have to deal with financial instability during/after the exit from its unconventional component, and address their external imbalances and debt dynamics with lower growth and less tailwinds. We believe that these challenges are not significant enough reasons to cast an overall pessimistic view on all EMEs alike. In addition, there are differences between EMEs and policies can improve prospects. In Brazil, especially, our strong buffers can mitigate risks.

 

What is the importance of emerging economies in this after-crisis period?

Emerging market and developing countries remain the driving force of the world economy, although growth is slowing down in many countries. In fact, such deceleration may entail positive aspects which shall prevail overtime. In particular, China moving towards a more sustainable growth model, even if at somewhat lower rates, is good news for the world economy as a whole, which would become more robust with this contribution to lower and more stable commodity prices and the correction of protracted global imbalances.

 

However, emerging market economies are fully aware that this transition in advanced economies could trigger financial volatility in global markets. Indeed we have seen a new set of questions posed by investors, market analysts and reverberated by the media. Despite a recognition that EMEs are stronger now, there are still doubts going forward: financial volatility seems to have exposed larger-than-foreseen current account deficits, high debt ratios, higher-than-targeted inflation, all explaining higher risk aversion that compounds currency depreciation.

 

What is your forecast for Brazil?

In any event, in Brazil, we first used textbook and well-tested policies: exchange rate flexibility and international reserves accumulation up to about $380 billion. We built very strong buffers to protect financial stability and prepared for the exit from UMP. Right now, with the current volatility in part due to the perspective of exiting from UMP, our foreign exchange reserves are capable of absorbing shocks and will provide for a predictable, smooth adjustment of asset prices, including the nominal exchange rate.

To deal specifically with excessive exchange rate volatility and to provide hedge and liquidity to the domestic foreign exchange market, the Central Bank of Brazil committed to a $60 billion program through the end of the year based on derivative instruments, in such way that safeguards our international reserves.

 

Finally, Brazil’s financial system is strongly capitalized and provisioned and relies little on external sources of funding. Our short term external debt, about $40 billion, is small compared to our international reserves, making the quality of Brazil’s signature solid, safe, stable and unquestionable. Overall, the usual external debt ratios for Brazil appear in zones of comfort (between 20 and 30% of GDP). Finally, our stability, payments’ capacity and size of Brazil’s economy make it the usual destination of about $65 billion a year of Foreign Direct Investment, thus making our current account position largely financeable, especially now that we are tightening our current policy stance.

 

How does the Central Bank of Brazil is making sure the country stays on a path of economic growth?

We are confident in Brazil that we can go through the current transition, we have always been a proponent of a transparent and important role for the IMF to help countries that are affected by turbulence while keeping good fundamentals. In that respect, the IMF governance reforms have entered a stage of complete paralysis and this has further eroded the Fund’s legitimacy and credibility. The institution has been missing target after target.

 

In that sense, BRICS countries have continued to work to implement their commitment to establish a New Development Bank (NDB) and a Contingent Reserve Arrangement (CRA). On the NDB, which will have an initial subscribed capital of $50 billion, progress has been made in negotiating its capital structure, membership, shareholding and governance. On the CRA, which will have an initial size of $100 billion, consensus has been already achieved on several key aspects, and the operational details of the CRA agreement are currently being negotiated.

 

What is your advice for foreign investors that are interested on the Brazilian economy?

Brazil and many emerging economies in general are in a much stronger position than usually portrayed to withstand the current transition turbulence. We have large foreign exchange reserves, improved economic fundamentals, sound financial systems and policy-readiness and experience dealing with “sudden stops”. For Brazil, despite the recent volatility, the normalization of monetary conditions in the US is a net positive as it reflects better prospects for a US and global recovery. Brazil continues to strengthen its macro-financial framework while implementing a wide range of reforms to enhance productivity and competitiveness in order to consolidate its economic growth model with social inclusion.