Brazil: Party On...For Now

PARTY TIME: Crisis or no crisis, the Rio Carnival must go on.

After Carnival is over and Lent kicks in, pessimism will take hold as Brazil is forced to face the sobering reality of the crisis and its effect.

BY WALTER T. MOLANO

The staccato pulse of Carnaval always lifts the Brazilian spirit, no matter what the circumstances. This time, it is no different. The strains of the global financial system, the collapse of commodity prices and the rapid deceleration of economic activity cannot dent the country's optimism.

Indeed, "optimism" should be Brazil's principal export. It would help reverse the gloom that permeates the rest of the planet. Nevertheless, cracks are appearing on the Brazilian veneer, and it is evident that it will soon suffer from the global catastrophe.

FDI FALLS

Last week's economic data was disheartening. Foreign direct investment (FDI) plunged 60 percent y/y in January to $1.9 billion, and the pace is expected to continue in February. Last January, FDI inflows were $4.8 billion. The preliminary data for this month shows that FDI will range between $1.5 and $1.8 billion. Monthly FDI flows peaked at the end of last year at $8.1 billion, but companies across the board are cancelling projects. A few weeks ago, Petrobras chopped its investment plans by a third.

Last week, CVRD made a similar announcement. CEO Roger Agnelli said it would be difficult for the company to reach $11 billion in new investments. The original plans called for $14 billion in outlays. The plunge in capital inflows, along with the deterioration of the trade accounts, paints an ugly picture for the Brazilian Real. The currency is already losing ground. Fortunately, central bank intervention is making it an orderly process. However, recent experience from the other emerging market countries shows that an orderly devaluation can turn into a rout if there is an unexpected loss of confidence.

Unfortunately, Brazil is in for some very disappointing macroeconomic numbers. Banks are slashing credit facilities, despite the strength of the overall financial system. Bank loans for new automobiles and white goods are disappearing. This is having dire implications for manufacturers and retailers. As a result, many companies are slashing jobs. IBGE reported that the unemployment rate in the six largest metropolitan areas rose 20.6 percent m/m to 8.2 percent. In other words, the unemployment rolls in these cities rose by 323,000 in a single month. This was the largest monthly increase in the unemployment rate since IBGE started the series. Sao Paulo suffered the worst, witnessing a 32 percent m/m increase in the unemployment rate--to 9.4 percent.

FILLING THE GAPS

Many companies continue to announce furloughs. Embraer, the state-owned aircraft manufacturer, was the most recent-idling 4,200 workers. The Brazilian government is becoming increasingly aware of the tightening credit conditions, and Lula is deploying the state-owned banks to fill in some of the gaps. BNDES is becoming a major source of company funding, and the president is promising that Banco do Brasil will expand its consumer lending facilities. The tightening conditions are also inducing many multinational firms to trim the repatriation of dividends, using their earnings to finance ongoing operations.

The deterioration of Brazil's economic conditions is coinciding with a new wave of political scandals. The most disturbing revelation was a Veja interview with PMDB Senator Jarbas Vasconcelos, a founder of the party and with 43 years of public service. Jarbas said that most of the members of his party were interested in personal self gain and corruption. His attack on
the PMDB, the largest political force in Brazil, came after the party cadre led a campaign to re-elect Jose Sarney, a highly controversial and tainted figure, as President of the Senate instead of Tiao Viana, who was much more interested in restoring the public's faith in the legislature.

WASTED OPPORTUNITY

The senator also raged on Lula, arguing that many of his social assistance programs were just mechanisms to buy votes. As has been said of Lula by many people, Jarbas indicated that the Brazilian president did little or nothing to take advantage of the commodity boom. The probable nomination of Minister Dilma Rousseff as the PT's choice to replace Lula suggests a continuation of the same. However, it is not certain that the electorate will be as receptive as in the past. The unraveling of the Brazilian economy is going to show the government's failure to prepare for the debacle, and Brazil could soon find itself politically rudderless.

But, what's there to worry about? The samba beat is drumming, and the blocos are meandering their way down the various streets of Brazil. The pessimism will take hold once Lent kicks in, and the country is forced to face the sobering reality of what is going on.

Monday, February 23, 2009

Walter Molano is head of research at BCP Securities.