Development: On 10 October Brazil’s finance minister Guido Mantega said that while Europe is at the epicentre of the “chronic” external crisis, the main danger for Brazil is from China, Brazil’s main trading partner.
Significance: Mantega made his comments following the weekly political coordination meeting at the presidential palace. The Chinese government yesterday said it would increase its stakes in China’s four largest banks, in an effort to shore up investor confidence. It was the first such intervention in three years, since the outset of the 2008 crisis. There are fears that Beijing is not in a position this time round to implement another massive fiscal stimulus, and investors have turned against China, selling off bank shares in particular. “We are wringing our hands that there won’t be a slowdown in China. Our fear is that this ends up compromising trade between emerging countries, which remains at a high level”, Mantega stated.
Key points:
• Mantega admitted that international credit “has dried up”, and while it has not yet hit Brazil, “which, unhappily, exports more commodities”, he said, “it has hit countries which export manufactured goods, as in the Chinese case”.
• The International Monetary Fund (IMF) warns in its latest (5 October) regional economic outlook on Latin America that while countries in the region “continue to benefit from the double tailwinds of easy external financing conditions and still-high commodity prices…the downside risks are potentially severe”. The report notes that “Latin America is as dependent on commodities today as it was 40 years ago. With commodity prices quite sensitive to global output, the region is particularly vulnerable to a global economic slowdown.” The Fund notes that net exports of primary products account for 10% of South America’s GDP in 2011, up from 6% in 1970.
• Brazil is fortunate in that exports account for about 13% of GDP, with its domestic markets worth over two thirds of GDP. That does not mean it is immune however. The government led by President Dilma Rousseff is trying to re-balance economic policy in favour of a tighter fiscal policy and a more stimulative monetary stance, in order to facilitate a reduction in Brazil’s structurally high interest rates and boost its low national savings rate (16% of GDP), and thereby reduce its heavy reliance on external financing for its capital needs. In tandem, the government is actively promoting a new industrial policy aimed at boosting the local manufacturing sector.
