Brazil Ends 2009 Largely Unscathed By Global Economic Crisis

January 06, 2010

While most economies were battered by the global economic crisis last year, Brazil emerged largely unscathed and, by some measures, set record highs.

Thanks to the resilience of its domestic market and steady foreign demand for its commodities, especially from China, Latin America's biggest economy shrank only around 0.2% last year, compared to an estimated 4% contraction in the European Union and 2.5% shrinkage in the U.S.

Market and government forecasts now see Brazil's 2010 gross domestic product growth returning to pre-crisis levels of 5% to 6.5%.

Brazil generated some impressive economic feats last year despite the financial crisis that began to rock markets in late 2008.

The stock market gained 83% last year, its best year since 2003, sustained in part by a record net inflow of 20.45 billion Brazilian reals ($11.8 billion) from foreign portfolio investors, according to a Bovespa stock exchange statement Tuesday.

Brazil's foreign reserves hit record levels, rising to $239 billion, or 15% more than in 2008. Reserves swelled thanks to daily government dollar spot market purchases, undertaken in a bid to stem the appreciation of the Brazilian real, which gained 34% against the dollar.

The real's appreciation was another--but mostly unwelcome--record in the currency's 16-year existence.

The center-left administration of President Luiz Inacio Lula da Silva proved sure-footed during the dark days of the global economic downturn. Government measures maintained employment and domestic demand, while inflation was comfortably kept in check below its 4.5% annual target.

Thanks to tax cuts, improved credit conditions amid an aggressive easing in monetary policy and the stability of spending power for middle- and low-income households, demand for consumer durables continued through the worst of the crisis.

Brazil's key automotive industry and its lengthy production chain, a major national employer, was the main beneficiary of the tax cuts and the easy credit policy. Domestic motor vehicle sales reached a record 3.1 million units last year, an 11% rise from the year before.

The volume of consumer credit expanded around 30% last year, with some 70% of vehicle sales financed.

The government-owned Brazilian Development Bank, or BNDES, helped boost credit, writing a record in low-cost loans of BRL137 billion, 49% more than in 2008.

The Selic base rate, meanwhile, reached an historic low of 8.75% last year.

Brazil is well-positioned to take advantage of the much hoped for global economic recovery. Brazilian stocks, for instance, are expected to make further gains in 2010, but much less than in 2009.

Alvaro Bandeira, director of Brazil's largest brokerage Agora Senior is predicting a 20% gain for the Ibovespa index in 2010 based on expectations of solid growth.

That's well below last year's return but still very impressive for an economy with almost pariah status two decades ago.

By: John Kolodziejski