WSJ, August 28 2015 How Brazil’s China-Driven Commodities Boom Went Bust Developing nation’s big bet on China turns sour as China’s appetite for By JOHN LYONS and PAUL KIERNAN
SÃO PAULO—Not long ago, Brazil stood as the leading example of how a developing nation could rise toward global prominence on the force of a China-driven commodity boom. As its economy surged, Brazil stormed the world stage—hosting a World Cup, demanding more say at the United Nations and blocking a U.S. free-trade plan for the Americas. Now Brazil is looking like a symbol of something else: resource-rich nations’ habit of ending their booms with spectacular busts. Brazil’s stock market is down 22% in the past year. Its currency has lost a third of its value against the dollar. And on Friday, Brazil is expected to report that in the second quarter, its economy shrank at a pace of about 1.7%. Economists are voicing fears of prolonged stagnation. China has caused turmoil in many places, but none more so than in this prime supplier of commodities to a country whose once-voracious appetite for them has dimmed. Brazil’s pain from China’s slowdown isn’t largely confined to the financial markets, as in some countries, but goes to the heart of its real economy. “We went from Brazil mania to Brazil nausea,” said Marcos Troyjo, a former Brazilian diplomat who leads a Columbia University center studying emerging markets. “We are looking at a lost decade, where growth stagnates, inflation is high, and, most sadly, a decade where you’ve learned nothing.” For Brazilians who believed, as their leaders were saying, that the country would climb to first-world status during the resources boom, the downturn has come as a profound disappointment. Big antigovernment demonstrations are now regular events: Protesters decry the corruption that a sweeping investigation is uncovering, and many call for President Dilma Rousseff’s ouster. As inflation nears double-digits and as unemployment and interest rates rise, middle-class households are starting to miss car payments and the poor are eating less meat. “Beef is the first to go!” said Janeide Ferreira, a 54-year-old cleaner in Rio de Janeiro who must take a sweaty two-hour bus ride to work each day from the slum where she lives. “Things were so much better five years ago.” Brazil is in danger of losing its investment-grade rating, to judge by the negative views of credit-rating firms, potentially sparking a disorderly currency decline. Some wealthy Brazilians aren’t sticking around to find out. Rich Brazilians are snapping up homes from South Florida to Scarsdale, N.Y., often with the long-term plan of raising families there. A cover story on the phenomenon in the weekly magazine Istoé this month is titled: “Bye-Bye Brazil.” Poised to Benefit Looking back, it is easy to understand the frenzy of optimism. If the biggest economic story this century was China’s rise, Brazil was uniquely poised to benefit from it. Rich in iron ore, soybeans and beef, not to mention oil, Brazil was positioned as a supplier of many things China needed. Its annual trade with China, only around $2 billion in 2000, soared to $83 billion in 2013. China supplanted the U.S. as Brazil’s largest trading partner. China’s rise helped spur global investors to pour more than $1 trillion a year into emerging markets by 2011, a fivefold increase in a decade. Brazil was a leading destination. Because its securities markets were more transparent than China’s, some investors bought Brazil as way to play China. In the midst of this, Brazil’s state-controlled oil company made a huge deep-water discovery, at a time when oil analysts were focused on tight supply and prices were rising. Voters in this nation of deep economic inequality had elected a president who rose from poverty, Luiz Inácio Lula da Silva. He positioned himself as a voice for millions being lifted in the commodities boom, clinching Rio de Janeiro’s right to host the 2016 Olympics in a stirring speech saying the games would be a gift to the poor. But Brazil had boomed several times in past decades, only to go bust. A 1966-1973 expansion was dubbed the “Brazilian Miracle.” What followed it in the 1980s was a tumultuous decade of hyperinflation, debt crises and falling living standards. This time was supposed to be different. In digging out from the 1980s mess, Brazil had cut spending, stabilized its currency and tamed the four-digit inflation. A combination of fiscal rectitude and increasingly competent government was meant to allow Latin America’s biggest economy to converge with advanced nations such as the U.S. The longtime quip about Brazil had been that “it’s the country of the future—and always will be.” In 2005, a book by a Brazilian economist was titled “The Future Arrived.” Brazil, one of the emerging-market investment darlings known as the “BRIC” countries (which also included Russia, India and China), turned in a sterling growth rate of 7.6% in 2010. Global development experts started talking about exporting the “Brazil model” to other emerging nations. Mr. da Silva envisioned the China-based commodity windfall as funding new roads, ports, dams and industries such as shipbuilding. Brazil was taking its place among the world’s developed nations. Officials began traveling to investor meetings with a booklet suggesting their economy would grow at an average of about 4.5% a year in perpetuity. It wasn’t to be. Brazil fell under what some economists call the “resource curse,” a theory describing how countries with abundant natural resources sometimes do worse than countries without them. The idea is that the money from commodity sales can lead to overvalued currencies and shortsighted policy-making, leaving such countries badly exposed when the resource boom finally ends. “Unfortunately, the history is that commodity-dependent economies do not catch up with the U.S.,” said Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management. “Not just oil producers. More countries end up being poorer, compared with the U.S., after they find a commodity than catch up.” Using data going back to 1800, he said commodity-dependent economies typically grow for a decade, then spend as long as two decades wallowing or slipping back. Some reasons are structural. The influx of hard currency from commodity exports strengthens a country’s own currency, which can toughen conditions for non-commodity industries such as manufacturing by hampering exports and making imports cheaper. At the height of Brazil’s boom, Goldman Sachs declared Brazil’s currency, the real, the world’s most overvalued. Movies and taxis in downtown São Paulo were more expensive in dollar terms than in New York. Brazil’s manufacturers began contracting. Many of Brazil’s problems were homegrown, though, said Alexandre Schwartsman, a former Brazilian central-bank official: “We managed to produce this recession ourselves.” Buoyed by China trade, nationalist-minded politicians launched a foreign policy meant to reduce the role of the U.S. in Latin America. Brazil blocked a U.S. free-trade initiative for the Americas. They teamed with Venezuela to create a regional security council to supplant one that included the U.S. The foreign minister worked from an office with a huge map of the world upside down, offering the message that the era of emerging markets was at hand. But the world wasn’t upside down. While Brazil tied itself more closely to anti-American governments like Venezuela, Argentina and Iran, some regional neighbors—Chile, Colombia and Peru—went around Brazil and cut individual free-trade deals with the U.S. Brazil also started spending its commodity windfall before its oil and ore were out of the ground—another feature of the resource curse. Anticipating commodity sales, the government spent increasingly heavily. Government banks supplied Brazilians with easy credit. Brazil subsidized energy bills, issued cheap loans to big companies with government ties and built stadiums to host global events such as the 2014 World Cup and the 2016 Olympics. Brazil’s national development bank, BNDES, lent so much that its loan portfolio became bigger than the World Bank’s, making many loans at below-market rates. Other investments failed to pay long-term returns. The credit-driven consumer boom ran out of gas, and some World Cup stadiums sit unused. Meantime, Brazil produced far less oil than predicted. Production actually shrank in some years, as Petróleo Brasileiro SA, known as Petrobras, struggled with the enormous task of developing oil fields in extremely deep water. Officials sometimes budgeted as if oil and ore prices would stay high, in what economists call another common mistake of resource-rich nations. Consider Vale SA, a mining giant with close government ties. As China’s demand for construction materials lifted iron-ore prices in Brazil to $126 a ton from $19 between 2000 and 2011, Vale executives began a $16 billion expansion of their main iron-ore complex and ordered a fleet of super-large “Valemax” ships to carry ore to China. When China’s growth began to slow, Vale’s ferrous-division director, José Carlos Martins, kept telling investors iron-ore prices would remain high. In dismissing analyst concerns on a July 2014 conference call, he said, “It’s amazing how much you focus on China.” Mr. Martins left voluntarily that year as iron ore headed south. He said his forecasts were thrown off by oil’s drop and the dollar’s appreciation, noting: “In the corporate world, you spend half your life making forecasts and the other half explaining why that forecast was wrong.” Vale has cut its dividend and sold some ships, but is pushing ahead with the mine project. Corruption scandal Commodities’ support of the economy allowed Brazilian leaders to put off addressing certain problems that had long bedeviled the nation, such as a political system that tended to breed corruption and a bureaucracy that stymied business innovation. “Brazil became complacent because of the intoxicating effects of China trade,” said Thomas Trebat, a former emerging-markets investment banker who directs Columbia University’s Columbia Global Centers in Rio de Janeiro. “Now they are suffering a hangover. The commodity boom may even have turbocharged some unhealthy practices. Brazilian prosecutors are looking into the activities of dozens of executives and politicians in a sweeping bribery and kickback investigation centered on activities at Petrobras as the oil giant spent heavily to develop its offshore field. Though corruption has long plagued the country, the figures this time have shocked even jaded Brazilians. Petrobras says at least $2 billion was stolen from it in the past decade. One executive indicted in the probe has agreed to return nearly $100 million. The leader of the lower house in Congress, Eduardo Cunha, is being investigated on suspicion of taking $5 million. He denies it. Brazil’s electoral court has authorized investigations of whether some of the corruption helped fund Ms. Rousseff’s 2014 re-election campaign. The treasurer of her Workers Party has been jailed on an accusation, which he denies, of money laundering. Ms. Rousseff and her party deny any wrongdoing. Amid the downturn, the government is fracturing, hindering its ability to turn things around. Ms. Rousseff’s public approval rating is down to 8%. Her vice president, Michel Temer, recently said he is no longer pursuing a vice president’s usual role of helping the president get things done in Congress, prompting speculation he wants her job. “Someone needs to unify everyone…because otherwise the country could enter into an ugly crisis,” Mr. Temer said this month. Ms. Rousseff and her advisers defend her policies, saying the downturn would have been worse had her government not expanded the social safety net and provided subsidies to industries to help them avoid laying off workers. While Brazil’s economy is forecast to contract by 2% this year, government officials are hoping the outlook improves next year as Ms. Rousseff introduces measures to streamline the government and works to rekindle good relations with the U.S. Brazil’s now-weaker currency might help revive manufacturing and exports. In addition, the country has $371 billion in central-bank reserves to cushion the slump. “We’re renovating the foundations of the economy, and we will resume growing with all of our potential,” Ms. Rousseff said this month. But China is the X-factor. Brazil’s exports to China tumbled by 19% in the first seven months of this year. For more than a decade, China has been there when Brazil needed it most. Brazil entered the latest commodity upswing, around 2002, verging on default, but Brazil’s economy began to catch fire from resource prices buoyed by Chinese demand. Brazil then again looked as if it could come undone after the global financial crisis in 2008. China’s $586 billion stimulus package helped reignite global demand for what Brazil produces. Even now, Brazil is looking to China for help. In May, Ms. Rousseff met in Brasília with Chinese Premier Li Keqiang. At a time when some global investors were starting to shun Brazil, China agreed to lend Petrobras $10 billion. The Chinese government also said it would consider investing in Brazilian railroads, ports and roads. Whether these things come to fruition is now a question, as China’s own economy slows. —David Luhnow contributed to this article. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
