The Curious Case of Brazil’s Closed Economy

Otaviano Canuto – Huffington Post, 1/21/2015

Brazil’s is an unusually closed economy as measured by trade penetration, with exports plus imports equal to just 27.6 percent of GDP in 2013. Brazil’s large size is often used to explain its relative lack of openness. But this argument does not stand up to scrutiny: Among the six countries with larger economies than Brazil’s, the average trade-to-GDP ratio is 55 percent. Given the size of its economy, we would expect Brazil’s trade to be equal to 85 percent of GDP, three times its actual size.

Controlling for other dimensions of country size (surface area and population) and structural features often associated with trade openness (urbanization, manufacturing share in GDP) still cannot adequately explain Brazil’s lack of openness.

Lack of trade dynamism at the company level

Brazil’s lack of openness becomes even more apparent if we look at the number and characteristics of exporting companies. Very few Brazilian companies export. Indeed, the absolute number of exporters in Brazil — fewer than 20,000 — is roughly the same as that of Norway, a country of just over 5 million people compared with Brazil’s 200 million. This means that, while in Norway there is one exporting company for about every 250 Norwegians, the ratio in Brazil is one for every 10,000 Brazilians.

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Davos 2015: Brazil warns of austerity

Gideon Rachman and Joe Leahy – Financial Times, 1/22/2015

Brazil is in for a period of austerity and supply side reform, including the potentially controversial overhaul of social welfare programmes, such as unemployment benefits, according to Joaquim Levy, the new finance minister.

Speaking to the Financial Times in an interview at the World Economic Forum in Davos, Mr Levy said that, in order to get government finances into order, “we will have to cut in several areas”. He stated his intention to “get rid of subsidies and get prices right”, highlighting “energy and other areas” as potential targets. In addition, Mr Levy wants to see reform of government welfare programmes, arguing that the design of Brazil’s unemployment benefit schemes is “completely out of date”.

Mr Levy acknowledged that a period of austerity could have an impact on economic growth, saying: “I think flat growth cannot be discarded as a possibility although GDP growth in Brazil is resilient.” He argues that Brazil is now more in need of supply side reforms than a stimulus to demand and expressed confidence that “as we get our house in order, the reaction will be positive”.

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Brazil ETFs Set to Continue Struggle in 2015

Jared Cummans – ETF Database, 1/19/2015

Brazil has long been one of the most alluring emerging market economies, earning itself the “B” in the popular BRIC nation group. Its economy was once bustling and offering handsome growth for investors, but that has screeched to a halt in recent years. What’s worse is that it does not appear the emerging market will get back on track anytime soon.

From 2010 to 2014, EWZ had an average annual return of -9.81%; from 2005 to 2009 that figure was 47.74%, a stark contrast. The poor returns come as GDP continues to disappoint, among other things. 2014 saw a trade deficit of $3.93 billion, the largest since 1998. Exports in 2014 dropped 7% while inflation continues to rise. The hefty costs of hosting the 2014 FIFA World Cup certainly did not do the country any favors. To put it simply, the Brazilian economy is facing a number of headwinds, none of which are quick fixes.

Looking forward to 2015, the outlook is not much better. GDP growth fell from 2.3% in 2013 to 0.15% in 2014, as the economy suffered a sharp slowdown at the end of 2014. Analysts are forecasting GDP growth of 0.5% for this year; while that may be higher than 2014, it is certainly not a number that is going to get the economy back on the right track, as it still lies on the brink of a recession. On top of that, inflation continues to rise, forcing the central bank to raise rates to attempt to keep prices at bay.

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Embarrassing First Day On Job For Brazil Minister As Dilma 2.0 Launches

Kenneth Rapoza – Forbes, 1/3/2015

Talk about a rough first day on the job. Nothing like getting scolded by the boss, who just happens to be the country’s president.

Nelson Barbosa is part of the three musketeers of Brazilian President Dilma Rousseff’s new and improved Dilma 2.0 cabinet. But on his first day as Brazil’s Planning and Budget Minister, Barbosa ticked off the pres when he discussed changes to the nation’s minimum wage policy.

Most of this is insider baseball to an American audience. But here’s the gist: the Brazilian minimum wage used to be around R$300 a month, or less than $4 a day in today’s dollars. It’s been going up by more than 10% a year for the past 12 years under the Workers’ Party leadership, of which Dilma is queen bee. It wasn’t entirely random. The formula was based on the inflation rate, plus the rate of national GDP growth. Regardless of the calculation, low income workers from maids to McDonald’s employees all saw their incomes rise higher in percentage terms than the middle class.

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In Brazil, A Once-High-Flying Economy Takes A Tumble

Lourdes Garcia-Navarro – NPR, 1/14/2015

It was a terrible Christmas season for stores in Brazil. For the first time in more than a decade — since 2003 — sales went down.

Roberta Pimenta owns a small shop selling children’s clothes at the Butanta mall in Sao Paulo, which is aimed squarely at the middle-class shoppers who live in the area.

“It was the worst drop in sales since I’ve had this store,” Pimenta says. “In seven years it was the worst year I had. And every year you have a 10 percent increase of employees’ salary, 10 percent increase in the rent, 10 percent in everything, so it is horrible.”

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Brazil’s Real Drops From One-Month High on Economic Team Concern

Paula Sambo – Bloomberg News, 1/15/2015

Brazil’s real fell from a one-month high on concern over Finance Minister Joaquim Levy’s ability to restore growth to Latin America’s largest economy.

The currency dropped 0.5 percent to 2.6306 per U.S. dollar at 2:57 p.m. in Sao Paulo after climbing yesterday to its strongest level since Dec. 9. Swap rates, a gauge of expectations for changes in borrowing costs, declined 0.04 percentage point to 12.62 percent on the contract maturing in January 2016.

Concern that Brazil’s fiscal deterioration would lead to a reduced credit rating helped push the real down 11 percent in 2014. Levy told reporters in Brasilia on Jan. 13 that seeking to cut gross debt below 50 percent of gross domestic product in the long term would be a positive step.

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Brazil’s Real Drops Most Among Major Currencies on GDP Outlook

Paula Sambo – Bloomberg News, 1/12/2015

Brazil’s real fell the most among major currencies after analysts surveyed by the central bank lowered their growth forecast for Latin America’s largest economy.

The currency slid for the first time in five days, dropping 1.5 percent to 2.6737 per dollar at the close of trade in Sao Paulo. The decrease was the biggest among 16 major currencies tracked by Bloomberg. Swap rates, a gauge of expectations for changes in borrowing costs, climbed 0.1 percentage point to 12.58 percent on the contract maturing in January 2017.

Analysts reduced their forecast for gross domestic product growth in 2015 to 0.4 percent from 0.5 percent, according to the median of about 100 estimates in a weekly central bank survey published today. Evidence of a stalled economy increases the challenges for Finance Minister Joaquim Levy, who has pledged to impose more rigorous fiscal discipline.

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Why Brazil Is A Surprisingly Closed Economy

Otaviano Canuto – Business Insider, 1/12/2015

According to traditional macro-level measures of trade penetration (share of exports and imports in GDP), Brazil is an unusually closed economy. For Brazil this measure was only 27.6% in 2013 – a figure among the lowest in the world. Notably, Brazil’s trade openness lags far behind its peers among the BRICS countries, all of which reached trade-to-GDP ratios of at least 50% in recent years.

Brazil’s size is often used to explain the country’s relative closedness. As the comparison with other large economies already indicates, this argument does not hold up to close scrutiny. While it is true that large economies tend to exhibit lower percentages of exports and imports to GDP, this feature fails to explain the exceptionally low levels of trade penetration observed in Brazil.

Looking at 2013 data from 176 countries available through the World Bank’s World Development Indicators (WDI) database, the average trade-to-GDP ratio is 96%. Even among the six countries with a larger economy than Brazil, the average is 55%.

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Brazil’s Rousseff promises fiscal discipline to investors

Reese Ewing and Alonso Soto – Reuters, 12/3/2014

President Dilma Rousseff said in a letter to investors that one of the main priorities of her second term will be to put Brazil’s fiscal accounts in order, sending a strong message that her administration will adopt more market-friendly policies.

In a letter that was read on Tuesday to investors at a JP Morgan conference, Rousseff gave the clearest backing as of yet to her future finance minister, Joaquim Levy, a known fiscal conservative.

“Our new economic team will work to gradually but structurally lift our primary surplus so we can stabilize and reduce the public sector’s gross debt in relation to GDP,” Rousseff said the letter provided to Reuters by the presidency.

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Guest post: from ideology to policy in Brazil?

Monica Baumgarten de Bolle – Financial Times, 11/26/2014

Monica Baumgarten de Bolle is a Global Fellow with the Brazil Institute.

President Dilma Rousseff’s soon to be announced new finance minister may mark an important shift in Brazil’s faltering macroeconomic framework: From the ill-fated experimentalism that culminated in the so-called “New Economic Matrix”, brain child of Minister Guido Mantega, to newfound orthodoxy. From a failed model based more on ideology than economics to more rational policymaking, this is what one should expect from Joaquim Levy’s appointment, widely expected to be confirmed on Thursday. How long it all lasts is another matter altogether.

Levy has been hailed as a representative of the private sector, someone who would bring much needed pragmatic thinking to the government. Although he has been at the helm of one of Brazil’s largest private banks, Levy is more of a policymaker than a banker, as his background clearly shows.

After completing his PhD at the University of Chicago, he spent many years at the IMF in the volatile 1990s. During this time, he went on a six-month assignment at the nascent European Central Bank. While at the IMF, he worked closely with Teresa Ter-Minassian, former mission chief to Brazil and former head of the institution’s Fiscal Affairs Department. After returning to Brazil, he went on to hold many key government positions, including Secretary of the Treasury under President Luis Inácio Lula da Silva. At that time, he was both formulator and executor of Brazil’s serial primary surpluses, annually upwards of 3 per cent of GDP. This helped deliver both a significant decline in the country’s debt to GDP ratio, and Brazil’s attainment of an investment grade credit rating in 2008.

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