Brazil's Coming Rebound. Consumers are spending and banks are sound. Is the Latin giant finally growing up?
São Paulo - For years, Edilson dos Reis Rodrigues dreamed of owning a home. But the public school teacher and his wife together earn just $710 a month, so he could never set aside a down payment. Now, he's finally getting the chance.
Thanks to a new government program called My House, My Life, Rodrigues will soon own a two-bedroom apartment near São Paulo. He'll get a cash grant covering a quarter of the $52,000 price and a discounted 30-year mortgage, so he'll pay just $220 a month—half what a conventional loan would have cost. "This is an incredible opportunity," the 31-year-old says, smiling broadly as he hands in paperwork to seal the deal.
My House, My Life is just one of the stimulus measures that Brasilia has implemented to keep Latin America's biggest economy from stalling. As a result, Brazil will likely be one of the first countries to emerge from the slump: The economy may grow slightly this year and by as much as 4.5% in 2010, helping lift millions of Brazilians out of poverty. "Brazil is emerging from the crisis, and next year we are going to have surprising growth," President Luiz Inácio Lula da Silva said proudly in a July 28 speech.
Lula has reason to be proud. The former union activist, who never finished elementary school, has been a surprisingly careful steward of Brazil's economy. In a country long plagued by hyperinflation, devaluations, and defaults, Lula last year won investment-grade status for Brazil's sovereign debt. And he did it while expanding social programs that have dramatically reduced poverty rates and spurred expansion of the middle class.
Veteran Brazil watchers say the country's resilience is due to a combination of abundant natural resources, an embrace of globalization after decades of looking inward, and resilient businesspeople and policymakers who have learned to survive difficult times. So as soon as the economy started to contract last year, Brasilia trimmed income taxes and cut levies on key consumer goods, helping manufacturers boost sales and avoid layoffs. "Brazil has proved it can govern itself and keep the economy on track in very difficult times," says Riordan Roett, a professor at Johns Hopkins University's School of Advanced International Studies.
Although the economy fell into recession in the first quarter, consumer confidence and spending quickly rebounded owing to the stimulus and sound domestic finances. A comfortable $212 billion cushion of foreign reserves and a decade of budget surpluses have allowed the central bank to slash interest rates to a record low of 8.75% from 13.75% in seven months while pouring liquidity into the market to keep credit flowing. And private banks are well regulated and have healthy balance sheets. "Brazil's fundamentals are very strong—we don't have any of the problems that created the bubble in the U.S.," says central bank President Henrique Meirelles.
Just as important, though, is Brazil's huge domestic market. While outsiders focus on the country's shipments of iron ore, steel, and soy to China, exports are just 12% of Brazil's $1.5 trillion economy. It's the 190 million people and the fast-growing middle class—now more than half the population—that drive growth. In the past seven years a government program called Bolsa Família has helped nudge 24 million Brazilians above the poverty line. And 8 million jobs have been created since 2003, while the minimum wage has increased 45%.
That's not to say Brazil isn't still a tough place to do business. Its highways, railroads, ports, and electric grid are outdated and congested. The government collects 36% of gross domestic product in taxes, similar to Europe, but delivers Third World services. Political corruption and a nightmarish bureaucracy can hobble growth. And government spending is starting to rise in the runup to next year's elections, which will mark the end of Lula's eight-year presidency.
But there's mounting evidence that Brazil is really changing.
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