Mauricio Cárdenas barely made his flight out of Rio de Janeiro. “The traffic was a nightmare; it took me hours,” says the director of the Brookings Institution’s Latin America initiative, who’d been attending the World Economic Forum on Latin America in April. “One is used to this sort of thing in São Paulo, not Rio.”
To Cárdenas, who’d been Colombia’s Minister of Economic Development and Transportation, the traffic jam epitomized the challenge facing Brazil: Its thriving economy is bumping up against capacity constraints. As he puts it, “There is too much global appetite for what Brazil can actually deliver.”
That Brazil, the perennial country of the future, has arrived at a pivotal moment in its economic development is not in contention. Opinion diverges sharply, however, on whether the nation’s sustained boom attests to Brazil’s emergence as a fast-growing but fundamentally sound emerging economy or amounts to an incipient bubble of the all-too-familiar credit-driven Latin American variety.
Brazil’s GDP has grown 5 percent or better in four out of the past seven years, and the economy soared 7.6 percent in 2010 (after declining modestly in ’09). April’s 6.4 percent unemployment rate was the lowest on record. Critically, Brazil’s inflation index hit 6.5 percent in April, fully 2 percentage points above the Banco Central do Brasil’s target. For the past eight years, consumer debt has expanded at an average of 23 percent annually, while average income has grown at only 10 percent a year.
“There is certainly a boom in Brazil — and possibly a bubble,” says Johns Hopkins University economist Olivier Jeanne (formerly of the International Monetary Fund). He points to a rise in Brazil’s currency and in certain asset prices, along with a bit of general consumer inflation. “There are reasons for the government to lean against those developments,” Jeanne says. Cárdenas, for his part, is squarely in the overheating camp. “Who isn’t interested in investing in Brazil?” he asks.
Institutional investors that find Brazil appealing aren’t buying into the overheating story. “The situation is quite benign,” asserts Ilan Solot, an emerging-markets strategist for Brown Brothers Harriman in London. Solot, a native Brazilian, contends that heavy consumer spending is in line with economic growth and that high real estate prices are driven by a brand-new phenomenon in Brazil: a mortgage market. “The country is growing, people have more money, and they are spending it,” he says.
Nick Robinson, head of Brazilian equities for Scotland’s Aberdeen Asset Management, which has $4 billion invested in the country, says he’s even “more positive” than he was this time last year. He notes that the Brazilian stock market was down 11 percent this year through mid-June. “I don’t think Brazil is in a bubble,” declares Robinson. “You don’t have the sort of feedback loops supported by securitization that you saw in the U.S.”
The optimistic perspective finds support from John Williamson, a senior fellow at the Peterson Institute for International Economics. He says Brazil experienced 40 years of double-digit inflation from the 1950s through the ’90s, but that this endemic inflation is “now very much of the past.”
In a positive sign, Brazilian regulators may be more mindful of the overheating risk than some foreign investors, or economists. In 2010 the central bank adopted macroprudential monetary tools such as higher interest rates and stiffer bank reserve requirements to damp too-easy credit and allow “sustainable credit market development.” The bank hiked its benchmark rate in June to 12.25 percent (from 10.75 percent in December 2010) and is likely to raise it again in July.
BBH’s Solot calls the government’s actions “quite proactive and effective, particularly in areas like controlling credit card borrowing and auto loans.” In a more radical move, Brasília has begun taxing capital inflows to temper their overheating potential (6 percent on fixed income and 2 percent on equity but zero on direct investments).
Brookings’s Cárdenas is skeptical. “The macroprudential measures are indeed reasonable and standard prescriptions, but they are not sufficient,” he contends. The government’s huge Brazilian National Development Bank (BNDES) continues to make abundant and ultracheap loans to corporations. In fact, says Cárdenas, BNDES makes more loans than the World Bank and at half the interest rate, and this is what is overheating the economy. “Real change in Brazil,” Cárdenas says, “would be to reduce the scale of this bank.”
Politically, however, that would be difficult. And politics is especially problematic right now. Brazil’s new president, Dilma Rousseff, suffered a setback with the recent resignation of her powerful chief of staff, Antonio Palocci, over a consulting fees scandal. As Finance minister in the Lula administration, Palocci had imposed the fiscal austerity regimen that ultimately unleashed Brazil’s economy and reassured financial markets. Rousseff has promised to do “whatever it takes” to get a grip on incipient inflation and has ordered fiscal tightening. Nevertheless, her willpower and political clout have yet to be tested. But even bears like Cárdenas don’t forecast an end to Brazil’s economic carnaval until after the country hosts the World Cup in Rio in 2014.
