28 January 2009

In Country: Economics

For the past few days I have been struck by the amount of sales, particularly shoe sales, in the stores here in Curitiba. Initially I thought it was because summer was almost over and the stores wanted to make way for fall inventory. But after asking around a bit I discovered that we are only half way through summer right now. This got me to thinking: why are all the stores advertising massive liquidation sales?

A brief search on the internet seems to have yielded some of the answers. Apparently Brasil, like most of the rest of the world, is experiencing an economic slowdown of epic proportions. Here are some of the facts:
  • On January 21, the central bank of Brasil lowered the interest rate one full point. This surprised many analysts who expected some lowering of the interest rate but not a full point. After adjusting for inflation Brasil's interest rate now stands at 12.75%, which is the highest in the world. However if you think 12.75% is high, try paying a loan with a 40% interest rate. As recently as 2002, this was the going rate for banks in Brasil. http://articles.latimes.com/2008/nov/26/business/fi-brazhousing26
  • Personal and household defaults are on the rise, registering in at 8.1% in December 2008. This is the highest default rate in Brasil since 2002.
  • The government has recently announced a 15 year job creation-housing construction investment plan for low income families. This suggests that Brasil is as badly in need of jobs and economic stimulus as the U.S. http://www.khl.com/magazines/international-construction/detail/item30530/Brazil-plans-to-invest-US$-152-billion-in-housing-sector/

Most of the information can be found by doing a simple Google search with the terms "Brazil economy"; and here is a link with some helpful explanation http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_marinis&sid=aeH44ekPr1yY

It is worth noting, however, that Brasil's economy seems to be better poised to withstand the worst of the global economic crisis than other Western nations. There are a variety of reasons to support this optimism. First, because Brasil's interest rate has been so high, very few people actually purchase homes they cannot afford. Another way to say this: there has been very little speculation in the housing market here. Second, because Brasil is almost completely energy independent, its overall economy is quite resilient to price fluctuations in oil and gas. In addition, the Brasilian government holds several billion dollars in reserve in case of currency drops or inflation threats. In other words: Brasil has saved money for a rainy day.

All of these factors serve as buffers for this economy to withstand the global shocks that are sure to come in 2009. Certainly Brasil will be effected but not to the same depth and degree as the U.S., the U.K. and countries in the Euro-zone. http://www.latinbusinesschronicle.com/app/article.aspx?id=3106

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