The 1.9% increase in GDP during the second quarter of 2009 has confirmed that Brazilian economy has managed to react against the impacts of the largest financial turbulence ever since the New York Stock Exchange crash in 1929. A year after the Lehman Brothers crash Brazil is surprising sceptics by being one of the first countries to emerge from the crisis and to pick the development cycle it had been exhibiting for the last few years up again. Signs noticed during this third quarter indicate it should be possible to close the year with positive results and to come back in 2010, to the baseline Brazil was at before the crisis. This should mean an annual growth of about 5%.
At the time most of the world was beginning to notice the first slowdown indicators, Brazil was showing a vigorous growth. This model – based on consistent macroeconomic foundations – helped the country to be readier to face the crisis than at any other time in its history. Brazil was then prepared to pick up the pace in a much faster rhythm than most other countries.
The financial crisis has put Brazilian economy to the test and it passed it with flying colours. Inflation under control; solidity, expressed in US$ 220 billion in international reserves; balanced public accounts; cleared foreign debt; and a regulated and stable financial system have allowed the country to hold its own under the strain of the economic hurricane that shook the world. It is quite a different scenario from the ones we have faced during other international crises, which swamped the country in extended recession periods.
Economic growth and breadth to face the crisis were possible thanks to the creation of a widespread consumer market. This was an entirely novel phenomenon in a country that had had to live with vast income distribution inequalities. During the last five years over 24 million Brazilians have emerged from poverty and 27 million others joined the upper-upper, lower-upper and middle classes. These progresses reflect the success of the government’s income distribution policy and the increase in employment rates from 2003 to 2008.
The population’s average income has been high since 2004. Inequality has also been dropping for six years now, as has just been shown by the National Household Sample Survey (PNAD), the most comprehensive survey on the Country’s social reality. Even during the toughest stage of the crisis, the strength of the Brazilian market was one of the factors that provided Brazilian economy with the power to quickly overcome hardships.
With solid basis and a vigorous market the country has shown its capacity to successfully advance a set of anti-crisis measures. On the one hand, it has adopted an expansionary monetary policy; on the other, it has developed a proactive fiscal policy. Together they have fed money into the economy, stimulated consumption, maintained jobs and pepped up businesses.
One of the monetary policy axis – together with the cut in interest rate – was the release of $ 55.6 billion in bank compulsory deposits authorized as soon as the international crisis worsened. Monetary expansion provided support to small- and medium-sized banks, thus ensuring stability to the financial system, contrary to what happened in several other countries. But this did not ensure the necessary amount of credit lines. The intervention of public banks was paramount to that. Without them credit would have remained scarce and interests been higher.
Another important instrument was fiscal unburdening, such as the cut in IPI (Tax on Industrialized Products) for purchasing cars, trucks, buses, construction material, house appliances and capital goods. The measures – which amount to a fiscal stimulus of $ 7.6 billion, 0,4% Brazil’s GDP – have managed to keep consumption high and accelerated recovery. About mid-year several industry segments had managed to surpass their production volume from the pre-crisis period. It is estimated that, as a whole, the anti-cycle policy should help GDP grow between 2.5% and 3.5%. Without it, it is likely that, instead of the 1% growth expected for 2009 GDP would have dropped 2%.
This reaction has placed Brazil on the threshold of a new development cycle that shows the country is going back on the tracks it had followed up to September 2008. The vast wealth expected from the exploration of the pre-salt layer petroleum, the need for infrastructure works to support growth, the potential of agribusiness and renewable energy and a vast range of other businesses are opening up amazing opportunities for Brazil to consolidate an economic model that brings growth and social development together.
Guido Mantega
Minister of Finance
* The Real was converted at R$ 1,80 = US$ 1
Source: Sustainable Economy – A publication from the Ministry of Finance
