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 This whole year the Brazilian stock exchange hadn't seen a tenser day than this Thursday, August 16. Hit by the same fever that has struck foreign finance markets elsewhere, the Bovespa (São Paulo's stock exchange) fell close do 9% during yesterday's trade session ending the day in a more modest 2.58% drop.
At its lowest, with a 8.71% decline, the slump was compared to the collapse of September 11, 2001, the day the New York World Trade Center suffered a terrorist attack. On that day, the Bovespa went down 9.18%, which was not as bad as the 10% + of January 1998, in response to the cambial devaluation imposed by the Fernando Henrique Cardoso administration. Despite accumulating losses of 17.4% since the July 19 record high, the Ibovespa, Brazil's stock exchange's main index is still 5.8 in the black for the year. Most of the commotion has to do with the US shaky mortgage market including trouble with Countrywide Home Loans, America's biggest independent mortgage lender, which might even have to file for bankruptcy, according to a few analysts. Brazil also reacted to the US Commerce Department announcement that the building of new houses fell 6.1% in July, the lowest rate since January 1997. The Brazilian currency, the real, is also suffering a beating vis à vis the dollar. The greenback went up 3.1%, yesterday, reaching 2.094 reais, the highest level of the American currency since March 14. One dollar was sold for up to 2.136 reais during the afternoon. According to a just-released study by Economática, a Brazilian consultancy firm, companies with capital in the Bovespa have lost US$ 209.7 billion since the São Paulo stock exchange reached its peak July 19, when the Bovespa made it to 58.124 points. This indicator has already fallen 17.3% since. For Brazilian President, Luiz Inácio Lula da Silva, Brazil has nothing to fear since the country like the fable's "little ant has been preparing itself for this financial winter." "I think that we will get out of this with more strength. I hope that the American real state market solve its crisis so not to affect other countries," said Lula. Lula reminded Brazilians that if the need arises, Brazil has the biggest volume of reserves of its history, about US$ 158 billion. He also stressed that there are more dollars getting into Brazil than leaving it. "And for now we are tranquil. There is no reason for us to say that we are not tranquil," he insisted The Brazilian president also sees in the current slump a moral lesson to those who are too greedy. For him the most affected are the pension funds, which were trying to "make easy money." He who tries to make money without any effort, should think of himself as being in a casino," said Lula. "He can win but he can also lose." Lula told reporters that he is following closely what is happening in the rest of the world, especially in the United States. And added: "As Brazil didn't bet on getting easy money, we prepared a firm foundation, in other words, we were piling up money all this time."
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Of course, we should believe that Brazil, for decades one of the world's shakiest and worst run economies, is now on a more solid footing than the rest of the world. Of course, we should believe that Brazil can shake off what the U.S. economy--the world's biggest and strongest--may not be able to. And, of course, we should believe that Brazil can avoid a threat to the global economy for the first time in its history. Nonsense!
The fact of the matter is that even as Lula and the government continue to insist that the Brazilian economy is strong, it has managed to undperform all other significant emerging economies. And growth here has little to do with any made-in-Brazil factors; instead, the economy grows because the global economy grows. And as the global economy is threatened, so is the Brazilian economy.
When the U.S. prime mortgage problem subsides, Brazil may see its fortunes improve. If the crisis continues, Brazil remains more vulnerable than most economies. That's a fact--and somehow thinking that because the crisis starts in the U.S. it won't have a lasting impact on Brazil is just plain wrong. Brazil will always remain vulnerable to global economic forces because its economic performance is dependent on the health of the rest of the world.
Investors know this, and that is why they are fleeing high-risk countries such as Brazil.