December 12, 2013
Brazil’s economic woes strike locally
The giant of South America continues to face economic woes, and that has already begun to spell trouble for Argentina, which counts Brazil as its main trade partner.
Latin America’s leading economy Brazil continues to struggle with a host of problems, including a record devaluation of the real, high inflation and low forecasts for GDP growth this year.
In August, Brazil’s real suffered its strongest devaluation since the 2008 economic crisis. The currency plunged 20 percent to 2.33 to the dollar. Although the currency did see a 1.2 percent bump last week, economists largely agree that is not going to last.
That is in part because markets continue to be disappointed by Brazil’s lowered GDP growth expectations.
“The growth expectations for Brazil have been decreasing, from 3.3 percent to 2.2 percent, which had a direct impact on the currency,” deputy finance manager of Ecolatina agency Federico Semeniuk told the Herald.
The lower growth forecast added to “high inflation that exceeded the Central Bank’s goals and news from the US regarding monetary stimulus” to create a worrying set of circumstances for the neighbouring economy.
Brazil is Argentina’s main trade partner so numerous sectors rely on Brazil’s economy and a weaker real erodes the competitive advantage that Argentine manufacturers and producers enjoyed.
“Vehicle production and construction are the only areas in Argentina’s economy with good numbers. But now both are being affected by Brazil’s situation and we can see that from August’s automobile numbers,” economist José Luis Espert told the Herald.
Eighty-five percent of the exported vehicles are shipped to Brazil but that is already starting to change. Automobile production dropped 12.2 percent in August compared to the same month last year as a direct consequence of a decrease in exports to Brazil.
The country is also the main buyer of Argentina’s onions, green olives, garlic, cheese, beans, pears and grapes, to name a few.
“Trade is too concentrated with Brazil and now with this devaluation Argentina loses competitiveness,” Mauricio Claverí, foreign trade and international business analyst of the Abeceb consultancy, told the Herald. “Now the effect is not so evident but problems might begin to be seen in the medium or long-term.”
Argentina’s trade balance with Brazil plunged 528 percent in August, compared to the same month last year, to a deficit of US$534 million, reflecting a significant decrease in Argentine exports to its neighbour.
Argentine sales to Brazil in August totalled US$1.28 billion dropping 19.1 percent compared to the same month last year. Because of this, Argentina is in fourth place in the ranking of top exporters to Brazil for the second month in a row, surpassed by China, the United States and Germany, after being third in June.
A DEVALUATION WAVE
Yet all the woes have not been domestic. The US Federal Reserve also played a key role as it revealed new measures to strengthen its monetary policy due to a recovery of the US economy.
“There’s a strong disappointment of the markets regarding Brazil and a general devaluation in all the developing countries,” Aldo Abram, economist and president of the Liberty and Progress foundation, told the Herald. “Dilma Rousseff took a more protectionist model than previous Brazil presidents and that affected the country’s image with investors.”
Argentina has devalued its peso 15 percent so far this year, remaining side by side with the high inflation rates. The Peruvian peso has also accumulated a devaluation of nine percent this year, followed by 7 percent of the Chilean peso and 5 percent of the Colombian peso.
“A new wave of devaluation in developing countries is about to begin,” Espert said. “If we focus on Brazil, Argentina should be worried. Our growth in the last decade relied on their growth and now that’s going to change.”
Brazil’s Central Bank announced a currency-intervention programme that will provide US$60 billion worth of cash and insurance to the foreign-exchange market by year-end, a move aimed at bolstering the real.
Although the real did strengthen last week, economists agree that is only temporary.
“These measures won’t help much and their effect is going to be minimal,” Espert said. “An effect might be seen in inflation but the suspension of cash infusions will affect Brazil’s economy in the long-term.”
And Argentina is likely to feel an effect from Brazil’s fall from the list of preferred destinations for global investors.
“When Brazil grows it imports more from numerous countries due to a higher spending capacity,” Abram said. “But now I see a problematic situation regarding Argentine exports. Brazil’s devaluation is not good news for Argentina.”