Invulnerable Brazil?

Two questions have dominated economic debate in Latin America in recent years. First, when will the current period of great international liquidity end? Second, what will happen when it does? We could also add a third, related, question: are Latin America’s governments preparing for that day? In the case of Brazil, the answer appears ambiguous, at least at first glance.

On one hand, Brazil has remained more or less at a standstill in terms of economic reform after the start of President Luiz Inácio Lula da Silva’s administration in 2003. Essential changes to the tax code, labor law, and pension system have simply not been made.

On the other hand, whereas, lenders once demanded commitments from Brazil that were often nearly impossible to meet due to the political situation, these same investors now generally seem completely satisfied with Brazil, despite its economic policy paralysis.

There are objective reasons for this change. For the first time in decades, Brazil has been able to take advantage of good economic times to reduce its external debt, thereby lowering the risk to lenders. Indeed, Brazil’s foreign debt-to-export ratio in 2006 was the lowest in the past 50 years. Moreover, while Brazil’s total gross foreign debt fell by $50 billion during the past eight years, its foreign currency reserves rose rapidly, especially in the past two years, cutting the net foreign debt by more than $120 billion since the 1999 crisis (see table).