Resilient Brazil

SÃO PAULO – Less than a decade ago, Brazil’s economy faltered at the first sign of instability in international financial markets. Today, by contrast, the country seems immune from global market turbulence – or so Brazilian officials believe.  

“The sub-prime crisis hasn’t yet reached the beaches of Copacabana,” Finance Minister Guido Mantega recently proclaimed. “We are growing free of imbalances and, in fact, gradually reducing our dependence on inflows of foreign exchange – that’s key.” Indeed, the government has emphasized that Brazil will be even more insulated as efforts to cut spending reduce dependence on external capital flows.

But Brazil’s ability to escape the effects of a recession in the United States depends on the scale of the crisis. Brazilian officials do have some reasons to boast that Latin America’s largest economy may be stronger than ever: macroeconomic indicators are healthier, solvency ratios have improved, and a mix of exports, investment, and domestic demand has been stimulating economic activity.

During the recent years of abundant global liquidity, the real grew stronger and the central bank was able to pile up foreign reserves, creating a cushion that totaled roughly $185 billion in late January, an amount sufficient to cover the entire foreign debt for the first time in history. With foreign direct investment still flowing in, Brazil’s lower external vulnerability leaves the country in a much better position than ever before to weather the global storm – at least for now.