Bearish on Brazil
The Commodity Slowdown and the End of the Magic Moment
Article Summary and Author Biography
Until recently, there seemed plenty of reasons to be bullish on Brazil. Having posted record growth for a decade and weathered the financial crisis well, the country looked poised to become a global economic leader. But the would-be giant stands on feet of clay. The economy depends too much on high commodity prices, and as demand falls, so may Brazil.
RUCHIR SHARMA is head of Emerging Markets and Global Macro at Morgan Stanley Investment Management. This essay is adapted from his new book, Breakout Nations: In Pursuit of the Next Economic Miracles (Norton, 2012).
Video
Jonathan Tepperman talks to Ruchir Sharma, head of emerging markets at Morgan Stanley, about the future growth potential of the world's leading emerging markets.
Response
Brazil's rise never depended on the sale of commodities, and thanks to recent reforms, the country will continue to prosper, write Shannon O'Neil, Richard Lapper, and Larry Rohter. Ronaldo Lemos, meanwhile, claims that those reforms have not gone far enough. Ruchir Sharma responds that Brazil is indeed headed for trouble.
Snapshot
In November, former Brazilian President Luiz Inacio Lula da Silva's closest adviser was sentenced to ten years in jail for corruption. Now, the highest court seems determined to go after Lula himself. Whatever the final result, the judges' campaign has convinced Brazil's taxpaying middle class that it is time to stop tolerating graft.
Brazilian President Dilma Rouseff at the White House. (Kevin Lamarque / Courtesy Reuters)
Until recently, the consensus view of Brazil among investors and pundits was almost universally bullish. Under the landmark presidency of Luiz Inácio Lula da Silva, the country became known as a paragon of financial responsibility among emerging markets. Having contained hyperinflation and reduced its debt, Brazil weathered the 2008 financial crisis better than most, growing at an average annual rate of nearly four percent over the past five years. And in the last ten years, some 30 million Brazilians have entered the middle class, giving their country, according to Brazil's promoters, the power to expand despite a turbulent global environment and to reduce income inequality even as it grew elsewhere in Latin America.
This decade of success has made Brazil one of the most hyped emerging-market nations, with one of the two top-performing stock markets in the world and receiving more foreign direct investment than most other countries. Over the past five years, the amount of foreign money flooding into Brazilian stocks and bonds surged to record levels, with inflows expanding from $5 billion in 2007 to more than $70 billion through this past January. Brazil's rise has solidified its reputation as a leading member of the BRICS -- Brazil, Russia, India, China, and South Africa -- the world's top emerging markets, which many expect to supplant the United States and Europe soon as the largest drivers of the global economy.
Yet this glowing image of Brazil rests on an extremely shaky premise: commodity prices. The country has grown largely in concert with surging demand for its stores of oil, copper, iron ore, and other natural resources. The problem is that the global appetite for those commodities is beginning to fall. And if Brazil does not take steps to diversify and boost its growth, it may soon fall with them.
THE COMMODITY CRAZE
This is a premium article
You must be a logged in Foreign Affairs subscriber to continue reading. If you wish to continue reading this article please subscribe , or activate your online account to get full online access.
