Bearish on Brazil

The Commodity Slowdown and the End of the Magic Moment

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.


Over the last ten years, global markets have developed an insatiable desire to invest in emerging-market countries, particularly those in which China was purchasing energy supplies and natural resources (these commodities now

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