Brazil, Destined For Boom or Bust: Part One

What wouldn’t OECD markets like Europe or the US do to have Brazil’s economy? The South American powerhouse turned in yet another trade surplus in 2010 at US$ 20.3 billion and exports rose by 31.4 percent. Employment is high, as the WSJ reported just this week. Unemployment is down to a record low of   5.3 percent in December from 5.7 percent in November, 6.7 percent for 2010 as a whole and 8.1 percent in 2009.

So what could be wrong? Why these complaints about currency wars and threats of capital controls? Well, as good as the current position is, when taken in isolation and looked at over the medium term Brazil is sliding down a slippery slope of deteriorating competitiveness and over-reliance on a narrow sector of commodity exports. As a recent Economist Intelligence Unit report explains the trade surplus, which peaked at US$46.5 billion in 2006, has been shrinking fast. 2010’s US$20.3 billion is less than half the level of 2006 and down by around a fifth from the level of 2009. Although exports continued to rise, by 31.4 percent in nominal US dollar terms, and exceeded US$200 billion for the first time, imports continued to rise at a much faster rate, by 41.6 percent.

Source: Economist Intelligence Unit

Not only are imports rising faster than exports, but the mix is changing. Once a major exporter of finished goods, Brazil is increasingly reliant on commodity products, much of which are going to China. Agriculture and livestock contributed US$63 billion to the country’s trade surplus, the report said, but industry and services registered a deficit of US$42.7 billion, illustrating that Brazil’s trade surplus has become increasingly dependent on commodities.

While Brazil’s exports have become progressively more reliant on the commodities trade, they have also become progressively more reliant on one country, China. Like Australia, Brazil’s fortunes are tied up in the ongoing story of China’s industrialization as the country imports increasing quantities of Brazilian iron ore and soy beans. For the first time in 30 years, Brazil exported more primary products than manufactured goods last year. Commodities accounted for 44.6 percent of overall exports up 4 percent over 2009, while manufactured exports fell sharply from 44 percent in 2009 to 39.4 percent in 2010.

Domestically, the government is coming under intense pressure to do something about the situation. O Globo, a domestic news site, is reported in Bloomberg as predicting Brazil’s trade surplus could shrink to just US$ 1 billion in 2011 as the currency continues to strengthen and choke off exports:

Graph courtesy of

(Continued in Part Two.)

–Stuart Burns

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