Wednesday, October 14, 2009

Why Did I Overestimate the Effects of the Crisis in Brazil?

In this February 25 post I wrongly predicted (as did the magazine The Economist) that the Brazilian economy would be heavily affected by the financial crisis. Looking backward, there's no question that I overestimated its negative effects in Brazil. Why?

In part, and ironically, because I overestimated the progress made by the Brazilian financial system since the country achieved macroeconomic stability in 1999. It remains very underdeveloped, what may help during a global financial crisis of the type we experienced, at the cost however of severely limiting the expansion of the country's economy during normal times.

Much more important however is something that nobody could have predicted: the country appears to have become part of a new wave of "financial bubbles" (loosely defined) frothing right now. As put by Constantino (in Portuguese, my translation):
There are some undeniable signs of froth in the Brazilian financial markets. The optimism in relation to the economic future of the country infected investors all over the world. Brazil seems to be the current object ball. Moody's has finally granted the long-awaited investment grade to the country. Billionaire property investor Sam Zell announced its commitment to increase investments in the country, stating that Brazil is his number one bet at the moment. And perhaps the main sign of excessive optimism was the Santander's Brazilian arm IPO issue. It was the largest IPO ever made in the Brazilian stock market.
This is BTW a phenomenon that we've been observing for many years: one "asset bubble" is simply replaced by another "asset bubble," as liquidity remains too high and interest rates too low. Countries like Brazil should start preparing themselves for the next pop.

PS: more support for this analysis comes from an article in the The Economist today: Mexico has a case of bubble envy. What just shows how ephemeral is success south of the border.

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