Brazil’s economy
Stalled
A long-awaited recovery still fails to materialise

FOR many months Guido Mantega, Brazil’s finance minister, has been forecasting that the economy is on the verge of vigorous growth that never seems to come. Even so, the third-quarter figures published on November 30th were a shock. The government had convinced independent economists that a weaker currency, lower interest rates, and a cut in sales tax on cars and white goods would prompt a healthy expansion of 1.2% compared with the previous quarter. In the event, the figure was just 0.6%. The national statistics institute also slashed its estimate of second-quarter growth, from 0.4% to 0.2%

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“Bad banks” seldom turn a profit but are still useful
Sep 8th 2012 | from the print edition ,  http://www.economist.com

“IT WILL be viable and will not post losses,” promised Luis de Guindos, Spain’s finance minister, on August 31st, as he unveiled plans for a “bad bank” to take over the dud property assets of Spain’s troubled lenders. Experience suggests that such pledges are not easily kept.

America’s Resolution Trust Corporation (RTC), for instance, was set up in 1989 to clean up savings-and-loans institutions with $394 billion in assets. The process cost taxpayers almost $76 billion.

The example of Sweden’s widely admired bad bank in the 1990s is even less encouraging. Sweden’s bank regulators vigorously marked down souring assets, forced banks to recapitalise (or be nationalised) and moved dud loans into specialised asset-management companies. This was to allow cleaned-up lenders to operate as “good banks” that lent to the real economy. Judged by its overall impact the Swedish bad bank was a success: growth bounced back quite quickly. But the cost to taxpayers was high. Sweden paid about 4% of its GDP to bail out its financial system, yet got back only about half of that from selling off loans and stakes in banks.

More reassuring to Spanish taxpayers is Maiden Lane, a vehicle created by the New York Federal Reserve to house assets owned by Bear Stearns and AIG that have turned out to be less toxic than expected. In June this year Maiden Lane repaid in full (and with interest) the money it had borrowed to fund its purchases. It still has some assets left to sell, so the government will probably turn a profit on the deal, in contrast to earlier estimates that it might lose as much as $6 billion on its $29 billion in assets from Bear Stearns alone.

Another relative success may be found in Britain’s bad bank, which took over some of the loans issued by Northern Rock, and all of the ones held by Bradford & Bingley. By the end of June 2012 it had £90 billion ($141 billion) on its books, on which it seems to be turning a profit thanks to cheap funding from the government. British taxpayers have fared rather worse with nominally good banks: the government’s equity stakes in Lloyds Banking Group and Royal Bank of Scotland have fallen in value by over £30 billion.

Ireland’s bad bank, the National Asset Management Agency (NAMA), also seems to be doing fairly well in managing the €74 billion ($93 billion) in loans it took over, mainly because it bought the assets from Irish banks for just €32 billion. Yet it is now in the invidious position of being a long-term manager of a large portfolio of state-owned properties with all the risks of political interference that this entails.

These precedents suggest a few lessons for Spain’s bad bank. The first is to be conservative when valuing the assets that will go into the bad bank, even if this imposes steeper losses on the banks handing them over. Cautious valuations will help set a floor for property markets and make it easier for the bad bank to sell assets quickly.

A second lesson is that borrowing costs matter. Bad banks in Britain and America turned good because they could borrow cheaply. Unless Spain’s borrowing costs fall sharply, the government will be hard-pressed to make a turn on even deeply discounted banking assets. Last is the lesson from Sweden and the RTC, that bad banks may be judged successful even if they incur large losses. Rather than promising profits, Mr de Guindos might do well to start reminding people of that.

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SANTIAGO – During a visit to Rio de Janeiro last year, US President Barack Obama told a cheering crowd that Brazil is the country of the future no more. “For so long, you were...told to wait for a better day that was always just around the corner,” Obama said. “Meus amigos, that day has finally come.”
 
Is Obama right? At first blush, the answer would seem to be an unambiguous yes. Brazil today is democratic, and its president gets to sit next to Russian, Indian, and Chinese leaders at much-publicized “BRIC” summits. The economy weathered the crisis triggered by Lehman Brothers’ collapse in 2008, and mounted a vigorous recovery in 2010. Brazil not only remains a top football power, but it will host the World Cup in 2014 – and the Summer Olympics two years after that.
 
For a while, financial markets were engrossed in a torrid love affair with Brazil. In the aftermath of the crisis, capital poured into the country, bidding up asset prices. Oil giant Petrobras raised $67 billion in its IPO, which until then was the world’s largest.
 
But dig a little deeper and a more complex picture emerges. An apartment in a fashionable São Paulo neighborhood may cost as much as it would in London or New York, but, when it comes to competitiveness, Brazil ranks 53rd on the most recent World Economic Forum index – just ahead of Mauritius and Azerbaijan, and behind Malta and Sri Lanka.
 
Of course, Brazil’s macroeconomic situation is vastly better than it was a decade ago, when capital fled the country and the exchange rate collapsed in the months before Luiz Inácio Lula da Silva was elected President. Years of primary fiscal surpluses, which began under President Fernando Henrique Cardoso and continued after 2002 under Lula, have brought public debt under control and earned Brazil an investment-grade credit rating.
 
But how fast Brazil can grow, and for how long, remains in question. After the 2010 boom, economic growth slowed precipitously. Indeed, by the third quarter of 2011, growth had stalled. Economic activity has picked up a bit since then, but forecasts for 2012 put real GDP growth at only 3.5% or less.
 
The key growth constraint is lack of domestic savings. If Brazil raises its investment rate to 23% of GDP from today’s 19% (as it must to build all that World Cup infrastructure), it will have to run a current-account deficit and rely on external savings equivalent to 3-4% of GDP for years to come. That gap can be easily financed with today’s abundant global liquidity, but a disorderly European default or an eventual US monetary tightening (yes, it will happen one day) could change that.

Moreover, because investors do not view Brazilian and non-Brazilian assets as perfect substitutes, low domestic savings mean perennially sky-high (nominal and real) domestic interest rates. Brazil is a country where traders get excited whenever the Central Bank’s short-term interest rate drops below 10%.
 
To offset the impact on investment of such high capital costs, the state-owned Brazilian Development Bank (BNDES) offers tens of billions of dollars in long-term loans at zero or negative real interest rates. That certainly benefits the firms that can get such loans; unfortunately, those firms are not necessarily Brazil’s most productive.
 
Both the private and public sector in Brazil under-save, but the government’s dearth of savings is the bigger problem. It is not for lack of revenue: Brazil’s tax receipts as a share of GDP are the highest in Latin America. The problem is a state that invests far too little because it has locked up too much money in inflexible current expenditure.
 
Public-sector pensions are a good example. A recent report by the bank Itaú estimates that in 2010, the social-security system covering private-sector workers spent 6.8% of GDP on benefits granted to 24 million people. In the same year, the system for public-sector workers spent about 2.1% of GDP on benefits – but for fewer than three million people. In other words, the average government pensioner’s benefits are 2.5 times higher than what the average private-sector retiree receives.
 
President Dilma Rouseff is aware of the problem, and her government is shepherding through Congress an ambitious pension reform. But progress, perhaps inevitably, has been slow. The reform is expected to be approved by the lower House imminently, and then move on to the Senate – a mere 15 years after it was first introduced.
 
The point is to free up resources for the public investment that Brazil desperately needs. In a continent-sized country far from Asia’s markets, transport costs are key. Brazil must build new roads, ports, and airports, and not just for football-mad tourists in 2014. It must build them to create the new exports and the higher-paying jobs needed to reduce Brazil’s continent-sized income inequality. If and when that happens, Brazil will be the country of the present and the future.
 
Andrés Velasco, a former finance minister of Chile, is a visiting professor at Columbia University for 2011-2012.

Copyright: Project Syndicate, 2012.
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