Brazil: Real economy takes a hit
Brazilian corporates are starting to feel the crunch, with some particularly exposed by their use of derivatives to hedge the value of the real and earnings under pressure for commodity producers as demand falls. But Brazil’s broad industrial base and generally responsive government policies should stand it in good stead.
While much of the focus of recent months has been on the effect of the financial and economic crisis on the banking sector, in Brazil its effect on the corporate sector is of at least equal immediate importance. Certainly, the financial environment is likely to have more significant short-term repercussions for Brazilian corporates than for those in a number of other countries.
There are three Brazil-specific reasons for this. Firstly, many Brazilian corporates used derivatives to hedge against changes in the value of the real. Unfortunately, these were taken out during a period of consistent appreciation and low volatility and the real’s more than 30% depreciation since June has resulted in huge losses – as well as gumming up the broader short-term borrowing market.
Even as President Lula was saying that Brazil would remain aloof from the problems affecting the US and Europe in September 2008, the economy was becoming rapidly contaminated by the global financial crisis.