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Opinion

Capital markets: Brazil’s unusual recovery

Monetary policy is now much more effective in Brazil and it’s having some interesting consequences.

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Brazil’s latest GDP figures were surprisingly bad: the economy expanded by just 0.1% in the fourth quarter of 2018, slowing from (a revised) 0.5% in the previous quarter. The Brazilian economy grew just 1.1% in 2018 and it is officially the slowest recovery from recession in Brazilian history – odd considering the slack created by the biggest-ever contraction.

Brazil’s recovery is unusual in other ways, too. Take international investors: usually the first to enter a country after a recession are the financial flows, with allocations of funds into public equity and the fixed income markets. The flows are usually more responsive to signs of renewed growth than other forms of investment – such as foreign direct investment (FDI) – that need to be more convinced of the robustness of a turnaround given the difficulty and expense of reversing such investments.

But in this cycle FDI has been performing better than expected – more than covering the country’s modest current account deficit – and the more speculative financial flows haven’t materialized.

Reticence

Some local bankers are perplexed by the international investors’ reticence. The international media, they say, are to blame for overplaying the portrayal of president Bolsonaro during his election campaign, though even they admit his first couple of months haven’t been reassuring from the point of view of establishing his ability to govern (his antics during carnival creating the first use of the term ‘golden showers’ in many ‘non-specialist’ publications – and now we can add Euromoney to that list too).




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