“This is absolutely unique,” said Brazilian-Dutch Giorgio Romano Schutte, professor of international relations and economics at the Federal ABC University in São Paulo. He argues that Brazil’s economy should have taken a hit when Putin started his war against Ukraine for two reasons. First of all, the invasion itself, resulting in great international uncertainty. But also because a few weeks after the war started, the Federal Reserve (the US central bank) raised interest rates for the first time in three years.
‘An international crisis and an interest rate hike in the US. In such a case, the booklets predict a capital flight from emerging economies’, Schutte says over the phone. ‘Ukraine’ could have been a major problem for Latin America’s largest economy, which was already struggling with high inflation. The open economy – without too much government intervention, money can come and go – is vulnerable, says the economist. This was already apparent in the pandemic when investors rushed out and sought the safe haven of the dollar. ‘Until now, the rule has been: if the wind is just wrong, they all go away immediately.’ The real could have devalued, prices would rise further.
Oil and Agriculture
But the opposite happened. While investors from virtually all emerging countries fled the pandemic, southern countries with high exports are proving more resilient to the current uncertainty in the global economy, says Brazilian economist Daniela Prates, who works in Geneva for UNCTAD, the UN’s trade and development division. Suddenly the cards for Brazil were well shuffled. Brazilian farmers and the Brazilian oil sector benefited from sanctions against oil country Russia and the devastating war in ‘granary’ Ukraine. Their products soared in value.
Brazil also had an additional economic weapon that gave investors a boost: ‘The Brazilian central bank also raised interest rates,’ says Prates. Investors and speculators were not concerned about the US interest rate hike as Brazilian interest rates also rose. The difference between those two rates remained significant. The Fed increased by a quarter of a percentage point from 0 to 0.25 percent. Brazilian interest rates currently stand at an impressive 11.75 percent. ‘That is attractive to international speculators who hope to make a profit with that difference.’
For international investors, therefore, Brazil continued to do good business thanks to the Brazilian central bankers. For example, they could invest their money in oil company Petrobras, which is one-third state-owned, but two-thirds owned by private (partly international) shareholders. Brazil’s huge iron ore mines were one such sector. The commodity has also appreciated significantly since the end of February. Brazil is one of the largest iron ore producing countries in the world.
poor people suffer
And although the large soybean farmers had to contend with the rising price of fertilizer, which they largely imported from Russia and Belarus, their crops also generated considerably more money worldwide. Professor Schutte: ‘Fertilisers have become more expensive everywhere, and the demand for agricultural products has not decreased as a result.’ Money has thus been flowing towards Brazil for the past two months and the real has increased in value. On a macroeconomic level, Brazil suddenly performed very well.
But those economic figures distort a harsh reality, say both economists. Some (wealthy) Brazilians and international investors fared well in March and April, but the macro-economic party was of no use to ordinary Brazilians. “Life has become more expensive,” Prates says. ‘The poor people suffer’, says Schutte. It is bitter, he says, that due to rising prices on the world market, Brazilians also pay more for products that are produced in their own country. ‘Some sectors benefit, but the majority are the victims.’
The good macroeconomic report is a boost for President Jair Bolsonaro, who hopes to be re-elected in October and slightly catch up in polls with his left-wing rival Luiz Inácio Lula da Silva. But polls and economic daily rates are proving extremely volatile in the South American country. In the past two weeks, the value of the real has fallen again against the dollar. ‘The festivity is already diminishing’, says Schutte. The wind turned in China, the largest importer of Brazilian raw materials: ‘Markets are reacting to the latest corona lockdowns in Shanghai and Beijing.’