1. The Impact on Brazil of the Global Financial Crisis John Williamson Senior Fellow Peterson Institute for International Economics

2. Finance versus the Real Economy?  Gloom and doom in the financial sector  Versus continuing prosperity in major parts of the real economy Export sectors in the US Export sectors in the US Emerging markets Emerging markets Primary product exporters Primary product exporters Brazil as an example Brazil as an example Reverse-coupling thesis Reverse-coupling thesis

3. Strengthened Fundamentals in Brazil  Low inflation country  Large primary surpluses and an expected overall fiscal surplus  Falling public sector debt/GDP ratio  Elimination of dollar-denominated debt from the public sector  Current account surpluses for 5 years  Low ratio of external debt to exports or GDP.

4. September 2008: Financial Crisis  Sudden change of view  Loss of US housing wealth since end-2006: c. $6 trillion  Loss of world equity wealth since the end of 2007: c. $20 trillion  Assuming 4% spending from wealth, and US has half the world’s housing wealth, this will reduce demand by about $1,300 b.  And demand is cut by lack of access to credit, by an unknown sum.

5. Impact on Brazil  Principal channel for world recession to impact Brazil is via current account: Lower prices of primary products Lower prices of primary products Lower demand for differentiated products Lower demand for differentiated products  About 50% of Brazil’s exports are primary products and the rest differentiated (manufactured) products  How large and how permanent will the decline in primary product prices prove?  Decline in real likely to temper the loss of markets for manufactured exports.

6. Two Measures of the History of the Brazilian REER

7. Contagion via the Capital Account  Brazil still a major net debtor, especially short- term, even though it has not recently had to borrow much  So a capital outflow is still possible and still has major consequences: Less FDI—modest and delayed effect on investment Less FDI—modest and delayed effect on investment Portfolio equity outflow—large, rapid effect in reducing Bovespa, thus Brazilian consumption, and reducing real, thus increasing inflation Portfolio equity outflow—large, rapid effect in reducing Bovespa, thus Brazilian consumption, and reducing real, thus increasing inflation Fewer loans for Brazilian companies—threat to investment, exports, production. Fewer loans for Brazilian companies—threat to investment, exports, production.

8. Policy  Accept the decline in the real but aim to limit overshoot  Don’t ditch inflation-targeting, but reformulate objective to prevent second-round effects of the depreciation on inflation  Replace missing foreign credits by an expansion in domestic credit  Join (if invited) in a concerted fiscal expansion with temporary measures.