As the good old days of record commodity and credit growth are gone for the moment, Brazil and its exchange traded fund (ETF) face the stark reality of global economic unrest.
Credit is scarce and banks have grown suspicious of one another. This set the stage for two of the largest banks in Brazil, Itaú and Unibanco, to merge and create a bank with combined assets of $263 billion, according to the The Economist.
A sudden selloff of Brazilian shares and currency created losses on foreign-exchange derivatives meant to limit Brazilian companies to currency moves. Companies goaded into this false sense of security acknowledged large losses, which spread fear throughout the industry and caused banks to reduce lending practices.
Reports are coming in showing farmers having hard time finding credit, which could ultimately affect next year’s harvests. Bank monthly payments for every type of loan has increased and consumer credit has shriveled up in banks’ anticipation of bad loans.
Planning minister Paulo Bernardo acknowledges that the government’s target for primary fiscal surplus for 2009 dropped from 4.3% to 3.8% of GDP.
Many safeguards have been implanted into Brazilian banking systems such as high interest rates, reserve requirements, and government backing. The resulting likely hood of bank failures is said to be minuscule.
The Brazilian government has also followed some prudent plans to fend off fiscal problems. It has decreased public sector’s debt from more than 60% of GDP in 2002 to less than 40%. Most dollar-denominated debts have also been dealt with.
Unlike most countries, Brazil’s financial problem mainly lies in the private sector. This poses an impediment to this sector’s ability to invest. Analysts have reduced growth forecasts for the country from 3% to 2% for the next year.
The iShares MSCI Brazil Index Fund (EWZ) is currently down 52.6% year-to-date. The financial sector is the fund’s third-largest weighting at 19.6%. It’s behind energy (30.2%) and industrial materials (27.2%).