Brazil economy still strong -- Best of emerging markets

September 10, 2008

The economic discipline that Brazil’s President Luiz Inacio Lula da Silva, known worldwide as Lula, has instituted is paying off. In 2007, Brazil's economic growth was 5.4%, inflation dropped to 3.6% and the current account surplus increased to $3.6 trillion. In 2005, Brazil paid off its loan to the International Monetary Fund (IMF) loan early. For these reasons, many investors agree that Brazil has the strongest of the four BRIC (Brazil, Russia, India, China) emerging market economies.

As a result, Brazilians have more income to spend domestically, and this has caused the local real estate market to double in the past five years. This has been helped by the creation of a local mortgage market, which has not suffered from the same fate as the U.S. That's because Brazilian banks continue to hold the mortgages, and not sell them to a secondary market.

In the last four years, interest rates have fallen from 16%, loan periods have grown to 30 years; and salaries have soared. Although 70% of Brazilians own their own homes, most are of low quality, giving homeowners the equity and desire to move to better properties. (Source: The Economist, Brazil nuts, September 9, 2008)

Quick Facts about Brazil:

• Ruled by Portugal for 300 years, became an independent state ruled by the military from 1822 to 1985, when it became democratic.
• Only slightly smaller in size than the U.S. Largest country in South America, bordering every country except Chile and Ecuador.
• Has 188 million people, about 2/3 that of the United States. GDP per person is increasing, and is now at $9,700, only slightly less than the world average of $10,00 for the world average.

What Brazil's strengthening economy means:

Investors in Latin America in past decades remember that Brazil's economy often turn south just when it seems the strongest. However, the changes that Lula has made means the economy now has a strong base that will protect it from severe downturns, despite slowing global GDP growth.

Action Steps:
Continue to hold have high quality Brazilian companies in your emerging markets fund. Large-cap U.S. companies should also benefit from Brazil’s growth.

For more on the Brazil, see the WorldMoneyWatch Top Ten Trend: Bolivarism in the Latin American Economy

Like this article? Sign up for your free email newsletter.