Not again, please! Brazil and India more vulnerable now to another crisis

April 25, 2013

After bad economic news from Germany, China and the United States over the past few weeks, here are two more. Brazil and India, two of the world’s largest emerging economies, are increasingly vulnerable to another crisis or to the eventual end of the ultra-loose monetary policies in developed economies after five years of a severe global slowdown.

Weak demand for Brazil’s exports and the voracious appetite of local consumers for imported goods widened the country’s current account deficit to 2.93 percent of GDP in the 12 months through March, the widest gap in nearly eleven years. In dollar terms, that amounts to $67 billion.

To help fund this gap, Brazil could at first loosen the currency controls adopted in the past few years and let more dollars in. But if the dollar flows change too swiftly, Brazil would find itself with three other options: curb spending by growing less, allow a decline in the foreign exchange rate at the risk of fueling inflation, or burn part of its international reserves – which are large, at $377 billion, but not infinite.

Such an outlook could get even more challenging if commodities prices drop – and last week’s tumble in many products sent a reminder of how volatile these markets can be, hurting not only Brazil but many other Latin American exporters.

    ”Whereas the region entered the 2008-09 global financial crisis from a position of relative strength, it is now much more vulnerable to another external shock,” said David Rees, emerging markets economist at Capital Economics, in London.

On the other side of the globe, India is also concerned. While Asia’s third largest economy stands to gain from lower commodity prices, with oil and gold imports accounting for a major chunk of its overall import bill, the rest of the story is at best similar, and perhaps even worse.

Running a current account deficit that’s twice as big as Brazil’s in percentage terms at 6.7 percent of GDP in October-December, but with smaller foreign exchange reserves at $295 billion, India depends more heavily on hot money and could be in a fragile situation if the big central banks switch off their printing presses.

    “Europe adopted quantitative easing and the U.S. adopted quantitative easing. We are concerned about what happens if they withdraw from quantitative easing – that’s our present concern,” India’s finance minister P. Chidambaram said at the G20 meeting in Washington last week.

He has implemented steps to rein in India’s country’s large current account gap through steps to boost foreign investments and curb local spending.

However, any progress on that front is likely to be painfully slow, BNP Paribas’ Chief Asia Economist, Richard Iley, wrote in a research note.

    “Certainly, Indian policymakers would be unwise to assume that the current benign global backdrop can persist indefinitely,” Iley said. “An abrupt shift in global financing conditions could yet blow India decisively off course.”

With Silvio Cascione in Sao Paulo

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