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How a well insulated Bric became a hot property

After the dotcom bust, it was western housing markets that helped reflate the world economy. Some hope the Brics will do the rebuilding after the credit crunch, writes John Paul Rathbone (Financial Times).
For sceptics, this is a pipe dream. Yet in 2001, when the term was coined, Brazil, Russia, India and China made up barely one-sixth of the world economy. This year, according to the International Monetary Fund, they account for almost one-quarter, having together overtaken the US.
“Even I get excited about Brazil’s prospects,” says Sir Robert Wilson, the normally understated chairman of BG, the UK energy group. Brazil does not suffer from the ethnic and border conflicts of India, Russia’s loose regard for contracts or China’s supercharged credit- and investment-led growth. The domestic market is relatively insulated: exports account for 13 per cent of gross domestic product. Net debt is a manageable 30 per cent of GDP – less than half the UK level. With foreign currency reserves of $230bn (€155bn, £139bn), it is a net global creditor. Export markets are diversified, with China overtaking the US last year as Brazil’s biggest trading partner. No big bank has failed.

All this has fuelled investor enthusiasm. “Brazil is in fashion now, although it wasn’t always so,” says Emilio Botín, chairman of Spain’s Banco Santander.
In the 1980s and 1990s the country mostly funded itself externally, in dollars. When global investors grew nervous they sold the currency, debt service costs soared and the fiscal deficit exploded, compounding the problem. A debt crisis and devaluation followed. Now most of the country’s debt is domestically funded, reducing its risk premium and allowing funds to be raised more cheaply. With less needed for debt payments, more can be spent on investment – and consumption. The vicious cycle turned virtuous.
Enthusiasts are unperturbed. “We have full confidence in Brazilian economic growth,” says Mr Botín. The Santander chairman, whose bank has a large operation in the country and is a dealmaker rarely on the wrong side of a bet.

Financial Times - 10 Nov 2009