Brazil bucks global economic downturn

The high food and commodity prices hurting most countries are buoying Brazil, a top exporter of minerals, soy, beef, chicken, and grains.

When Carl's Jr. looked at expanding its international fast-food franchise operation earlier this year, several emerging markets were muted. But after a trip to São Paulo and Rio de Janeiro in June, company officials made sure Brazil was on the list.

Why? The country's young, meat-eating population is growing, which is important to the American chain, says Mike Stout, director of international franchise sales.

But Carl's Jr. also had other motives that speak to Brazil's newfound economic robustness.

"Disposable incomes are increasing and more and more people are moving into the middle class," Mr. Stout said in a telephone interview from St. Louis, shortly after a two-week visit here. "The economy is growing and inflation is stable. From a business perspective, we love the market."

Add to that lower interest rates and easier credit, and you have the reasons Brazil is emerging as an investment magnet. Direct foreign investment to Brazil doubled last year as companies as diverse as real-estate developer Tishman Speyer and agricultural machinery producer John Deere looked to the Southern Hemisphere as a place to do business.

It is a remarkable turnaround for a nation accustomed to boom and bust and strengthens Brazil's place as Latin America's economic powerhouse. Although many countries in the region are doing well – Latin America is enjoying one of its best periods of economic growth in 40 years, the United Nations reported last month – Brazil is outpacing its neighbors. Moreover, the good times seem set to roll: As the rest of the world tightens its belt in fear of a downturn, Brazilians are putting their hands in their pockets and pulling out cash.

"I've definitely been spending more, on clothes, shoes, books, travel," says Neusa Neves, a retired teacher who was poring over coffee-table books in a store window on São Paulo's main street recently. "Things are much better and we are going through a good phase."

Enjoying steady growth

There are several factors behind the nationwide spending spree, economists say. High food and commodity prices – Brazil is one of the world's leading producers and exporters of minerals, soy, beef, chicken, and grains – have brought in cash and created jobs.

Prudent economic policies have kept inflation to below 5 percent and annual growth at about the same rate. The currency is at its strongest level against the dollar since 1999 and investors are so sure Brazil is on the right track that it was recently given "investor grade," a Wall St. qualification that confirms its status as a good place to invest.

Perhaps most important, rising wages, falling unemployment, and a government-assistance program that has put money in the pockets of the poorest families, have helped lift as many as 20 million people into the middle class, economists and researchers say.

Car, home sales on the rise

Those people have money to spend and they are flaunting their newfound liquidity. Sales of domestic appliances rose 17 percent last year, the number of cellphones in use went up 21 percent, and sales of notebook computers and plasma and LCD televisions almost tripled.

For major purchases such as cars and houses, the figures are even more revealing. The number of home mortgages rose 72 percent last year to its highest number ever, and the amount of money being borrowed to buy vehicles jumped 45 percent. Car production last year hit a record high of almost 3 million and rose 21 percent in the first five months of 2008.

"We always knew that there was a very significant portion of the population who were excluded," says Humberto Barbato, president of the Brazilian Electrical and Electronics Industry Association. "There is a whole new group of people coming into the consumer market."

Much of the spending has been made possible by falling interest rates and easier credit. Until recently, interest rates were so high and Brazil's economy so unpredictable that banks would not lend for any extended period.

But President Luiz Inácio Lula da Silva has proved a careful steward of Brazil's economy. Although many believed the former leftist would abandon Brazil's conservative fiscal policies, he has kept monetary policy tight, especially during his first few years in office. Since then, he has gradually overseen a fall in interest rates from 25 percent when he took over to 11.25 percent last year. The Central Bank has since increased the rate to 12.25 percent in a bid to combat inflation.

Even though the rate is still among the highest in the world, it is low by Brazilian standards and interest payments are more manageable than at any time in years.

Lenders are thus more inclined to give credit, and consumers can reduce their payments over longer periods. Mortgages once available for only a five-year term are now available for over 30, automobiles can be paid up over seven years, and even domestic appliances are on offer for 24 monthly payments.

Millions more could join the spree

Experts agree that while consumers are taking advantage of the favorable credit conditions, interest rates are still, in the words of Mr. Barbato, "at money-grabbing levels." Millions are holding off until the rates fall further.

"We're tempted [to buy a car on credit], but we'd rather save our money and buy something outright," said Fernanda São Paulo, a merchant out shopping on a recent Sunday with her husband. "It's easier today, but we haven't taken advantage because of the interest rates. You could buy two cars for what you end up paying."

That sentiment is still widespread, especially among the better educated. It sends a clear signal to bankers and economists that if rates drop further, millions more people could start spending.