If all goes to hell in a handbasket, then Brazil’s economy will contract as much as 5% this year, said Roberto Setubal, president of Itau Unibanco, Brazil’s largest private bank.
The 5% number is his worst case scenario, which is dependent on the continued collapse of commodity prices. The base case is 2.5%. Brazil’s GDP declined by more than 3% last year.
“I think that a drop of five percent is steep at the moment, but we will be looking at this throughout the year,” Setubal said during a conference call with investors on Thursday. “We want to be realistic. If it is better than that, great.”
The trick in Brazil, then, is to have lowered expectations. Setubal lowered his guidance for loan growth this year, but admitted he was being conservative.
If Brazil’s GDP falls by 4%, it will be the worst back-to-back performance of the Brazilian economy since the Great Depression in 1930-31.
Moody’s MCO -3.91% is currently in town to discuss a possible downgrade to junk status. Brazil is already considered speculative grade by Standard & Poor’s and Fitch. Brazil became investment grade in early 2008, months before the Lehman Brothers/Bear Stearns blowout that led to the Toxic Asset Relief Program in October of that same year, and a general rout of global equity markets.
Brazil’s economy bounced back quickly with a number of stimulus measures helped along by nearly fully employment and incomes that had risen handsomely over a seven year stretch.
But once quantitative easing began in the U.S., and later in Europe, investment firms turned to the advanced economies for safer bets. Brazil portfolio investments declined. And then the commodity bubble burst with a bang from China, putting a decisive end to Brazil’s boom years.
A few economic policy mis-steps, coupled with a massive political corruption crisis, has muddied up a relatively good story. Consumer confidence is stagnant at best, but that depends on where you look. In automotive, it’s hit the skids completely.
On Thursday, Brazil’s National Association of Automobile Manufacturers said that January car production fell 29.3% on the year. In 2015, production fell 22.8%. The industry is off to a bad start, meaning work stoppages are likely if this keeps up, and possible downsizing in the auto industry supply chain.
“We’ve gone back 13 years,” the Association’s president Luiz Moan said at a press conference in Sao Paulo today.