Brazil and Beyond

Neil Shearing, chief emerging markets economist at Capital Economics, visited Global Finance on September 10, just as Standard & Poor’s cut Brazil’s public debt to junk level. We asked him about the outlook for that country and other emerging markets.

Global Finance: How would you describe Brazil’s current situation?

Neil Shearing: I’m not saying that Brazil is going back to the ‘80s and the ‘90’s, but the outlook is pretty grim. The fiscal policy is dire, the politics are dire. But two aspectsthe weak real and the Petrobras scandalcould represent two watershed moments for the country. I would not be surprised if in two years’ time we would look back to when the real hit 4 versus the US dollar as the moment when the Brazilian manufacturers started to compete on global markets, and to the Petrobras scandal as the time when Brazilian institutions became mature [enough] to prosecute politicians for corruption.

GF: Brazil aside, there’s a widespread feeling that the boom in emerging markets is over. Do you agree?

Shearing: The speed at which the sentiment is shifting is remarkable, but I think it has gone too far in the other direction. Sentiment was too optimistic six months ago but now may become too gloomy. After a decade of growth, the emerging market sector is a very diverse and different place than it was ten years ago. Back then, all these economies were suffering from similar vulnerabilities, whereas now only a few economies look like that, like Turkey for example.

GF: What about Latin America?

Shearing: In the previous commodities boom, a lot of foreign currency debt was accumulated in Latin America. This time around, if there has been an expansion of debt, it has been mainly local currency debt, and that carries fewer risks. I am still downbeat for Latin America, but it is too black-and-white to say, ‘We have gone through a boom and [now] we are going back to the 1980s.’ We have a new phase: It is a period of so-so growth. It is going to be 3% to 4% in the emerging world, faster in [emerging] Asia because they are poorer, slower in emerging Europe because they are richer, slower in Latin America because of the legacy of commodity prices… A real exception has been Mexico, where I still think that the economy will pick up from next year.

GF: And the BRICs?

Shearing: With the exception of Brazil, over the last six months China, Russia and India did not show unemployment increases, suggesting that it is not a problem of demand, as it was the case in the US in 2008. It is more a crisis on the supply side: It is more about foreign investing in Latin America; a slowdown in productivity growth in Latin America, but also part of Asia; overbearing red tape and regulation in India; over-reliance on energy in Russia; excessive reliance on investment in China. It is not that the catch-up was exhausted. As these countries become richer, it is normal to expect a slowdown in growth but I think they are slowing beyond what you would normally expect. China should be able to grow 6% a year, India more than that at around 8% or 9% a year, Brazil and Russia should be able to growth at around 3% or 4%.

GF: Will China’s woes block the liberalization process?

Shearing: It could be the case, but not necessarily. One important point to make about China is that there are some parts of the economy, the service sector in particular, which still do quite well. There are no signs that retail sales, or the labor market, is slowing. If you look at things like the health sector or tourism, they are still strong.

GF: What emerging countries are going to see the higher growth in the next decade?

Shearing: The manufacturing countries, mostly in Asia. I do not see a new boom [led] by commodity producers.