Economy

BRAZIL - The Orient Express

By Alexandre Schwartsman - 5511-3012-5726 - aschwartsman@santander.com.br

While Brazilian exports in general have dropped significantly since 3Q08, exports to China, after a sharp adjustment late in 2008, have rebounded strongly, reaching in April higher levels than seen in 2008, in sharp contrast to exports to the rest of the world.

Not by chance, Brazilian primary products exports (driven essentially by the performance of iron ore and soy) are the only ones to display an increase relative to the same period of 2008. A closer inspection reveals that primary exports growth is also associated with China.

Indeed, whereas exports to China represent about 10% of exports registered in the 12-month period ended in April 2009 (and 20% of primary exports), they also account for more than one-third of the increase in exports (and primary exports) observed between April 2008 and April 2009. At any rate, China has become the largest market for the expansion of Brazilian exports, chiefly of primary products.

At the margin this expansion can be explained essentially by the increase of Brazilian exports’ market share in the Chinese market, as imports during the past 12 months are essentially unchanged compared with early 2008. At the margin, however, Chinese imports appear to be recovering from the doldrums recorded during the last quarter of 2008, possibly due to the process of rebuilding inventories depleted last year. Moreover, the signs of industrial recovery, as expressed by PMI readings above the “50” critical threshold in March and April, suggest further expansion in the near term. This should help push Brazilian exports even further in the months to come.

That said, the profile of Brazilian exports to China is very different from the average. While primary products represent about 39% of total exports in the past 12 months, they account twice that share (79%) of exports to China, suggesting that export growth to that country should materialize essentially as primary (non-industrial) export growth. However, our past estimates assign to weak industrial exports a great deal of the decline in industrial output since the third quarter of 2008.

Thus, the good performance of exports to China should help the balance of payments, but is unlikely (directly at least) to help much in terms of providing demand growth for the industrial sector.

Source: Ernest W. (Chip) Brown, Head
212-583-4663 ebrown@santander.us

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