Bad News from Emerging Markets

12/16/2011 6:30 am EST


Jim Jubak

Founder and Editor,

Taking a break from the Eurozone crisis, MoneyShow’s Jim Jubak reviews the recent data from the Brazilian and Chinese economies that could be key for investors in emerging markets.

This is Jim Jubak, spanning the globe.

I know that it seems recently that everything has been about Europe. But while we’ve been watching the unwinding or the rewinding of the European debt crisis, we’ve had interesting news, important news, coming out of Brazil and China in the first week of December.

Both of those countries are key points for the worry about whether we’re going to have a hard landing in emerging markets, or whether they’ll produce enough growth to keep the global economy growing, even as Europe and maybe the United States slow. So this is kind of bad news…it’s for people who think we’re going to have a hard landing and not get the growth we need.

Brazil for the third quarter came out and said, "Whoops—not only did we have growth slow, but it actually turned negative quarter-to-quarter. So from the second quarter to the third quarter, Brazil’s GDP dropped by about 0.4%. Not a whole lot, but certainly on the negative side and it’s not what you wanted to see.

Now, the Brazilian Central Bank has been aware that the Brazilian economy was slowing. It’s been cutting rates since August, three times—1.5%—and are probably going to keep on cutting. The whole idea was to try to head this off.

The problem is that they didn’t really think about the possibility that they were going to get a slowing of the Brazilian economy because of rising interest rates that they put in to lower inflation…plus the second thing of a slowdown from Europe, so that you have Brazilian exports slow in the first half of the year and really not pick up again.

It looks like this process is going to continue. Brazil’s exports were actually up about 8% in the third quarter, but no one really expects that to last as European economies slow.

So if you have an 8% increase in exports, but you still have an economy that’s running in the red (negative territory) and you think that exports are going to slow, it seems unlikely that you’re going to get a fourth quarter with positive growth. That would put Brazil into a technical recession.

The government is still saying that they can somehow manage to get 3% growth in 2011. Right now, the rate is more like 2%. It seems unlikely they’re going to see acceleration in the fourth quarter, but maybe.

For 2012, the government is saying 5% growth. It just doesn’t seem in the cards, especially if you look at the broken-backed nature of 2012, with a very slow first half and then maybe a decent second half as multiple interest rate cuts kick in.

The Central Bank has cut interest rates from 12.5%—yes, that’s high, but Brazilian interest rates are always high—down to 11% now, and now economists are talking about 9% by the end of 2012, which is really about as low as Brazilian interest rates ever get.

In the same week, we had really kind of nasty news from China about the real-estate market. If we’re looking for a reason that China might have a hard landing, the reason tends to be real estate. We’ve had a boom in real-estate prices that now seems to be tempered. We’re seeing real-estate sales drop off.

Most importantly at the local government level, a lot of government revenue comes from the sale of land—the majority of it, in fact, because most taxes collected at the local level go to the national government, and local government doesn’t get anything out of that. So big cities like Shanghai or Guangzhou fund themselves out of land sales.

In the month of November, we had four scheduled land sales either be canceled or just postponed in Guangzhou—they didn’t happen. Guangzhou was counting on raising about $8 billion from land sales in 2011. As of the end of November, they’ve raised about $2.2 billion, a huge deficit.

What this means is it ripples through, because this is the level of government which produces spending on infrastructure, roads, airports, and all that stuff. If that spending doesn’t happen because the government doesn’t have it, it means the economy slows. That’s what people are really worried about right now.

That’s a separate issue than the issue of how much bad debt is out there because these local government loans were backed by real estate, and if real estate prices come down, the collateral of the banks have on these local government loans isn’t going to be worth as much. This is a separate problem.

Simply looked at from a question of how fast the economy is going to grow, the falling real-estate market means bad news for local government taxes and local government spending.

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