Sunday, October 11, 2009

Brazil asserts itself on world stage

Khaleej Times Online: "Olympics affirms Brazil's rise, Lula legacy"
The Australian: "Olympic boost to Brazilian economy"
Financial Times: "Moody's rates Brazil at investment grade"
Wall Street Journal: "Brazil: IMF Bond Purchase To Diversity Foreign Reserves"

Brazil’s move from regional to world power continued to gain momentum over the past few weeks. On October 2nd, the International Olympic Committee selected Rio de Janeiro to host the 2016 Olympic Games. Earlier this September, Brazil agreed to provide $10 billion to the International Monetary Fund, and Moody’s upgraded Brazil’s debt to investment grade. The combination of these events is further validation of Brazil’s economic rise over the past decade.

The International Olympic Committee’s selection of Rio de Janeiro to host the 2016 Olympic Games marks the first time that South America will host the Olympics games. Similar to the way that China holding the 2008 Olympic Games represented China’s entrance onto the world stage, this selection further signifies Brazils’ rise as an economic power. Brazil’s economy, already out of the recession, will benefit from the IOC’s selection of Rio for the 2016 Olympics. Brazil’s tourism industry can expect a significant boost in the coming years. Rio will also require significant investment in infrastructure in preparation for the games that will also result in an influx of construction jobs. The IOC’s selection indicates its confidence in Brazil’s stability, an endorsement which will further assure the world of Brazil’s political and economic stability and should, in turn, increase foreign investment in the country.

Moody’s upgrading of Brazil’s debt to investment grade signifies the bond rating organization’s confidence in Brazil’s economic stability. Brazil’s economic stability represents a significant shift from the 1980’s and 1990’s, when Brazil faced high inflation and frequent economic crises. Since 2002, however, Brazil’s economy experienced significant growth and began to stabilize. Moody’s upgrade serves as a lagging indicator of the Brazilian economy’s development over the past decade. Furthermore, the fact that the upgrade comes just as the world is exiting the latest financial crisis represents a significant accomplishment. Brazil escaped the financial crisis relatively unscathed in comparison to developed nations. The BIC of the BRIC countries weathered the financial crisis relatively well and are now emerging from the crisis while developed countries have lagged behind. This represents a unique shift from historical economic crises, where developing countries often suffered more than developed countries.

Last week Brazil announced the purchase of $10 billion in bonds from the International Monetary Fund. The bond purchase from the IMF also marks a significant step in Brazil’s economic progress, as in the past, Brazil was the recipient of IMF loans, now it is contributing to the funding of the IMF. The purchase signals that Brazil, Russia, India, and China will soon expect a larger role at the institution. Currently, the BRIC countries hold less than 10% of the voting power. Recent reforms have increased their voting power by approximately 5%. The $10 billion purchase of bonds from the organization will likely result in further increases in voting power.

Discussion Questions:
Will the IMF ease restrictive covenants on its loans as BRIC countries gain more voting power?

Will the developing nations' rise to power in international organizations create more legitimacy and progress in these organizations?

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