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Thursday, May 03, 2012 10:46 AM

Comments from Brazil on Brazil and China: Nonperforming Loans Soar, Recession in Brazil Arrived, China will Follow

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This morning I received an email from Otavio who lives in Brazil. Otavio writes ...

Hi Mish,

Hello from Brazil. Much of what we both expected has begun to occur in Brazil since we exchanged emails last year. The economy has slowed down greatly. We are on the brink of a recession here, if not in recession already.

Nonperforming loans have risen pretty much on banks' balance sheets causing bank stocks to plunge. Check out ITUB US Equity on Bloomberg. The Brazilian middle class is very much sunk in debt.

The BACEN (Brazilian Central Bank) has cut overnight rates from 12 percent to 9 percent, but the market expects at least another 100 bps cut in the next two months. These aggressive rate cuts, plus massive interventions in the FX market to sell Brazilian REAL, have weakened the REAL from 1.70 to 1.93 per USD.

The government has also instructed public banks to lower their lending rates. It's our own Brazilian version of QE here.

However, the economy is showing signs of weakness. Just today, Industrial Production came out at -0.5 percent but economists predicted an increase of 1.2 percent.

Our economy has been strongly correlated with China's in the last decade. If we are this close to a recession in Brazil, the slowdown in China will be far more than most expect.

Regards Otavio
Brazilian Banks Drop on Delinquency Concern

A quick check of ITUB on Bloomberg turned up Bovespa Declines as Brazilian Banks Drop on Delinquency Concern
Apr 25, 2012 3:42 PM CT

The Bovespa stock index declined as Itau Unibanco SA (ITUB) led Brazilian banks lower after it said it expects losses from bad loans to rise in the second quarter.

Itau, Latin America’s biggest bank by market value, was the worst performer on the MSCI Brazil/Financials Index, which fell the most among 10 industry groups. OGX Petroleo (OGXP3) & Gas Participacoes SA gained the most in four months after it said an oil field off the coast of Rio de Janeiro was declared commercially viable.

The Bovespa dropped 0.4 percent to 61,750.38 at the close in Sao Paulo. The real weakened 0.1 percent to 1.8800 per U.S. dollar at 5:32 p.m. local time.

Itau expects to spend as much as 6.4 billion reais in bad - loan provisions in the second quarter, up from 6 billion reais in the first three months of 2012, according to a regulatory filing today. Banco Bradesco SA (BBDC4)’s delinquency rate may rise 10 basis points in the second quarter, executive director Luiz Carlos Angelotti said in a conference call yesterday.

“These alerts from banks regarding expectations of rising delinquency rates really scared investors,” Pedro Paulo Silveira, chief economist at TOV Corretora, said by telephone from Sao Paulo. “Considering interest rates are decreasing and the economy is slowing down, banks may see their revenue fall as well.”
ITUB Chart

Brazil Manufacturing PMI in Contraction

Inquiring minds are investigating the HSBC Brazil Manufacturing PMI™ published May 2.
Both output and new orders fall for first time in 2012 so far

Andre Loes, Chief Economist, Brazil at HSBC said: “The HSBC Manufacturing PMI index fell to a four month low of 49.3 in April, from 51.1 in March. This was the first PMI manufacturing reading below 50 in 2012, signalling a contraction of activity in the industrial sector.

Broken down, numbers show a broad-based decline in industrial activity, with all components falling below 50, except for both input and output prices which accelerated relative to one month ago (and with output prices reaching the highest level of growth since May 2011). Concurrently, inflationary pressures should remain a source of concern, despite the string of benign CPI readings earlier this year.”
If Brazil weakens further as I expect, the country is already in recession. Moreover, the much beloved BRICs (Brazil, Russia, India, China) and emerging markets in general will not be good hiding places.

Mike "Mish" Shedlock
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