Brazil hits roadblock as global crisis snowballs

By Raymond Colitt - Analysis

BRASILIA (Reuters) - Only months after investors believed Brazil was finally emerging as an economic heavyweight, the snowballing global financial crisis has brought the Latin American giant back down to earth.

Brazil's stock market had gained eight-fold in just over five years, driven by strong domestic demand and a seemingly insatiable appetite for its main exports, from iron ore and steel to sugar and soybeans.

But the Bovespa stock index .BVSP sank to its lowest in around two years on Wednesday morning, and is down almost 50 percent from its all-time high of 73,920 points on May 29.

Brazil's currency, the real, has lost about one-third of its value in just over a month.

"I've been in the market since 1980 and I've never seen anything like it," said Lucy Sousa, head of the Brazilian association of capital market analysts.

"A few weeks ago, brokers were forecasting the Bovespa at 80,000 this year. Now we're at 40,000," she said.

Brazil is not the only emerging market to be taking a beating as rattled investors flee from risk. Stock markets in Mexico and Argentina had fallen 38 percent and 40 percent from this year's highs, respectively.

And Brazil's peers in the so-called BRIC group of elite emerging market nations are also feeling the pain. China's Hang Sei index .HSI was 51 percent off this year's high on Wednesday, while Russia's RTS index was down 69 percent and India's National Stock Index was off 45 percent.

For the first months of this year, many economists and investors had thought that somehow Brazil, which has made great strides in recent years in cleaning up its public finances and is home to a vast domestic market, would emerge largely unscathed from the global financial turmoil.

But that optimism sank like a brick this week, along with the financial markets.

"I don't see how Brazil can escape economic stagnation now," said Alexandre Assaf, professor of finances at the University of Sao Paulo.

Brazil's economy grew at a 6 percent annual rate in the second quarter of this year and was expected to expand around 3.5 percent in 2009, but investment bank Morgan Stanley revised its forecast for next year to 2 percent on Monday and other economists are expected to follow suit.

FALLING COMMODITIES A THREAT

One way the global financial crisis hits Brazil is through falling commodity prices, as the country still depends heavily on natural resources and agricultural products.

In addition, some economists say foreign direct investment will slide and so worsen the balance of payments, which is already under pressure from a narrowing trade surplus.