The Seventh-Largest Economy in the World Spirals Down

HSBC, which knows a thing or two about the world, and about Brazil, is bailing out of Brazil.

It’s unloading its “entire business in Brazil,” it said this week, including retail banking and insurance. It will hand its long list of wealthy clients and over 21,000 employees to Bradesco, one of the largest private banks in Brazil, for $5.2 billion. Too much? Bradesco’s stock has since plunged over 9%.

Once the deal gets regulatory approval and closes, HSBC is out of Brazil. “The transaction represents a significant step in the execution of the actions announced during the Investor Update on 9 June 2015,” it said. After that update, Reuters had described HSBC’s motivations with these choice words:

For shareholders, betting on Brazil was risky as lenders grapple with tax hikes, weak credit demand, rising defaults, and the impact of what looks likely to be the country’s worst recession in over two decades.

The seventh largest economy in the world in 2014, according to the World Bank, is spiraling down, with private sector output, as Markit put it, falling at the “sharpest pace since March 2009.”

This is how Markit titled its Brazil Services PMI report on Wednesday: “Service sector activity drops at joint-fastest rate in survey history.”

The index hit 39.1 in July (50 is the dividing line between contraction and expansion), the fifth month in a row of contraction, with all sub-sectors in the survey “registering substantial falls in business activity.”

To add to the toxic mix, costs soared, with the rate of increase reaching an 81-month high, third fasted in survey history, due to “inflationary pressures, exchange rate factors, and client fee adjustment.” No green shoots in the immediate future: new orders fell for the fifth month in a row. The “deteriorating operating environment” caused the pace of job losses to accelerate “to a survey record.”

Some companies still nurtured glimmers of hope: 29% of them expected activity to be higher in one year, based on the notion that the economy would somehow recover “in the coming months.”

This gloomy report on the service sector came on the heels of Markit’s Manufacturing PMI report, which had inched up to a less dreadful 47.2 in July, but remained “among the lowest since 2011, reflecting a slumping economy.”

There too were some glimmers of hope, such as the “stabilization” of export orders and slower rates of declines in some categories, but mostly it was unadulterated gloom:

“Brazil’s manufacturing slump extended to July.” New orders and production were in contraction for the sixth month in a row, “with tough economic conditions being widely cited by survey respondents.” Companies tried to control their ballooning costs by shedding jobs.

And they cut their purchases for the sixth month in a row, and did so at an accelerating pace as “operating conditions continued to deteriorate.” This led to a decline in inventories for the seventh month in a row. Markit:

Sub-sector data highlighted broad-based declines in new orders, output, buying levels, and employment, with contractions noted across the three monitored market groups. The worst performing category in July was capital goods. Latest data pointed to a ninth consecutive monthly increase in cost burdens faced by Brazilian goods producers.

While services companies and manufactures were able to raise selling prices on average to deal with inflationary pressures, they couldn’t do so enough as “strong competition restricted some firms’ pricing power.” Hence more cost cutting where they could: In the private sector overall, job shedding “accelerated to the quickest since April 2009.”

Markit concluded that the “overall scenario” was “bleak”:

The survey indicates that the combined output of the manufacturing and service sectors suffered the largest fall since early-2009. Weak demand, high interest rates, fiscal tightening, strong inflation, and rising unemployment are expected to continue to hamper activity in forthcoming months.

These references in both reports to the trough of the Financial Crisis and to data that is the worst “in survey history” make for a chilling read. Brazil’s economic problems run deep; and a good part – as in most countries – is home-brewed….

On Wednesday, five construction-company executives were sentenced to years in the hoosegow for their role in a vast bribery and corruption scandal involving state-controlled oil company Petrobras, Brazil’s largest company and former crown jewel, now a teetering over-indebted colossus. Three other construction company executives were sentenced last month. The scandal has been exploding relentlessly for over a year. Petrobras suppliers have been dragged down. Nearly 50 politicians are being investigated as the heat moves closer to President Dilma Rousseff, whose approval rating in the most recent poll plunged to 8%.

And the Brazilian real dropped to $0.2829, the lowest since 2003, down 35% from a year ago.

Perhaps it’s possible to clean up the way business got done. But the financial uncertainty and upheaval is wreaking havoc on the economy. HSBC must have seen that this wasn’t just a short-term blip, something that would blow over in a few months. It must have had visions of corporate defaults cascading through the banking system. Perhaps it imagined the possibility of other un-pleasantries that could get very costly for a bank. At any rate, it got out at a big valuation while it still could.

Brazil is the B in BRICS, a concept that Wall Street hyped for years to the nth degree. The C in BRICS is running into trouble too, with visions of a “downward spiral.” Read… The Unnerving Thing Global Automakers Just Said About China’s Economy

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  7 comments for “The Seventh-Largest Economy in the World Spirals Down

  1. Vespa P200E says:

    She’s the BRIC, house, the only one,
    who’s built like a amazon

    All the while the Rio with its crime-ridden gang dominiated ghettos where poor citizens barely get by yet wasted money on Wolrd Cup 2014 and now Olympic 2016. Wait Greece borrowed and spent billions for Olympics in 2004 – what can go wrong?

    • Spencer says:

      What can go wrong? Check and see how much gold can be looted from them!

      See Venezuela/Goldman Sachs.

  2. Petunia says:

    In the last year I’ve watch two good soap operas (novelas) on Spanish TV, both Brazilian exports. The most interesting part was that one was based on trade with India and the other on trade with Morocco. Nowhere is the US mentioned except to talk about the US dollars that the characters hold in safes. The entire focus was on Brazil with emerging market destinations. You can always tell what’s important in Latin America by what is going on in the soaps. Nobody seems to care about the US in Brazil.

  3. yan says:

    HSBC bailed mainly due to many regulatory “mishaps” over the years, including:
    – cheating capital movement reporting for its clients (as in not declaring flows, at all). This prompted the central bank to audit its whole business.
    – Helping its customers cheat taxes, to the tune of several billion dollars. Currently under investigation.
    – Laundering money for all the people involved in the PETROBRAS corruption scandal. Currently under investigation.

    Brazil is a mess, but HSBC bailed because it ran out of schemes to make money the only way it appears it knows how to these days: through fraud.

  4. Cameron says:

    The IMF’s FX reserve data shows that emerging-market reserves have dropped for three successive quarters, from a peak of $8.06T at end Q2 2014 to $7.5T by end Q1 2015. Their reserves have fallen $575B since the middle of last year.
    And currencies across Asia are dropping like stones.
    The debt of non-financial corporations in emerging economies has surged from a 73% of GDP before the financial crisis to 106% of GDP as of 4Q 2014.
    A debt crisis is emerging in emerging economies.
    Falling commodity prices, rising corporate debt, falling demand, capital outflows and the probability that the Fed will hike rates and increase debt servicing costs is a recipe for a crash.

  5. Julian the Apostate says:

    Rats overboard! It was so much easier when it was about opium.

  6. Maximus says:

    Brazil is a banana republic and a cleptocracy. It will be the next Venezuela.

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