However, with its large foreign exchange reserves and a current account surplus, the economists at Allianz and Dresdner Bank see Brazil in good shape to cope with the harsher financial market climate. Indeed, Brazil could easily digest an increase in external bond spreads of several percentage points. And the slide in the currency also has its positive aspects as it could buoy exports, thus boosting economic growth momentum.
Brazil: Stability and weak growth
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The economic policy aimed at building up confidence has helped reduce inflation and susceptibility to financial crises, but Brazilian growth in the decade so far has lagged well behind that of other emerging markets, averaging only 2.5 % a year, despite the positive global backdrop. In other words, the seeds have been sown, but the harvest not yet reaped. Unless Brazil manages to lift potential growth, via structural reforms for example, there is a risk, at least in the longer term, of setbacks from a more populist economic policy which in turn would undermine the success on the stability front.