Economics,  Math

The Terms of Trade of Brazil


An article in the New York Times by Paul Krugman talked about a current economic downturn in Brazil. What happened:

First, the global environment deteriorated sharply, with plunging prices for the commodity exports still crucial to the Brazilian economy. Second, domestic private spendingf also plunged, maybe because of an excessive buildup of debt. Third, policy, instead of fighting the slump, exacerbated it, with fiscal austerity and monetary tightening even as the economy was headed down.

What didn’t happen:

Maybe the first thing to say about Brazil’s crisis is what it wasn’t. Over the past few decades those who follow international macroeconomics have grown more or less accustomed to “sudden stop” crises in which investors abruptly turn on a country they’ve loved not wisely but too well. That was the story of the Mexican crisis of 1994-5, the Asian crises of 1997-9, and, in important ways, the crisis of southern Europe after 2009. It’s also what we seem to be seeing in Turkey and Argentina now.

We know how this story goes: the afflicted country sees its currency depreciate (or, in the case of the euro countries, its interest rates soar).

Less economic activity in a euro country may mean less revenue for the government, making it harder for the government to meet its government bond obligations, causing the interest rates of those bonds to rise.

Ordinarily currency depreciation boosts an economy, by making its products more competitive on world markets. But sudden-stop countries have large debts in foreign currency, so the currency depreciation savages balance sheets, causing a severe drop in domestic demand. And policymakers have few good options: raising interest rates to prop up the currency would just hit demand from another direction.

But while you might have assumed that Brazil was a similar case — its 9 percent decline in real G.D.P. per capita is comparable to that of sudden-stop crises of the past — it turns out that it isn’t. Brazil does not, it turns out, have a lot of debt in foreign currency, and currency effects on balance sheets don’t seem to be an important part of the story. What happened instead?

Slowly going over the three points that Krugman made in the beginning:

1. Commodity prices went down and Brazil exports a lot of commodities.

Brazil’s exports in 2016:


At a glance, we have among commodities: vegetable products, mineral products (5% crude petroleum, 10% iron and copper ore), foodstuffs, animal products, metals, and precious metals. Though picking out these specific ones may end up in overestimating or underestimating the true percentage of commodity exports among all of Brazil’s exports, let’s use these for our approximation. The total percentage of these products is about 60%, where around 36% are agricultural commodities, around 27% are metal commodities (metals + iron and copper ore), around 5% is crude petroleum, and around 2% are precious metals. These categorizations that I did are improvisational and not following any official definitions.

Looking at the S&P GSCI Agricultural & LiveStock Index Spot (SPGSAL):


we definitely do see a downtrend in the last several years in agricultural commodities.

Looking at the S&P GSCI Industrial Metals Index Spot (GYX):


there was a decline from 2011 but a rise from 2016.

Looking at the S&P GSCI Precious Metals Index Spot (SPGSPM):


it’s been flat since around 2013.

Looking at S&P GSCI Crude Oil Index Spot (G39):


it has been low after a decline in 2014 with volatility in 2017-2018.

But instead of eyeballing this phenomenon with a bunch of different charts, there’s a way that we can mathematically eyeball this in one chart, called the Terms of Trade. The Terms of Trade, very generally, is a ratio of the prices of a country’s exports to the country’s imports.

Investopedia’s definition of terms of trade:

What are ‘Terms of Trade – TOT’?

Terms of trade represent the ratio between a country’s export prices and its import prices. The ratio is calculated by dividing the price of the exports by the price of the imports and multiplying the result by 100.

For some of the mathematics of the Terms of Trade, see the post Terms of Trade.


A terms of trade chart quantitatively summarizes all the above eyeballing we did with the visualization of Brazil’s exports and the charts of commodities indices as well as the eyeballing we didn’t do with Brazil’s imports. And we see what we expect in the above graph, which is a drop in Brazil’s terms of trade in the last several years.

2. Brazil’s consumer spending (the red graph) declined:


due to rising household debt:

From: World Bank Open Data – Domestic credit to private sector (% of GDP) – Brazil

The chart above is described by the World Bank source as:

Domestic credit to private sector refers to financial resources provided to the private sector by financial corporations, such as through loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment.

We see Brazilian domestic credit rise up to 2015 but then decrease after that. But checking non-performing loans as a percentage of total gross loans:


we see that nonperforming loans – in other words loans that didn’t make the scheduled payments they were supposed to to the loan issuer for some period of time – increase from 2014 to 2016. That can explain or “fill in the hole” of the decrease in domestic credit after 2015.

Krugman writes that

Brazil does not, it turns out, have a lot of debt in foreign currency, and currency effects on balance sheets don’t seem to be an important part of the story.

Looking at the stock of external debt (private non-guaranteed):


there is a large rise from 2009 to 2014 and then a slow decrease. Looking at total stock of external debt (including publicly guaranteed debt) as a % of Gross National Income (to make it a more easily compared to the previous chart of domestic private debt as a % of Gross National Product):

From: World Bank Open Data – External debt stocks, private nonguaranteed (PNG) (DOD, current US$) – Brazil

We see that total external debt increases about 15% of GNI from ~2010 levels to 2016 levels while domestic credit to the private sector also increases about 15% of GDP from ~2010 levels to 2016 levels. We don’t really see a lack of debt in foreign currency from these graphs (assuming that the World Bank data on Brazilian external debt is in USD) that Krugman describes. Perhaps these charts of external debt may not be the correct or same data that Krugman is referring to.

We do see a depreciation in the Brazilian Real starting from 2015:


but no big increase in the external debt stock in USD starting from 2015, which seems to mean that the external debt indeed was borrowed in USD and thus the value of that debt in USD was not affected by the depreciation in the Brazilian Real. Comparing the exchange rate with the external debt stock as a % of GNI, the large increase in external debt stock as a % of GNI from 2014 to 2015 would correspond to the depreciation in the Brazilian Real from 2015 if the years on the x-axis of the graph of external debt stock is the last date (or some late date) of the year, e.g. the increase in external debt stock from 2014 to 2015 is in actuality from the date of 2014-12-31 to 2015-12-31. Following that, the level of external debt stock as a % of GNI moves quite in line with the exchange rate of the Brazilian Real to the USD, e.g. the increase in debt and depreciation in the Real from 2014 to 2015, the flatness from there for about a year, a decrease and appreciation for a year after that, and then an increase and depreciation for a year after that. From this, it seems that the effect of the depreciation of the Brazilian Real on Brazilian external debt was significant – as significant as domestic credit.

3. Brazil implemented fiscal austerity to try to deal with “long-term solvency problems” (the blue graph)


and raised interest rates to try to deal with inflation, which was caused by depreciation in the currency. The currency depreciated due to lower commodity prices, which of course is also reflected in the terms of trade graph above.

Depreciating currency (blue) and inflation (change in or first derivative of red):


Interest rates raised to combat inflation:


We can see that interest rates rise in late 2015 as a response to rising inflation. Inflation drops as a response in the next couple of years, but this rise in interest rates contributed to the slow down in Brazil’s economy.


So we have a drop in the terms of trade (due to a drop in commodity prices), a drop in consumer spending (due to a rise in household debt in preceding years), and then fiscal austerity and monetary contraction as government policy responses, causing a recession in Brazil.

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