Brazil gets bruised by Wall Street

NEW YORK (Fortune) -- It was not a week for celebration for President Luiz Inácio Lula da Silva of Brazil, even though on March 14 he did become the first Latin American leader to be received by President Obama in the White House. First there was the embarassment reported by the New York Times of the Americans changing the date of the White House meeting, allegedly because of the St. Patrick's Day holiday, and then there was that slight misspelling of President da Silva's name in the White House press release. And to top it all off, Wall Street suddenly turned bearish on his country.

While President da Silva was attending an investor conference in New York this week, Morgan Stanley released a report predicting that Brazil's economy will shrink by 4.5% in 2009. The bank believes that Brazil's domestic demand is going to decline significantly this year as unemployment rises and consumers lose confidence.

This was followed by a Credit Suisse assessment that the stock of the Brazilian state-owned oil company Petrobras is highly overvalued. The news sent Brazilian stocks into a tailspin.

No wonder da Silva's opening words at the conference started on a pleading note. "I know you will be getting hungry as I speak and you are staring at your forks and knives, but please don't throw any knives at me, or especially the shoes," the Brazilian President said, soliciting bursts of laughter from the crowd.

On a more serious note, da Silva told investors that he did not see Brazil's future to be nearly as bleak as the analysts think. "We will grow less than expected in 2009, less than we could have were it not for overseas crisis," he said. "But grow we will."

That will be a tall order considering that Brazil's GDP shrank 3.6% in last year's fourth quarter, compared with the previous quarter, which, according to the country's national statistics agency, was the biggest decline since 1996. The unemployment rate has been climbing too and reached 8.2% in January.

Da Silva and his team of advisers counter that over the past 11 years their country has created more than 11 million jobs, and 20 million Brazilians have joined the ranks of the middle class. They point out that Brazil has $200 billion in foreign reserves and that the country's government-controlled banks have acted as a cushion to the global financial meltdown. Even the country's reliance on exports, usually problematic for emerging economies, is a manageable 14% of GDP.

Later in the week Brazil's central bank announced that it can still keep cutting interest rates to counter the effects of slowing domestic demand. But this did not convince Morgan Stanley: the bank responded by cutting the rating of Brazilian stocks from "overweight" to "equal-weight."

Seems like da Silva will have to duck more than a few economic shoes if Brazil is to perform the way he sees it.