From Tokyo, Japan and Changsha, China – this is Down to Business English. With your hosts Skip Montreux and Dez Morgan.
Dez Morgan — welcome back to the podcast!
Thanks Skip. It’s good to be back on the show after my year-end break in the UK.
For listeners who don’t know, you are based in Changsha, China but your home is in the UK.
That’s right. My employer is in the UK and they send me to teach at a University here in Changsha for about eight months of the year.
And where exactly in the UK did you travel back to?
Home base for me is the city of Stirling, Scotland. I was there for six weeks this time.
Very nice. Did you get up to anything interesting? Or did you mainly just spend time around the house, relaxing with your family.
I did have some work-related things to take care of, but you know, for the most part I was at home with the family.
Nice.
I was planning on attending the famous Hogmanay festival in Edinburgh on New Year’s Eve to watch the fireworks. But unfortunately it was cancelled at the last minute due to inclement weather.
Well, that must have been a disappointment.
It was. But you know, it was probably for the best. The weather was terrible and it would have been really cold, even if I had a few glasses of Scotland’s finest whisky in me to keep warm.
Well fortunately for you Dez, today on Down to Business English we are focusing on a country where staying warm is not a problem — Brazil.
Brazil? What’s happening there?
Economic trouble that has lead to a full blown currency crisis
Oh, that sounds serious.
It is very serious. Investors are worried, interest rates are soaring, and the government is scrambling to restore confidence.
I want to hear more about this.
Then let’s do it. Let’s get D2B … Down to Business with Brazil’s Currency and Debt Crisis.
So Skip, what is the source of the problems in Brazil?
It is a complicated situation, but to boil it down into one overarching statement — investors have lost confidence in the direction the country’s economy is taking.
Is that a polite way of saying they don’t like the government’s economic policies?
They have issues with them, yes.
And what would these policies be?
Since coming back into power for the second time in January 2023, President Luiz Inácio Lula da Silva — commonly referred to as just Lula — has increased public spending.
Well, no surprises there.
And this spending has raised a lot of concerns about Brazil's ability to balance its books.
Leading to a loss of confidence from investors?
And when foreign investors lose confidence they start to sell off their investments in stocks and government bonds and pull their capital out of the country.
And what precisely has Lula’s government been doing to cause investors to lose confidence? I know you said he increased public spending, but can you be a little bit more specific?
They have done many things. They have increased the minimum wage, increased salaries for civil servants, and are reviving and expanding key social welfare programs — all in an effort to reduce inequality.
Which of course looks good on paper. But it also means higher government debt if they don’t have the revenue to pay for those programs.
Precisely. And investors are very nervous about how the government can finance those debt obligations.
It’s a reasonable concern. Where does Brazil’s debt to GDP ratio stand anyway?
Their debt-to-GDP ratio today stands at 76.1%, compared to 73.1% when Lula took office in 2023.
Definitely on the rise, but not significantly.
Well, I don’t know about that. In October of 2024 the ratio was 78%. The only reason it decreased at the end of the year was Brazil’s central bank sold off a portion of their foreign exchange reserves.
But still, the ratio is not that catastrophic — after all, the US debt-to-GDP ratio is 121%.
True. But it is misleading to compare the debt to GDP ratio of a developed economy like the US to an emerging economy like Brazil. Unlike the US, which issues debt in its own globally dominant currency, Brazil’s debt is more vulnerable to currency fluctuations.
In any case, foreign investors were very worried about how Brazil was going to fund their debt. Which prompted them to pull their investments and capital out of the country.
Which in turn led to a major devaluation of the currency. Over 2024, the Brazilian Real fell 23% against the US dollar, making it the worst performing emerging-market currency last year.
23%?! So, what does that translate to?
On December 19 the Real was trading at 6.53 to the US dollar. Although it has recovered a little since then, it is still very weak.
So I’m guessing that Brazil has had to raise interest rates in order to try to strengthen the Real.
Correct. Going against the flow of other central banks around the world, Brazil has been raising their interest rates. Currently, the interest rate in Brazil stands at 13.25% and is expected to rise in 2025. Some analysts are even predicting a rate of 15.5% by June.
That is indeed very high. But at least high interest rates should tame inflation.
Not really. Because the Real has fallen so far import prices have risen considerably.
Adding to inflationary pressures.
Inflation in Brazil now stands at 5.2%, much higher than the Central Bank's target of 3%.
Oh, not good.
But putting inflation and a weak currency aside, the real problem comes with how Brazil finances its public debt.
You mean how they raise money to pay for their spending.
46% of their debt is financed through floating rate bonds, known as LFTs.
And what does LFT stand for?
It is a Portuguese acronym that stands for Treasury Financial Bill. I am not even going to attempt the Portuguese pronunciation of LFT though.
Ahh, come on Skip, we like to see you suffer.
Really? Okay, I’ll give it a try. In Portuguese LFT stands for ‘Letras Financeiras do Tesouro’.
Not bad.
Apologies to all Portuguese speaking listeners.
And you said these LFTs are floating rate bonds?
That’s right. The rate the bond is paid out at is linked to the official interest rate set by the central bank. Unlike traditional bonds that have a fixed 10 or 30 year rate, these rates float with the current interest rates.
And it’s unusual for governments to finance their debt with these floating rate bonds?
Well, it’s not that unusual. But what is unusual is the extent to which Brazil relies on them to finance their debt. Like I said, 46% of Brazil's debt is financed with these LFTs.
So on one hand, Brazil is defending their currency by raising interest rates while on the other hand, those interest rate hikes means it’s costing them more and more to fund their spending.
Yes, it is a vicious cycle.
And impossible to sustain.
In an attempt to restore confidence in the currency, Finance Minister Fernando Haddad unveiled a plan to cut 70 billion Reals, or approximately $12 billion, from public expenditures over the next two years.
Well, that does sound ambitious, but has it worked?
Well, the plan was only announced in November 2024 and so far has only been partially approved by the Brazilian Congress, so it is too early to say whether it will have any effect.
You’ve talked a lot about government policies and actions but how about the underlying economy in Brazil? How’s that performing?
In actuality, it's not performing too badly. The GDP grew 2.9% in 2023 and economists predict that it will come in at around 3% or 3.5% for 2024 once the fourth quarter numbers are reported.
So the real economy seems to be on par with other countries.
In terms of GDP, yes.
Well, on that note, I think it’s time for us to get D2V … Down to Vocabulary.
Let’s start D2V with the phrase to balance the books.
Something I often have trouble with.
Me too. To balance the books is an accounting expression. It refers to making sure that the amount of money a business or company has coming in is more than, or at least equal to, the amount of money they are spending.
Well like I said, something I often have trouble with.
In today’s report, I reported that investors have a lot of concerns about Brazil’s ability to balance its books.
Investors are worried that the Brazilian government does not have the ability to take in more money than they’re spending.
Could you give us another example, Dez?
A company that has a lot of debt can have trouble balancing their books unless their sales are growing fast enough for a balance to be achieved. Did you know that in their early days neither Amazon nor Tesla could balance their books.
No, I did not know that.
But the growth potential was so strong that investors stayed on board until they could show a profit.
And the rest is history.
Next we have another expression — to go against the flow. When you go against the flow, you do the opposite of what everyone else is doing.
A good way to visualize this expression is to think of how much harder it would be to swim in a river in the opposite direction of the current. You are swimming against the flow of the current.
Indeed that is much more difficult. In the report, Skip noted that Brazil is going against the flow of other central banks around the world. He was saying that Brazil was raising rates while other countries were lowering them.
It’s important to note that ‘going against the flow’ has a neutral connotation and can be interpreted positively or negatively depending on the context.
Can you give us another example using going against the flow?
Sure. For example, a company that has a unique vision and goes against the flow of what their competitors are doing, they are often the market leaders of tomorrow.
Oh, very true.
James Dyson who launched the very first bagless vacuum cleaner in 1993 is one such example.
The father of the Dyson vacuum cleaner. Yes, that is a good example of engineering something that went against the flow of what others were doing.
The final item on our D2V list today is the term a vicious cycle. A vicious cycle is a series of negative events, which build on each other making the situation worse and worse.
Like how I drink coffee during the day to stay awake, but then I can’t get to sleep at night, so I’m tired the next day. So I drink more coffee, which keeps me up even later, and on and on it goes.
Yes, that is a very vicious cycle. In today’s report Dez summarized Brazil’s situation by saying that on one hand they have to increase interest rates to support their currency, but on the other hand those interest rates increased their debt payments, which led to a weaker currency, which leads to higher rates, and on and on it goes.
Skip quite rightly described that as a vicious cycle.
On a more positive note, the opposite of a vicious cycle is a virtuous cycle where one event promotes another positive event.
I think of GoPros.
GoPros?! The action camera company?
Yeah. They built a strong community of passionate users using a virtuous cycle. Their first customers captured and shared video content using GoPro cameras. That user-generated content then attracted more customers who wanted to capture their own sporting adventures. The growing customer base led to the development of new and improved products, further driving growth and innovation for GoPro.
That is a fantastic example of a virtuous cycle. In fact, we should do an entire episode on the GoPro story at some point in the future.
Would you like to help Down to Business English reach more people wanting to improve their Business English skills? Follow Down to Business English on Apple Podcasts, YouTube Music, Spotify, or any place podcasts are found. Leave a rating and a review and tell everyone how much you enjoy the show.
And that was our report on the Currency Crisis in Brazil. We hope everyone found it informative.
The Bonus vocabulary episode for today’s D2B will be released in the next 48 hours or so. The words and phrases we will focus on will be — overarching, to look good on paper, a debt obligation, to tame something, and to sustain.
D2B members — look for that bonus D2V in your Members-only RSS feed.
If you haven’t already, be sure you have copied your feed URL from your Membership account on the D2B website and have pasted it into your favorite podcast app.
And Apple Podcast subscribers, you don’t need to do anything. The bonus D2V episode will appear automatically in your Apple Podcast app as soon as it drops.
And if you are not a D2B member or Apple Podcast Subscriber, and you find Down to Business English useful in your English studies, do consider becoming a D2B member or Subscriber today. To become a D2B member directly through our website, just go to d2benglish.com/membership and sign up today.
And to subscribe through Apple Podcasts, just visit the Down to Business English show page in the Apple Podcast app and click on the subscribe button.
Thanks for listening everyone. See you next time.
Bye bye.
Down to Business English … Business News, to improve your Business English.