Brasilia, Oct 8 - Only months after investors believed Brazil was finally emerging as an economic heavyweight, the snowballing global financial crisis has brought the Latin American giant back down to earth.
Brazil's stock market had gained eight-fold in just over five years, driven by strong domestic demand and a seemingly insatiable appetite for its main exports, from iron ore and steel to sugar and soybeans.
But the Bovespa stock index sank to its lowest in around two years on Wednesday morning, and is down almost 50 percent from its all-time high of 73,920 points on May 29.
Brazil's currency, the real, has lost about one-third of its value in just over a month.
"I've been in the market since 1980 and I've never seen anything like it," said Lucy Sousa, head of the Brazilian association of capital market analysts.
"A few weeks ago, brokers were forecasting the Bovespa at 80,000 this year. Now we're at 40,000," she said.
Brazil is not the only emerging market to be taking a beating as rattled investors flee from risk. Stock markets in Mexico and Argentina had fallen 38 percent and 40 percent from this year's highs, respectively.
And Brazil's peers in the so-called BRIC group of elite emerging market nations are also feeling the pain. China's Hang Sei index was 51 percent off this year's high on Wednesday, while Russia's RTS index was down 69 percent and India's National Stock Index was off 45 percent.
For the first months of this year, many economists and investors had thought that somehow Brazil, which has made great strides in recent years in cleaning up its public finances and is home to a vast domestic market, would emerge largely unscathed from the global financial turmoil.
But that optimism sank like a brick this week, along with the financial markets.
"I don't see how Brazil can escape economic stagnation now," said Alexandre Assaf, professor of finances at the University of Sao Paulo.
Brazil's economy grew at a 6 percent annual rate in the second quarter of this year and was expected to expand around 3.5 percent in 2009, but investment bank Morgan Stanley revised its forecast for next year to 2 percent on Monday and other economists are expected to follow suit.
FALLING COMMODITIES A THREAT
One way the global financial crisis hits Brazil is through falling commodity prices, as the country still depends heavily on natural resources and agricultural products.
In addition, some economists say foreign direct investment will slide and so worsen the balance of payments, which is already under pressure from a narrowing trade surplus.
In Brazil's favor, however, the market mayhem may be more a result of foreign investors dumping emerging market assets to cover losses elsewhere than a reflection of Brazil's economic fundamentals.
"This is not a technical adjustment of Brazilian assets but the fallout of an unprecedented global crisis," said Darwin Dib, senior economist with Unibanco.
President Luiz Inacio Lula da Silva, a leftist whose popularity ratings hit record highs last month thanks to a strong economy and higher social spending that has helped cut poverty levels, has been reluctant to even talk about the crisis.
When he did so, he pointed an accusatory finger at the United States.
The central bank recently started selling dollar repurchase agreements and swaps to inject liquidity into financial markets and shore up confidence. It has also eased reserve requirements for banks, but critics say it Brazil was slow to react to the spreading crisis.
"This should have happened some time ago," said Assaf.
Some analysts say the writing was on the wall months ago and that policymakers and investors alike ignored the threat of a commodities price slump.
"Since late last year, the market had gone beyond what was merited by fundamentals, investors were wrapped up in a wave of euphoria," said Sousa.
Now even the development of massive oil discoveries, whose future revenues politicians are already eagerly trying to grab a piece of, may be delayed.
"This crisis is much bigger than any others we've seen. Certainly there will be consequences, adjustments, some course correction," said Pedro Barusco, head of engineering with state oil company Petrobras, referring to a five-year strategic development plan it is about to launch.
Still, optimists say not all is lost and that Brazil, long called a sleeping giant for its untapped potential, is only taking a nap.
"We're paying the price with slower growth now but when this is over, we'll be there, we'll bounce back," said Dib.