Economy

Brazil GDP data hint at swift upturn

June 10, 2009

Brazil is recovering more quickly than expected from the global economic crisis, data for gross domestic product in the first quarter released yesterday suggest.
The economy contracted by 1.8 per cent against the first quarter of 2008, according to the government statistics office.

The consensus among market economists had been for a contraction of 2.8 per cent.
Compared with the previous quarter the contraction was just 0.8 per cent, much less than the 3.6 per cent shrinkage seen in the last period of 2008.

"This is particularly important," said Alexandre Lintz, economist at BNP Paribas in São Paulo.

"After the very strong contraction in the fourth quarter there was a lot of concern that this would continue, but the fall was much more moderate this time."

Private consumption, which had fallen 1.8 per cent quarter-on-quarter at the end of 2008, recovered by 0.7 per cent in the first period.

Nevertheless, the economy remains in contraction and investment is still falling sharply.
It fell 14 per cent compared with the first quarter last year and is unlikely to recover soon. Capacity utilisation in industry, for example, is about 79 per cent - a slight recovery from the 78 per cent seen at the end of last year but far short of pre-crisis levels of more than 83 per cent.

Overall, however, Mr Lintz said the moderate pace of recovery appeared to have continued into the second quarter and that the second and third periods should show sequential growth of about 1 per cent each.

The better than expected figures suggest the central bank, meeting yesterday and today to decide whether and by how much to cut its target overnight interest rate, is unlikely to follow the 1.5 and 1 point cuts it delivered at its March and April meetings respectively.

The market viewed the size of those cuts as emergency measures. Yesterday's economic data suggest the bank will be able to pursue the policy of "fine tuning" it laid out in the minutes of its last meeting and maintain its current loosening cycle for longer than expected.

The bank's rate, known as the Selic, fell from 13.75 per cent a year in September to 10.25 per cent in April. Many expect it to fall to 9 per cent by the end of this year, although some are predicting a rate as low as 8 per cent.

Discounting inflation of about 4.3 per cent, this would bring Brazil close to its target of having "developed world" interest rates, providing a further boost to investment and growth.

By Jonathan Wheatle

Source: Financial Times (www.ft.com)


Brazil Throws Its Weight into Global Currency Debate

June 11, 2009

By announcing that it will help finance the International Monetary Fund, Brazil joined Russia and China in taking a shot at the dollar's status as the world's reserve currency, though not as explicitly as they have.

Brazilian Finance Minister Guido Mantega said Wednesday Latin America's largest country will offer $10 billion in financing to the IMF to help support credit availability for emerging market countries.

"This will increase Brazil's international influence," said David Fleischer, a political scientist at the University of Brasilia.

"Brazil is contributing directly to the re-engineering of the global finance system."

According to Mantega, Brazil will buy IMF bonds, which are denominated in an IMF currency unit, the Special Drawing Right, the use of which China and Russia have lately begun pushing.
Late last week, China said it is willing to buy as much as $50 billion in IMF bonds. It recently suggested that SDRs replace the greenback in the future as the world's premier reserve currency.

Greater reliance on SDRs could give China and Russia a way to diversify their reserves out of the U.S. dollar, albeit quite indirectly, as SDRs are based on a basket of international currencies, including the dollar.

According to HSBC, at current exchange rates, the dollar represents 41% of the SDR unit, while the euro makes up 37.5%, the yen 12% and the British pound 9.5%.

The timing of Brazil's announcement was interesting, coming on the same day as Russia announced its aim to cut the share of U.S. Treasuries in its foreign reserves. Russia holds the equivalent of $400 billion in reserves, the world's third-largest after China and Japan. Brazil's reserves amount to $204.6 billion.

Brazil itself has made some tentative gestures toward reducing the dollar's influence, including a recent proposal to trade with China in their own respective currencies. The Chinese have not formally responded to the Brazilian overture.

Chinese, Russian and Brazilian officials in recent months have all called for a critical review of the dollar's position as the global reserve currency.

But at a news conference Wednesday, Mantega struck a different note, saying, "In reality, this is an investment Brazil is making with part of its reserves to aid developing countries with scarce credit."

Mantega said the decision on which reserve funds to redirect would be up to the central bank, but added that they would probably use those assets that were producing "the lowest returns." He did not specifically say U.S. Treasuries would be targeted.Brazil's central bank doesn't routinely publish the composition of its foreign reserves, but U.S. Treasurys clearly make up the largest proportion of them. A year ago, the central bank said roughly 80% of its reserves were in U.S. Treasurys, while 15% was in euro-denominated government bonds and a small portion in gold.

Yet even if Brazil buys the IMF bonds exclusively with U.S. Treasurys, the $10 billion involved is less than 5% of Brazil's foreign exchange reserves and a drop in the bucket of outstanding U.S. Treasurys.

On the other hand, the move is significant for Brazil domestically.

Historically, Brazil's relationship with the IMF has been rather one-sided - as a borrower. However, in recent years, anchored by a pragmatic economic policy based on tight control over inflation and increasing foreign reserves, Brazil has paid down debts and is now emerging as an IMF creditor, raising its international profile among the world's economic heavyweights.Analysts say that lends itself to political benefits for President Luiz Inacio Lula da Silva's administration.
"It is clear that this will be used in the next presidential race as a way of trumpeting the achievements of the ruling Workers' Party," said the University of Brasilia's Fleischer.

In October of 2010, Brazilians will elect Lula's successor, as his second four-year term ends then and he is not eligible for a third. Elections will include congressional seats and other offices.

By Rogerio Jelmayer

Source: Dow Jones Newswires (www.dowjones.com)

Brazil on the Rebound

25 May 2009

Regular readers of Insights will recall a prediction I made in January this year that "Brazil will lead the global emerging markets out of the current doldrums to be the top performing emerging market in 2009".

I suggested that there were three reasons to be optimistic about Brazil's economy in 2009:

- Self-sustaining domestic growth, led by consumer spending;
- Massive infrastructure investment;
- Increasing trade between the BRIC countries and other emerging markets.

So, what's been happening in the last five months?

Firstly, Brazil's Bovespa stock index has already climbed 33% this year (following a record 41% decline in 2008) and the economy is growing again after a short-lived recession. The Government predicts GDP growth of 1% this year and Brazil's economy now stands at $1.31 trillion, the 10th largest in the world. The unemployment rate in Brazil's six largest metropolitan areas fell to 8.9% in April, the first decline in four months, and the Brazilian real will steady around 2 per US dollar having weakened to 2.51 per dollar in December from a high of 1.56 in August last year.

Self-sustaining domestic growth, led by consumer spending

In order to counter the slowdown in exports, the Brazilian government has cut taxes on cars, home appliances and construction materials, injected about $90 billion into banking and money markets and increased public spending. The central bank has cut interest rates three times since January to a record low of 10.25% and retail sales are rising slowly. According to Brazil's Finance minister, Guido Mantega, the economy will improve further in the second quarter and the pace of growth in the last quarter of this year may reach as high as 5%. Sales rose 0.3% in March from the previous month, after a 1.5% gain in February. These are encouraging signs for the growth of much-needed domestic consumption.

Massive infrastructure investment

Whilst Brazil's construction industry has been hit by the global slowdown, the Government's Growth Acceleration Program (launched in 2007) is committed to supporting investment in infrastructure projects. With Brazil's large fiscal stimulus package (US$254bn, representing a significant 19% of GDP) there is widespread activity across many infrastructure projects including road, rail, power and the construction of low income housing. In addition, housing, commercial and tourism construction is also set to get a sizeable boost from the preparations for the 2014 World Cup, which is estimated to inject a further US$43bn into the infrastructure sector.

Increasing trade between the BRIC countries and other emerging markets

"Intra-BRIC" trade and investment is one of the key indicators to watch in evaluating the prospects for growth in the global economy in 2009 and beyond, and there have been many deals signed between two or more BRIC leaders in the early months of this year. The latest follows a very successful state visit to China by President Lula de Silva in which he signed 13 agreements with Chinese President Hu Jintao (both pictured above) covering science, space, law, ports and farm products.

In the most significant of these agreements, the China Development Bank agreed to lend US$10 billion to Brazil's Petrobras in return for a guaranteed supply of 200,000 barrels of oil per day to China's state oil firm Sinopec for the next 10 years. The agreement for Brazil to supply China with oil was largely negotiated in February, along with a memorandum of understanding on long-term financing for Petrobras which needs funds to help extract massive, newly-found oil reserves. Petrobras and Sinopec also signed a memorandum of understanding on exploration, refining and petrochemicals. This deal came hot on the heels of a similar agreement under which Russia has agreed to supply China with oil for 20 years in exchange for loans to Russian state firms.

For the first time, China displaced the United States as Brazil's top trading partner in April, a trend that is expected to continue as China looks to secure energy resources from its BRIC trading partners. According to President Lula de Silva, "In 2009, China became Brazil's first trading partner. Now we still face the challenge of exploring the full potential of investments that our economies can offer to each other." Brazilian exports to China have grown by 65% from January to April 2009 compared with the same period one year ago.

Next BRIC Summit

The next official meeting of the BRIC leaders is scheduled for 15th and 16th June in Yekaterinburg, Russia. This will be the first international appearance of Prime Minister Manmohan Singh of India since being re-elected earlier this month (a sign of the times that he has chosen Yekaterinburg over Washington for his first overseas trip!) According to Chinese Foreign Ministry spokesman, Ma Zhaoxu, when confirming China's involvement in the next BRIC Summit: "The BRIC countries, namely Brazil, Russia, India and China, are all important emerging nations and driving forces for the world's common development. They share the same or similar opinions on many international issues and all have the political desire for further cooperation and communication. In recent years, the four countries have exchanged views on world economic and developing issues of common concern through various channels. The dialogue and co-operation among the four countries is transparent and open and is not aimed at any other country."

By David Thomas

Source: www.thinkglobal.com.au