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Monday, December 24, 2007

Merry Xmas and A Happy New Year

Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.

Credit crunch, did someone use the expression credit crunch?

Friday, December 21, 2007

Brazil Inflation December 2007

Brazilian consumer prices rose in the month through mid-December at their fastest pace in two years, damping expectations that the central bank will resume interest rate reductions any time soon. Consumer prices, as measured by the government's benchmark IPCA-15 index, rose 0.7 percent in the month through mid- December, triple the 0.23 percent in the previous month, the national statistic agency said today on its Web site.

Surging domestic demand on the back of the Brazilian economy's fastest growth since 2004 has pushed up the annual inflation rate from an eight-year low of 2.96 percent to just below the central bank's annual target of 4.5 percent this year.

Brazil's central bank kept its benchmark overnight interest rate unchanged at a record low 11.25 percent at each of the last two meetings on concern rising consumer demand may threaten its inflation target for 2008. In two years through September, policy makers cut rates at 18 straight meetings

Today's inflation report cements expectations that the central bank may not begin cutting rates again until year-end 2008, compared to just a few months ago when many economists said policy makers could resume cuts by March.

The surge in monthly inflation was led by food, fuel and cigarette prices. The IPCA-15 is a mid-month preview of the central bank's benchmark IPCA inflation rate, scheduled for release on Jan. 11.

The price of beans surged 104 percent in the 12 months through Dec. 10, while milk and potato prices climbed 20.5 percent and 70.4 percent respectively.

Latin America's biggest economy expanded 5.7 percent in third quarter, compared with a revised 5.6 percent increase in the second quarter, the government said Dec. 12.

In the four quarters ended Sept. 30, the economy grew 5.2 percent from 4.9 percent in the same period ended in June, the biggest accumulated annual growth rate since the end of 2004.

In a separate report from the national statistics agency, unemployment in the six largest Brazilian cities fell to 8.2 percent, the lowest since the government began a new series for the indicator in 2001.

Average household inflation-adjusted wages, a gauge of disposable income, jumped 2.4 percent from the same month a year earlier.

About 717,000 new jobs were created in November from the year-ago month, spurred by a jump in real estate-related occupations and social work including education and health care assistance, the government said.

Two in every three workers have remained in the same job for at least two years, indicating that the economy's expansion is also helping to stabilize to the nation's workforce.

Yields on interest-rate future contracts rose. The yield on the contract maturing in January 2009, the most widely traded in Sao Paulo's Commodities and Futures Exchange, rose 9.7 basis points, or 0.097 percentage point, to 11.98 percent at 10:45 a.m. New York time.

Wednesday, December 12, 2007

Brazil's economy expanded 5.7 percent Q3 2007

Brazil's economy expanded 5.7 percent in the third quarter, the fastest year-on-year expansion since June 2004. Gross domestic product rose more than the revised 5.6 percent increase in the second quarter. Latin America's biggest economy expanded 1.7 percent from the previous quarter, faster than the revised 1.3 percent pace in the second quarter, according to the Rio de Janeiro-based statistics agency.

Sunday, December 09, 2007

Brazil to Create SWF?

From Jonathan Wheatley in the FT today.

Brazil SWF to counter rising currency

By Jonathan Wheatley in São Paulo

Published: December 9 2007 22:10 | Last updated: December 9 2007 22:10

Brazil will create a sovereign wealth fund with the primary aim of intervening in foreign exchange markets to counter the appreciation of Brazil’s currency, according to finance minister, Guido Mantega.

“It will have the function of reducing the offer of dollars in the market and helping the real to appreciate less,” he told the Financial Times.

His statement adds to controversy surrounding the fund, first announced by Mr Mantega in October. Since then, funding plans and objectives have undergone several revisions. The uncertainty has caused concern among investors and officials at the country’s central bank. The SWF appears to differ substantially from funds operated by other countries.

Under Mr Mantega’s original plan, the SWF would have drawn on Brazil’s foreign reserves, which have risen quickly this year to about $180bn. That plan sparked a behind-the-scenes row between the finance ministry and the central bank.

Darwin Dib, economist at Unibanco, a São Paulo bank, said the plan was unorthodox and that that level of firepower would have no lasting impact on exchange rates. He said the proposal raised doubts over the government’s commitment to Brazil’s floating exchange rate regime.

“The big victory for the central bank,” a central bank official said, “is that the fund will have nothing to do with Brazil’s foreign reserves and nothing to do with the central bank.”

But in an interview with the FT in Brasília last week, Mr Mantega said the fund would indeed affect the accumulation of reserves and would share the central bank’s source of funding at the national treasury.

Under current rules intervention in currency markets is the sole prerogative of Brazil’s central bank.

Friday, December 07, 2007

How Sensitive Is Brazil To A Global Slowdown?

Marcelo Carvalho is again spot on in this Tuesday's MS GEF post:

As the US economy appears to slide towards recession, and global growth forecasts are cut back, the debate intensifies about whether emerging markets like Brazil would be able to ‘decouple’ from the developed world’s agony. The ‘decoupling’ debate is misplaced, in our view, at least in its binary version. If the US goes into recession, does Brazil necessarily have to contract sharply? We think the answer is no. But then is Brazil fully immune? Our answer is again no. Decoupling should not be seen as a yes or no proposition, but rather as a spectrum of possibilities, in a continuum of outcomes. As usual with these matters, in medio stat virtus: the truth lies somewhere in the middle.

As the US economy appears to slide towards recession, and global growth forecasts are cut back, the debate intensifies about whether emerging markets like Brazil would be able to ‘decouple’ from the developed world’s agony. The ‘decoupling’ debate is misplaced, in our view, at least in its binary version. If the US goes into recession, does Brazil necessarily have to contract sharply? We think the answer is no. But then is Brazil fully immune? Our answer is again no. Decoupling should not be seen as a yes or no proposition, but rather as a spectrum of possibilities, in a continuum of outcomes. As usual with these matters, in medio stat virtus: the truth lies somewhere in the middle.

The balance of payments is the main channel of transmission from global turbulence into Brazil. We have already made the point that Brazil’s trade surplus is likely to narrow much faster than the consensus believes (see “Brazil: Waiting for Godot”, EM Economist, October 26, 2007, and “Brazil: Trade Consensus – What Is Wrong with This Picture?” EM Economist, November 16, 2007). Robust domestic demand and a strong currency should keep imports growing rapidly, while exports are set to struggle amid a less encouraging global environment. The market consensus is calling for only a modest decline in the trade surplus from roughly US$40 billion this year to around US$35 billion in 2008. By contrast, we see the trade surplus falling by half, to about US$20 billion in 2008. Correspondingly, while the consensus view still looks for a current account surplus next year, we are confident that the current account will fall into negative terrain in 2008. But the current account is just part of the picture. In this note, we take a closer look at the other side of the balance of payments: the capital account.

Das Kapital account

Swings in the capital account have been by far the main driver behind changes in Brazil’s international reserves, much more so than the relatively less volatile current account balance. Indeed, an unprecedented surge in capital inflows this year has allowed the central bank to speed up its pace of intervention in the foreign exchange market, and to more than double its stock of reserves from the US$85 billion mark seen at end-2006.

Capital account strength has been broad-based, across net foreign direct investment (FDI), equities and fixed income. Net FDI has surged to record-highs, even without the help from privatization-related inflows which boosted FDI figures at the beginning of the decade. Macroeconomic stability has expanded companies’ planning horizons. Declining real interest rates have unlocked investment opportunities. And robust domestic demand has enticed firms to expand their output capacity. Coupled with favorable global conditions, the improving domestic environment has attracted FDI into Brazil, mainly in the form of new operations (although also through inter-company loans, to a lesser degree). Interestingly, net outward direct investment has risen in recent years too, as Brazilian companies expand abroad.

Where is FDI going?

Net FDI inflows are widely spread across the economy. Services (including financials and retail) account for about half of the total, although the broadly defined agribusiness-mining complex has gained importance (especially mining). Within industry, the main recipients of FDI include sectors such as metallurgy, fuels, chemicals and food processing.

Capital inflows into the equity market have also boomed to unprecedented highs, spurred by a record-high number of IPOs. The expansion and maturing of the local capital market has brought a deluge of new companies to the local stock market. Foreign participation in IPOs has been high at about three-quarters of the total, and so it is unsurprising that capital inflows through this channel have boomed.

Registered inflows into the local fixed income market have jumped high as well, in part supported by tax and regulatory changes aimed at facilitating direct foreign participation in the local market. Brazil’s Treasury has steadily bought back its external debt, migrating its financing towards the local market. That brings hope of redemption from the so-called ‘original sin’ (or emerging markets’ historical inability to issue long-term debt in local currency). It also lures foreign investors into the local fixed income market.

The outlook for 2008

What to expect for the capital account going ahead? We look for a slowdown in capital inflows next year. As the global economy decelerates, and global risk-aversion re-emerges after being suppressed for years, recent all-time high capital inflows seem unlikely to persist. Net FDI should prove relatively resilient, as this type of flow tends to follow normally slow-moving perceptions about longer-term trends. We suspect that the peak in IPOs in the local stock market is behind us. Likewise, we fear that an environment of less global risk appetite might take its toll on capital inflows into the local fixed income market. We assume that these inflows slow towards levels seen prior to the 2007 boom.

All in all, we assume that capital inflows slow from about US$90 billion in 2007 to almost a third of this in 2008, although admittedly the capital account is harder to predict than the current account. How does that compare with expectations about global capital flows into EM overall? The latest report from the International Institute of Finance on this subject sees a modest decline (to still-high levels) in capital flows to emerging markets in 2008 after a peak in 2007. To be frank, such a projection now looks a bit sanguine in light of ongoing downgrades in the global environment for next year, in our opinion. For Brazil in particular, our assumptions are less smooth than the IIF’s: we see a higher peak in capital inflows in 2007 and a larger decline in 2008.

What are the risks around our forecast? If our numbers materialize, Brazil would still be able to accumulate foreign reserves next year, albeit at a slower pace than in 2007. That should prove to be a relatively benign backdrop. We suspect that the main downside risk to our scenario would be a sharper-than-expected turnaround in capital inflows. If the capital account really dries up, on top of what seems to us to be an inevitable deterioration in the current account, then the Brazilian real would suffer – although the central bank theoretically could lean against currency-weakening by selling reserves. In turn, currency devaluation could push inflation expectations up, eventually forcing the hand of the central bank to tighten. Monetary tightening, for its part, could take the punchbowl away from the domestic demand party. To be fair, there is potential upside risk too. If capital inflows prove more resilient than we assume, resulting currency strength would prolong Brazil’s virtuous-cycle story.

Bottom line

The current account balance is bound to fall into deficit next year, and capital inflows look set to take a hit too, in our view. We assume that the overall balance of payments will remain sufficiently robust to allow further reserve accumulation, albeit at a slower pace. The main downside risk: if capital inflows really dry up, then the currency could weaken significantly, pushing inflation expectations up, forcing interest rates higher, and entailing a downturn in the growth outlook.

Thursday, November 15, 2007

The Future Is No Longer What It Used To Be

A very interesting piece from Morgan Stanley's Marcelo Carvalho.

Despite renewed turbulence in US markets, Brazilian asset prices have done well in recent weeks, with the local stock market close to all-time highs, and the currency remaining strong. As for the outlook for 2008, analysts continue to paint a rosy picture for Brazil. But what could be wrong with this picture?

The consensus remains too optimistic on Brazil’s trade balance outlook for 2008, in our opinion. We recently argued that the market consensus for a US$35 billion trade surplus next year is simply too upbeat (see “Brazil: Waiting for Godot”, WIB, October 26, 2007). Our out-of-consensus forecast instead looks for a much narrower surplus, of about US$20 billion. The consensus forecast for the 2008 trade balance has started to drift lower, but still has a long way to go.

The current account balance should soon dip into deficit. The market consensus still looks for a current account surplus in 2008. That should change soon. As prospects for the trade surplus are revised down, so should the current account balance. After running in surplus for several years, the actual current account balance could move into negative terrain as early as 2Q08, in our view.

The consensus assumes just more of the same. What are analysts missing? We think the main problem is that the market consensus seems to simply assume ‘business as usual’ for 2008. It fails to recognize an evolving global landscape and its implications for Brazil’s trade outlook, against the backdrop of robust domestic demand growth and a strong currency.

The future is no longer what it used to be

The global environment is changing. History may view the years since 2003 as a uniquely favorable backdrop for emerging markets, with a potent combination of strong global growth and rapidly rising commodity prices. That picture may be changing in the coming year. The IMF, for instance, foresees a decline of 7% in non-fuel commodity prices next year, and a slowdown in global growth from 5.2% in 2007 to 4.8% in 2008, with risks biased to the downside.

Global growth risks are biased to the downside. Morgan Stanley now judges that the risks of a US recession have risen to about 40% (from around one-in-three before), and has recently revised down its 2008 US growth forecast to 1.7% (on a 4Q-over-4Q basis) from 2.1% before (see “The Credit Recession”, WIB, November 9, 2007). At the start of the year, the US 2008 forecast called for 3.0% growth.

The implications of a euro area growth slowdown tend to be overlooked. Although much market attention focuses on the US, analysts often appear to forget the importance of Europe for emerging markets. In fact, while the US takes 19% of emerging market exports, the Eurozone takes 28%. For Brazil’s exports, the US represents 19% and the Eurozone 22%. Morgan Stanley has called for euro area growth of 2.0% in 2008, down from 2.6% in 2007. But high oil prices, a strong euro and tight credit conditions could slow euro area growth to 1.5% next year (see “Oil at 100, Euro at 1.5, Credit Crunch: The Bill”, Global Economic Forum, November 5, 2007).

In all, our global GDP growth forecast now stands at 4.6%, but risks still seem biased to the downside. After several years in which global growth figures were repeatedly revised upwards, we may be entering a cycle of growth downgrades.

Let’s do the math

Soaring export prices have been a major plus for Brazil’s trade performance, but that could change. Amid strong global growth, Brazil’s export prices have climbed more than 50% since 2002. The trade surplus, which has run above US$40 billion lately, would be already running close to the US$20 billion mark at 2002 average prices. Note that, at 2002 prices, the trade surplus has actually started to narrow already since 2006. And as we have argued before, even a moderate decline in export prices can make a significant dent in the trade surplus.

The outlook for export volumes in 2008 is uninspiring. A historical series gauging the external demand for Brazil’s exports can be constructed, based on total import growth at Brazil’s main export destinations, weighted by their share of Brazil’s exports. The correlation of that series with Brazil’s exports is high. In addition, we projected the global demand for Brazil’s exports, based on Morgan Stanley’s individual country forecasts. The upshot is that the external demand for Brazil’s exports is projected to slow from 18% in 2006 to 16% in 2007, and then to 12% in 2008.

And a strong currency does not help export competitiveness. Our econometric work suggests that a change of one percentage point in global real GDP growth implies a change of four percentage points in the external demand for Brazil’s exports. In other words, if global real GDP growth slides to the 3-4% range, external demand would slow to the 5-10% range. This in turn could easily pull Brazil’s export volume growth close to a halt, as currency appreciation since 2003 has already acted to slow export volume growth to about 6% in the latest data.

The consensus forecast for imports looks too sanguine. Imports look bound to keep growing at a strong pace next year. Imports are highly correlated with domestic demand, as proxied by industrial production. In fact, in light of steady currency appreciation since 2003, imports have grown even faster than industrial production would have suggested. Looking ahead, the market consensus sees industrial production growth at 4.5% in 2008, relatively stable compared to recent figures. But the consensus forecasts a slowdown in import growth to about 15% in 2008, from a pace of almost 30% in the latest data, despite the consensus view that the currency will remain strong next year. Something has to give.

For years, strong export growth has allowed fast import growth amid currency appreciation without trade deterioration. This is changing. Since 2003, strong global growth and rising commodity prices, and the resulting push for export growth, has allowed imports to grow quickly under an appreciating currency at the same time that the trade balance still kept improving. However, as the global economy slows and prospects for exports turn less exuberant, the combination of robust domestic demand and a strong currency will likely take its toll on the trade balance.

It does not take absurd assumptions to see potential for a significant erosion in the trade balance. A simple sensitivity analysis suggests that a range of plausible assumptions on import and export growth can result in relatively large swings in the trade balance next year. For instance, a 10% change in exports means a change of about US$15 billion in the trade balance, while a 10% change in imports alter the trade balance by about US$11 billion.

Bottom line
The market consensus forecast for Brazil seems to assume business as usual. It fails to recognize important changes in the global environment. As the outlook for exports turns more challenging while imports keep growing on strong domestic demand, the trade surplus is bound to narrow faster than the market expects. In turn, Brazil’s current account balance should soon dip into deficit.

Brazil Retail Sales September 2007

Bloomberg this morning:

Brazil's retail sales rose more than expected in September, led by sales of cars, computers and home appliances, as record low interest rates stoke consumer demand in Latin America's biggest economy.

Retail, supermarket and grocery store sales, as measured by units sold, rose 8.5 percent in September from the year-ago month, the national statistics agency reported today. Economists expected an 8 percent gain, according to the median of 31 forecasts in a Bloomberg survey.

The report added to speculation that central bankers won't move to lower the benchmark lending rate anytime soon on concern that accelerating economic growth will fuel inflation, said Zeina Latiff, an economist with ABN Amro NB's Brazilian unit.

``The figure reinforces the central bank diagnosis about the need to pause,'' said Latiff, in a phone interview from Sao Paulo.

Against the backdrop of the fastest economic growth since 2004, the bank on Oct. 17 paused after 18 straight cuts, holding the overnight rate at an all-time low of 11.25 percent, down from 19.75 percent in September 2005

Higher food and gasoline prices last month helped quicken annual inflation last month to 4.12 percent compared with an eight-year low of 2.96 percent in March. The bank targets annual inflation of 4.5 percent.

Sales of computer, office materials and communication equipments jumped 30.4 percent in October from the year-ago month. Sales of home appliances climbed 12.7 percent. Sales of cars and construction materials rose 19.8 percent and 9.1 percent respectively.

``Higher sales are disseminating among all sectors,'' said Zeina, who doesn't expect policy makers to lower the so-called Selic rate again until 2009.

The Brazilian real rose for a second day in early trading, climbing 1.7 percent to 1.7355 per dollar at 9:16 a.m. New York time from 1.7660 late yesterday.

Yields on interest-rate futures fell. The yield on the inter-bank deposit contract for Jan. 2, 2010, delivery, the most traded interest-rate futures contract in Sao Paulo, fell 6.6 basis points, or 0.066 percentage point, to 11.940 percent.

Tuesday, September 18, 2007

Brazil and Safe Havens

Ok, as the US starts to slow, and Japan and Germany follow suit, the interesting question is going to be to try and follow who in the emerging markets sector can hold up under the pressure. Brazil will be an interesting test case in this sense. Bloomberg today:

Brazil's real rose after the Federal Reserve cut the benchmark U.S. lending rate more than expected, making yields on Brazilian bonds more attractive and buoying expectations that demand for the country's exports will remain strong.

The real rose to a six-week high, climbing 2.2 percent to 1.8770 per dollar at 3:41 p.m. New York time after the Fed cut the benchmark rate by a half-percentage point to 4.75 percent. The real touched 1.8730, the strongest since Aug. 3. Brazil's currency has appreciated 13.9 percent this year, the second- biggest gain among the 16 most actively traded currencies tracked by Bloomberg News.

``A half-point cut sends a very clear message the Fed is not just looking at inflation, it's also making economic growth a priority,'' said Rogerio Chequer, who helps manage about $150 million of emerging-market stocks and bonds at Atlas Capital Management in White Plains, New York.

The real may strengthen to 1.85 reais per dollar over the next month, said Ronie Marcelo Germiniani, proprietary trading manager in Sao Paulo at Banco Itau SA, Brazil's biggest non- government bank in terms of market value.

The rate cut reassured investors that the world's largest economy will continue to grow, preserving demand for Brazilian exports such as orange juice, steel, coffee and soybeans.

Brazil's trade surplus widened to $3.54 billion in August from $3.35 billion the previous month, according to the Trade Ministry. That exceeded the $3.1 billion median estimate in a Bloomberg survey of 18 economists.

Record Exports

Exports rose to a record $15.1 billion last month from $14.1 billion in July, while imports also increased to a record $11.6 billion from $10.8 billion in July, the ministry said.

Brazil's 11.25 percent benchmark rate is among the highest in the world and is more than double the U.S. rate, helping lure capital to the country's fixed-income market.

The yield on Brazil's benchmark zero-coupon bonds due in January 2008 fell 2 basis points, or 0.02 percent, to 11.1 percent, according to B

Monday, September 17, 2007

Banco Santander in Brazil

This is an interesting piece from Bloomberg this morning:

Botin Builds `Republic of Santander' in Lula's Brazil

Brazil's trade minister is a former executive at Banco Santander SA. So is the man who oversees the country's monetary policy. Spain's biggest bank spent 1.8 million reais ($948,000) to back President Luiz Inacio Lula da Silva's campaign in 2002.

Now Santander is bidding for ABN Amro Holding NV's Brazilian unit to double its size in Latin America's largest economy. The deal would make Santander the biggest non-state bank in Brazil, ahead of Banco Itau Holding Financeira SA.

``Brazil is fast becoming the Republic of Santander,'' said Paulo Pereira da Silva, a federal deputy and head of Forca Sindical, the country's second-biggest union grouping. ``The bank's influence is growing.''

Santander Chairman Emilio Botin built ties to Lula as other lenders pulled back on concern the former labor leader would default on Brazil's debt, said Mauro Guillen, who wrote a history of the bank. Five years later, Citigroup Inc. and HSBC Holdings Plc are vying for a bigger slice of the Brazilian market as declining interest rates increase demand for loans.

``If they succeed in buying ABN Amro, Santander will become a Brazilian powerhouse,'' said Guillen, a professor at the Wharton School in Philadelphia. ``It's a quantum leap.''

Santander, based in the northern Spanish town of the same name, is part of a group led by Royal Bank of Scotland Group Plc that has offered 72 billion euros ($100 billion) for Amsterdam- based ABN Amro. The Spanish bank would get ABN Amro's Brazilian unit, Banco Real and Italian lender Banca Antonveneta SpA. A Santander spokesman declined to comment on ties to Lula.

Banespa Purchase

Botin appeared with Lula at a ceremony today in Madrid, where he said he expected Brazil to receive an investment-grade credit rating within 18 months.

``You know that we believe in Brazil,'' Botin told Lula, reminding him how they first met in his campaign office before the 2002 elections.

Santander, which entered Brazil in 1982, made its biggest push in 2000, when it bought Banco do Estado de Sao Paulo SA, known as Banespa, for $4.8 billion. Botin paid more than three times the price offered by the next-highest bidder, Uniao de Bancos Brasileiros SA, or Unibanco.

The rising value of Brazilian banks shows Santander's investment was sound, said Francisco Luzon, the bank's Latin America chief. Shares of Unibanco, Brazil's sixth-biggest bank by assets and the closest in size to Banespa, have risen fourfold since 2000, giving it a market value of 50.7 billion reais.

Yet Banespa's profitability and efficiency lag behind those of Brazil's biggest non-state banks, said Luis Miguel Santacreu, an analyst at Austin Rating in Sao Paulo.

Still Struggling

Banespa's return on equity was 15.5 percent last year, compared with 20.5 percent at Banco Bradesco SA and 18.3 percent at Itau. It also has the worst customer-complaint ranking among Brazil's biggest banks, according to the central bank.

``Buying Banespa was like a snake devouring a cow -- it takes a long time to digest,'' Santacreu said.

The payoff will be worth it, says Andrea Williams, who helps manage $2.4 billion in European banking stocks, including Santander, at Royal London Asset Management.

Brazil's mortgage market may grow more than fivefold in the next seven years, reaching 10 percent of gross domestic product from 2 percent now, according to Luiz Antonio Franca, mortgage director at Itau. Brazil contributed 455 million euros to Santander's first-half earnings, or 10 percent of group profit.

Santander backed Lula before the October 2002 elections, giving 1.8 million reais to Lula's party, according to Brazil's electoral court. It also donated 1.4 million reais to Jose Serra of the Social Democracy Party. By comparison, Itau donated 3.12 million reais to Serra's party and 350,000 reais to Lula's Workers' Party.

`Critical Time'

In August of that year, Botin restricted access to Santander's research after a New York analyst recommended selling Brazilian assets as the country's bonds and currency plummeted on concern Lula would default on 1.05 trillion reais of public debt.

After Lula's victory, Botin paid a call on the new president and pledged to maintain $2 billion in trade lines at a time when international lending to Brazil had plunged 16 percent.

``Santander believed in Lula and Brazil at a critical time,'' said Alexandre Marinis, who runs Mosaico Economia Politica, a consulting firm in Sao Paulo.

In March, Miguel Jorge, Banespa's corporate affairs director, was named trade minister. Mario Gomes Toros, a former vice president for Santander in Brazil, was appointed monetary policy chief at the central bank a month later.

A spokesman for Lula didn't return calls seeking comment. Jorge declined to be interviewed, a spokesman for the Trade Ministry said. Toros's representative declined to comment.

Jorge and Botin

At Banespa, Jorge helped leaders of United Workers' Central, Brazil's biggest union grouping, devise a plan for deducting loan payments from payroll checks, slashing costs for union members, said Jose Paulo Nogueira, executive director of the ABC Metalworkers' Union.

In previous corporate posts at Volkswagen AG's factory in Sao Bernardo and Autolatina, a venture of VW and Ford Motor Co., Jorge mixed with union leaders allied to Lula, including Luiz Marinho, who is now social security minister, Nogueira said.

Botin and Jorge hugged at today's meeting between Lula and Spanish Prime Minister Jose Luis Rodriguez Zapatero.

``Is Jorge someone Lula trusts? Well, he made him a minister,'' Nogueira said. ``They've been very astute.''

Wednesday, September 12, 2007

Brazil Q2 2007 GDP

Brazil's economy expanded at the fastest pace in three years in the second quarter as lower interest rates and a currency rally fueled higher consumer spending and business investment.

Gross domestic product, the broadest measure of a country's output of goods and services, jumped 5.4 percent from a year earlier after growing a revised 4.4 percent in the first quarter or put another way gross domestic product in the April-June period expanded a seasonally adjusted 0.8 percent from the first quarter.

The Brazilian economy's year-on-year expansion in the April-through-June period was the fastest since the economy grew 7.5 percent in the second quarter of 2004.

Brazil's currency gained on the news and the real gained 0.8 percent to 1.9090 per dollar at 4:08 p.m. New York time (13-09-07), the strongest since Aug. 9 when it traded at 1.90 reais per dollar. The real has gained almost 12 percent this year, the best performer among the six major Latin American currencies.

Brazil's central bank has cut the benchmark lending rate 18 straight times since September 2005 - from 19.75 percent to 11.25 percent, fueling consumer lending, business investment and industrial output. The real has appreciated 20 percent against the dollar in that period as export revenues for Brazil's commodity exports surged.

Consumer spending in Latin America's biggest economy rose 5.7 percent in the second quarter from the same period a year earlier, the 15th straight quarterly increase, the government said. Investment rose 14 percent compared with the second quarter of 2006, while industry rose 6.8 percent, services 4.8 percent and agriculture rose 0.2 percent.

The 12-month inflation rate has accelerated since March, when it reached 2.96 percent, its lowest level since February 1999. In August, the rate climbed to 4.18 percent.

Bank lending has increased every month since February 2004, helped by falling interest rates and the increase in paycheck- backed loans, created by Lula in September 2003, the central bank said Aug. 27.

The program allows workers to borrow at lower costs because repayments are deducted directly from their wages.

Vehicle sales in Brazil have risen more than 25 percent this year as lower borrowing costs, coupled with longer maturities for car loans, fueled demand. Automakers have stretched out maturities to as long as 84 months from 36 months last year, lowering the monthly payments for borrowers.

Monday, September 03, 2007

The Real and the Trade Surplus

From Bloomberg this morning:

Brazil's Real Gains After Trade Surplus Increased in August

By Adriana Brasileiro

Sept. 3 (Bloomberg) -- The real gained as a widening trade surplus in August boosted speculation that rising dollar flows will support the local currency.

The real rose 0.4 percent to 1.9540 reais per dollar at 3:36 p.m. New York time. The yield on Brazil's benchmark zero-coupon bonds due January 2008 fell 4 basis points, or 0.04 percentage point, to 11.19 percent, according to Banco UBS Pactual SA.

``The outlook is for inflows to stay strong this year, protecting the real from external shocks,'' said Reginaldo Galhardo, currency director of Treviso Corretora, a Sao Paulo brokerage.

Brazil's trade surplus widened to $3.54 billion in August from $3.35 billion the previous month, the Trade Ministry said in a report on its Web site. It exceeded the $3.1 billion median estimate in a Bloomberg survey of 18 economists.

Exports rose to a record $15.1 billion last month from $14.1 billion in July, while imports also increased to a record $11.6 billion from $10.8 billion in July, the ministry said.

Thursday, August 16, 2007

Brazil Treasury Purchases Jump to Record

From Bloomberg today:

Brazil Treasury Purchases Jump to Record

Brazil is purchasing more U.S. Treasury notes than ever as China, for three years the biggest buyer of American government debt, reduces its holdings.

Brazil's portfolio of Treasury securities increased $41.5 billion to a record $93.6 billion in the first half of 2007, Treasury data showed today. That left Brazil ranked fifth among international holders of U.S. debt in June, up from 10th at the end of 2006 and surpassing South Korea and Germany.

The unprecedented demand from Latin America's largest economy is offsetting a weaker appetite in China, which sold U.S. notes for a third month in June. Brazil will sop up more American debt in the short term as Banco Central do Brasil President Henrique Meirelles tries to restrain his country's currency amid a surge in investment, analysts said.

``I would expect the Brazilian central bank to continue intervening and to buy Treasuries,'' said Nuno Camara, an economist who covers Brazil for Dresdner Kleinwort in New York. ``Unlike some Asian central banks that are moving toward some diversification, Brazil can't really take on too much risk, so they put it in Treasuries.''

Brazil has almost doubled its foreign-exchange reserves so far this year to a record of almost $160 billion, from $85.8 billion at the end of 2006. The purchases aim to slow a 49 percent rally in the Brazilian real over the past three years, the biggest gain against the dollar of the 17 major currencies tracked by Bloomberg.

Brazil didn't buy dollars yesterday for the first time since July and refrained again today. The real traded at 2.0295 per dollar at 3 p.m. in New York time, compared with 1.9853 yesterday.

Matching Liabilities

Brazil, the biggest debtor among developing nations, needs to concentrate its reserves buildup on dollar-denominated bonds because most of the country's government and corporate foreign liabilities are in the U.S. currency, said Emilio Garofalo, a former director at the central bank who now runs the investment consulting company EBS Capital in Sao Paulo.

``Brazil's choice of currency for the reserves was always based on future obligations, and that's the way it should be,'' said Garofalo, who managed the reserves for six years. ``Most of Brazil's debt sales have been in dollars.''

Beatriz Dornelles, a spokeswoman for the Brazilian central bank, said the monetary authority doesn't comment on its reserves strategy.

Biggest After China

China, the biggest foreign holder of Treasuries after Japan, sold a net $14.7 billion of U.S. government debt from April through June, the first time the country has sold Treasuries in three straight months since November 2000.

China, with total foreign exchange reserves of about $1.3 trillion, is seeking the prospect of higher returns by shifting some money from the relative safety of U.S. government debt into stocks and corporate bonds: The country bought a record $2.94 billion of U.S. stocks and a net $4.78 billion of corporate bonds in June, the Treasury data showed.

China has more leeway to buy assets denominated in other currencies because its reserves exceed its debt, Garofalo said. For Brazil, buying a bigger proportion of assets in other currencies, betting on bigger gains, would be speculation that the central bank shouldn't engage in, he said.

Swelling Debt

Brazil's total debt owed to creditors abroad -- including liabilities of companies and government -- rose to $182 billion at the end of June, from $157 billion a year earlier. The government's share of foreign debt has risen to $71.2 billion from $64.8 billion over the same period.

While Brazil likely will remain a buyer of Treasuries for at least another year, the country's investments are significant enough ease investors' concern that China will continue selling U.S. debt, said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co. in New York.

Brazil's share of all U.S. Treasuries held abroad in June rose to 4.2 percent, from 1.7 percent a year earlier. By comparison, China and Japan accounted for 46 percent of international holdings in June, down from 50 percent a year earlier, according to Treasury figures.

Brad Setser also ran a version of this story:

Almost all Brazilian purchases of US debt show up in the US data. Brazil bought $13b in long-term debt in June ($12.2b of Treasuries) and added $1.1b to its short-term holdings, for $14.1b in net inflows. In q2, Brazil – almost certainly Brazil’s central bank – bought $24.6 b of US long-term debt, and increased its short-term holdings by $2.4b, for a net inflow of $27b.

The net inflow in q2 though was a slightly smaller share of Brazil’s $37.6b reserve increase than in q1. In q1, net inflows from Brazil totaled $22.5b, almost equal to the $23.7b increase in Brazil’s reserves.

Nonetheless, one of the most stunning facts in the TIC data is that Brazil’s central bank provided far more financing to the US Treasury in the first half of 2007 – it bought $41.9b of US Treasury bonds – than the IMF provided Brazil in 2002-03. The IMF’s total lending to Brazil was only a bit more than $30b at its peak. I am always amazed by that particular data point. It drives home just how much the world has changed.

Brazil Real Weakens Past 2-Per-Dollar for First Time Since May

From Bloomberg this morning:

Brazil Real Weakens Past 2-Per-Dollar for First Time Since May

Brazil's currency weakened past the 2.0-per-dollar level for the first time in three months as losses in global credit markets prompted investors to shun riskier emerging-market assets.

The real fell as much as 2.4 percent to 2.0325 reais to the dollar, the first time it breached 2.0 per dollar since May 15. It closed down 2.2 percent to 2.0295 per dollar, following a 2.2 percent slide yesterday. The central bank didn't buy dollars for a second day, after purchasing the U.S. currency in the spot market daily since July 2006.

``Volatility is at unimaginable levels now and nobody can clearly assess the damage caused by loses in credit markets,'' said Ronie Marcelo Germiniani, the proprietary trading manager at Banco Itau SA, Brazil's biggest non-government bank in terms of market value. ``Nobody is going to take significant positions in emerging markets under these circumstances.''

The real has weakened 7.8 percent this month, trimming its advance this year to 5 percent. Losses in the real deepened last week as central banks around the world started injecting cash into money markets last week to prevent losses related to the U.S. subprime rout from causing illiquidity.

The real also fell against the yen today as some investors pulled out of so-called carry trades in which they borrowed in yen and invested in Brazilian fixed-income assets. The real fell 2.7 percent to 57.2676 yen.

The central bank's purchases of dollars until recent days built up foreign reserves, which reached a record $160 billion in July.

As its foreign reserves increased, Brazil's holdings of Treasury securities increased $41.5 billion to a record $93.6 billion in the first half of 2007, Treasury data showed today. That left Brazil ranked fifth among international holders of U.S. debt in June, up from 10th at the end of 2006 and surpassing South Korea and Germany.

Dollar Purchases

Finance Minister Guido Mantega said yesterday the central bank deemed it unnecessary to buy dollars. ``The central bank isn't obliged to carry out dollar auctions every day,'' Mantega told reporters in Brasilia yesterday.

``There was some talk yesterday that the non-intervention was a sign the bank saw this crisis as really damaging, and was worried it may make things worse by buying dollars,'' Germiniani said. ``So the bank may act today just to show that their outlook is still for the real to appreciate because of strong investment flows.''

The real's recent declines will bolster profit margins at manufacturers, including textile and shoe makers, which have been squeezed in international export markets by the real's rally, said Pedro Bastos, chief executive officer for the Brazilian asset management unit of HSBC Holdings Plc.

``The weaker real gives those sectors a reason to celebrate now,'' Bastos said in an interview in Sao Paulo.

Retail Sales

A government report today showed Brazilian retail sales rose 11.8 percent in June from a year earlier. The increase in retail, supermarket and grocery store sales, as measured by units sold, was more than the 10.6 percent rise in May and higher than the median 11.3 percent rise forecast in a Bloomberg survey of 28 analysts. Retail sales increased a seasonally adjusted 0.4 percent in June from May and rose 8.2 percent in the 12 months through June.

The yield on Brazil's benchmark zero-coupon bonds due January 2008 rose 8 basis points, or 0.08 percentage point, to 11.27 percent, the biggest rise since the yield jumped 9 points to 11.14 percent on July 26, according to Banco UBS Pactual SA.

Sell-Off Of Brazilian Assets

From the FT Today:

Brazil’s financial assets hit by global turmoil

By Jonathan Wheatley in São Paulo

Published: August 15 2007 23:18 | Last updated: August 15 2007 23:18

Brazilian financial assets broke through significant support levels on Wednesday as turmoil on global markets threatened to reach a part of the world that had seemed relatively free from contagion.

“Brazil is not immune at all,” said Christian Stracke of Credit Sights, a research firm. “Brazil is arguably more exposed to the global economy and to global financial markets than ever before.”

Much of the fall in Brazilian assets is explained by investors selling to cover losses in other markets.

But the extent of the slippage suggests investors may be sensing Brazilian assets are riskier than previously suspected.

Brazil’s currency, the real, lost 2 per cent against the US dollar on Wednesday to break below R$2.00 for the first time in three months.

The São Paulo Stock Exchange Index fell 3.2 per cent to 49,285 points, its first close below 50,000 points since early May, bringing losses over the past month to more than 15 per cent.

The sell-off came as fear spread around global markets that contagion from the US subprime lending crisis was spreading to other asset classes.

“This is no longer a subprime crisis, this is a full-blown structured product crisis,” Mr Stracke said.

As recently as last week fund managers said Brazilian markets were immune to contagion because they were free of high-risk, illiquid securities. “What’s happening is a massive unwinding from risk, and it’s hard to see Brazil falling into that category any more,” said one New York hedge fund manager.

But analysts such as Mr Stracke argue that foreign investors have become exposed to high-risk credits in Brazil through the large amount of debt raised overseas by Brazilian financial institutions.

Last year, $18.8bn entered Brazil as foreign debt, the vast majority raised by banks. They invested some of it in high-yielding public securities. But a significant amount was passed on as consumer credit.

Total financial sector credit in Brazil stands at about $395bn, of which $135bn is consumer credit and $260bn, corporate. Foreign banks account for 36 per cent of the total, according to Anefac, a financial markets association that monitors credit.

Consumer credit is the engine of recent growth in Brazil. The economy grew by 3.7 per cent last year and will grow by about 4.5 per cent this year – a significant improvement on the average of 2.5 per cent over the previous 15 years.

Yet the credit that is fuelling growth is extraordinarily expensive for various historical reasons. Credit card debt bears interest of 224 per cent a year, according to Anefac. The overdraft rate is 145 per cent. Even debt with a reasonable level of collateralisation, such as payroll-linked or car loans, costs between 15 and 33 per cent a year.

It is this credit to which international investors are indirectly exposed. Roberto Vertamatti, director of Anefac’s financial committee, said such risk was so far perceived as of little significance. “But there is always a risk and the exposure is certainly there,” he said.

Mr Vertamatti said some 15 per cent of Brazilian credit was securitised through instruments such as receivables funds, often traded between financial institutions. He said the risk that Brazilian banks could be exposed directly to subprime lending in the US was minimal and would easily be dealt with by the central bank relaxing restrictions on liquidity.

Monday, June 25, 2007

Liquidity, Fund Inflows and Consumption

This in Bloomberg this morning:

Never have Gucci, Porsche, Jaguar, Prada and Tiffany been so in love with Brazil, home of the world's best-performing currency over the past three years.

The waiting list for Prada SpA's new spring-summer line of leather bags has swelled to 120 people at Dona Santa, a luxury goods store in the Brazilian coastal city of Recife. The most expensive bag in the collection costs $3,600, equal to about half the annual income of the average Brazilian household.

Porsche AG has sold more sports cars and SUVs in the South American country this year than it did in all of 2002 and 2003 combined. Grand Cru, the country's second-largest importer of premium wines, forecasts a doubling of sales this year.

The Brazilian real's three-year, 60 percent rally has pared the cost of imports, fueling a surge in luxury goods sales. That boom is part of a doubling of imports in the past three years that is curbing growth in Brazil's trade surplus and leaving the currency vulnerable to a decline in commodity exports.

The real has gained 9.9 percent this year to 1.9417 per dollar, buoyed by record exports of commodities such as iron ore, orange juice and soybeans and by foreign investment in the country's stock and bond markets.

The real's rally has buoyed the purchasing power of Brazilians, from the poorest to the richest. The average monthly household income in Brazil rose to 1,114 reais in May, or $574. That's double the $287 average three years earlier.

The highest-paid banker in Brazil today takes home $113,000 a month, up from $27,000 a month in 2004, according to Sao Paulo-based Grupo Catho, the country's largest recruiting company.

Brazil's list of billionaires has grown, climbing to 20 this year from four in 2003, according to Forbes magazine. Brazil's richest 1 percent earns as much as the bottom 50 percent, according to the state-funded Institute of Applied Economics.

Luxury goods sales will reach $4.3 billion this year, a 48 percent rise from two years ago, according to Sao Paulo-based research company GfK Indicator.

Thursday, June 21, 2007

Unemployment in Brazil

The contents of this Bloomberg article this morning makes the demographic component in economic growth pretty clear I feel:

Brazil's unemployment rate was unchanged in May from the previous month as quickening economic growth prompted more people to come into the workforce, offsetting gains in hiring.

Unemployment in Brazil's six largest metropolitan areas was 10.1 percent, the national statistics agency said, higher than the median forecast of 9.9 percent in a Bloomberg survey of 16 economists.

``Unemployed people are looking for jobs as the positive outlook for the economy boosts companies' confidence to spend more on hiring,'' Sandra Utsumi, chief economist with BES Investimentos in Sao Paulo, said in a phone interview. ``Even though the jobless rate didn't drop, the perspective for the labor market is positive as the economy is growing.''

The difference with Germany, Japan etc (or Latvia, Lithuania for that matter) couldn't be clearer. The rate in Brazil doesn't fall dramatically with growth due to the large numbers of younger people who are continuously coming online.

Companies are hiring more as slowing inflation, lower interest rates and rising family incomes encourage consumers to boost their spending, said Utsumi. Market analysts expect the economy to grow 4.25 percent this year and 4 percent in 2008 compared with 3.7 percent in 2006, according to the median estimate a June 15 central bank survey.

Brazil's central bank slashed the benchmark interest rate to 12 percent, a record low, on June 6 from a 19.75 percent in September 2005, as inflation reached the lowest level in eight years.

Meanwhile back in Latvia annual wage inflation is running at 33%.

Friday, February 09, 2007

Biotech and Dollar Purchases

Ok, to me it looks rather like Brazil is about to start rocking and rolling. Two stories in today from Bloomberg seem interesting:

Brazil to Invest 10 Billion Reais in Biotechnology

Brazil plans to invest 10 billion reais ($4.77 billion) in biotechnology over the next decade to fuel growth in agriculture, pharmaceuticals and other industries.

Brazilian President Luiz Inacio Lula da Silva signed a decree today creating the program to invest 1 billion reais annually for 10 years. Lula also called on companies to match the government's investments.

The cash will be used to fund research and development of a new strain of sugarcane that is resistant to droughts, a vaccine for rabies and other projects. By stepping up biotechnology funding, Brazil, the world's biggest grower of sugarcane, oranges and coffee and home to 20 percent of the planet's living species, aims to meet rising demand for its crops and reduce its dependence on foreign pharmaceutical makers such as Pfizer Inc.

``Brazil has strengths that put us in a position to stand out in these new technologies,'' said Lula, 61, during a ceremony today at the presidential palace in Brasilia. ``This policy will help Brazil realize this potential.''

Brazil Real Falls as Central Bank Steps Up Dollar Purchases

Brazil's real fell for a second day on speculation the central bank is stepping up its efforts to halt the currency's rally by buying more dollars and planning sales of reverse currency swap contracts.

Central bankers have bought dollars since July to help exporters whose profit margins have been eroded by the real's four-year, 71 percent rally. Reverse currency swaps allow investors to hedge against a weaker dollar by locking in a fixed exchange rate to sell the U.S. currency in the future.

``The bank will probably act more aggressively now,'' said Jorge Knauer, manager of foreign exchange at Banco Prosper in Rio de Janeiro. ``There could be a sale of reverse currency swaps very soon in addition to heavier dollar purchases.''

Thursday, February 08, 2007

Brazil Selling Reais-Denominated Bonds

Another interesting insight into the global liquidity situation, Brazil is able to sell 1.5 billion reais of 21-year local currency denominated bonds in international markets:

Brazil sold 1.5 billion reais ($717 million) of 21-year bonds in international markets, the government's longest local-currency, fixed-rate maturity ever.

The Treasury sold the bonds, which mature in January 2028, to yield 10.68 percent.

Today's sale is part of the government's effort to shift more of its debt into local currency securities and to lengthen the maturities on those bonds. Issuing bonds denominated in reais allows Brazil, the biggest debtor among developing nations, to protect against a sudden rise in borrowing costs should its currency weaken.

``With a Brazilian real issue the government relies less on U.S. dollar financing and becomes less sensitive'' to swings in the currency, said Jean-Dominique Butikofer, who helps manage about $725 million of emerging-markets debt at Union Bancaire Privee in Zurich.

Brazil first sold real-denominated debt in September 2005, when it issued $1.5 billion worth of bonds due in 2016. In September, it sold $750 million of local currency debt due in 2022. Strong demand for the securities led the Treasury to sell more of those bonds twice: in October, with the sale of $300 million of the bonds, and again in December, with the sale of $350 million.