Brazil Economy Watch

Facebook Links

2009-06-20T03:29:00.000-07:00

Quietly clicking my way through Bloomberg last Sunday afternoon, I came across this:

Facebook Members Register Names at 550 a Second

Facebook Inc., the world’s largest social-networking site, said members registered new user names at a rate of more than 550 a second after the company offered people the chance to claim a personalized Web address.

Facebook started accepted registrations at midnight New York time on a first-come, first-served basis. Within the first seven minutes, 345,000 people had claimed user names, said Larry Yu, a spokesman for Palo Alto, California-based Facebook. Within 15 minutes, 500,000 users had grabbed a name.

Mein Gott, I thought to myself, if 550 people a second are doing something, they can't all be wrong. So I immediately signed up. Actually, this isn't my first experience with social networking since I did try Orkut out some years back, but somehow I didn't quite get the point. Either I was missing something, or Orkut was. Now I think I've finally got it. Perhaps the technology has improved, or perhaps I have. As I said in one of my first postings:

Ok. This is just what I've always wanted really. A quick'n dirty personal blog. Here we go. Boy am I going to enjoy this.

Daniel Dresner once broke bloggers down into two groups, the "thinkers" and the "linkers". I probably would be immodest enough to suggest that most of my material falls into the first category (my postings are lo-o-o-ng, horribly long), but since I don't fit any mould, and Iam hard to typecast, I also have that hidden "linker" part, struggling within and desperate to come out. Which is why Facebook is just great.

In addition, on blogs like this I can probably only manage to post something worthwhile perhaps once or twice a month, and there is news everyday.

So, if you want some of that up to the minute "breaking" stuff, and are willing to submit yourself to a good dose of link spam, why not come on in and subscribe to my new state-of-the-art blog? You can either send me a friend request via FB, or mail me direct (you can find the mail on my Roubini Global page). Let's all go and take a long hard look at the future, you never know, it might just work.

Don't Get Carried Away Now!

2009-05-24T03:00:00.000-07:00

As Paul Krugman recently pointed out, one of the central points they made in the latest IMF World Economic Outlook was that recessions caused by financial crises tend to get resolved on the back of export-lead booms, with countries normally emerging from the crisis with a positive trade balance of over 3 percent of GDP. The reason for this is simple, since consumers are so laden-down with debt from the boom period, they are naturally more obsessed with saving than borrowing during the initial crisis aftermath. So much then for the typical crisis, and the typical exit. But musing on this point lead Krugman to an additional, rather disturbing, conclusion: since the present financial crisis is truly global in its reach, the habitual exit route to recovery will only work after we are able to identify another planet to send all those exports to (shades of Startreck IV). The joke may seem a rather exaggerated one, in poor taste even, but behind it there lies a little bit more than a grain of truth.

But not everywhere is gloom and doom at the moment, and on the other side of the world they woke up reeling from different kind of bounce last Monday morning, on learning that India’s outgoing government had been not only been re-elected, but had been thrust back into power on a much more stable basis. And that was not the only pleasant surprise in store for those reading their morning newspapers in London, Madrid or New York, since India's main stock index - the Sensex - shot up as much as 17% during early trading on receiving the news, while the rupee also surged sharply. So just one more time we find ourselves faced with the prospect of living in a rather divided world, where on one side we have growing and deepening pessimism, while on the other we see a burst of optimism, with someone, somewhere, getting a massive dose of that "let a thousand green shoots bloom" kinda feeling. Perhaps we should ask ourselves whether there is any connection?

Well, and to cut the long story short, yes there is, and the connection has a name, and it's called sentiment. Indeed sentiment is precisely why the recent (and highly controversial) US bank stress tests were so important. Their real significance was not for any relevance they may have from a US banking point of view (which was, of course, highly contested), but for the reassurance they can give market participants that there will not be another financial explosion in the United States (as opposed to a protracted recession, and long slow recovery), or put another way, to show the days of "safe haven" investing are now over. Risk is about to make a comeback, and the only question is where?

Which brings us straight back to all that earlier talk of coupling, recoupling, decoupling, and uncoupling which we saw so much of a year or so ago (or to Decoupling 2.0, as the Economist calls it). And to the world as we knew it before the the demise of Lehmann brothers, where commodity prices were booming like there was no tomorrow on the one hand, while credit- and housing-markets markets were steadily melting down in the developed economies on the other, where growth was being clocked up in many emerging economies at ever accelerating rates, while the only "shoots" we could see on the horizon in the US, Europe and Japan were those of burgeoining recessions.

The point to note here is not just that a significant group of investors and their fund managers spent the better part of 2008 busily adapting their behaviour to changed conditions in the US, Europe and Japan, but rather that a very novel set of conditions began to emerge, as the credit crunch worked its way forward and property markets drifted off into stagnation in one OECD economy after another. Just as they were finally announcing closing time in the gardens of the West almost overnight it started "raining money" in one emerging economy after another - as foreign exchange came flooding in, and the really hard problem for governments and central banks to solve seemed to be not how to attract funding, but rather how to avoid receiving an excess of it. Thailand even attained a certain notoriety by imposing capital controls with the explicit objective of discouraging funds not from leaving but from entering the country.

Then suddenly things moved on, and day became night just as quickly as night had become day as one fund flow after another reversed course, and the money disappeared just as quickly as it had arrived. Behind this second credit crunch lay an ongoing wave of emerging-market central bank tightening (during which Banco Central do Brasil deservedly earned its spurs as the Bundesbank of Latin America) with the consequence that one emerging economy after another began to wilt under the twin strain of stringent monetary policy and sharply rising inflation. Thus the boom "peaked" in July (when oil prices were at their highest), and momentum was already disapearing when the hammer blow was finally dealt by the decision to let Lehman Brothers fall in late September. By November all those previous positive expectations were being sharply revised down, with the IMF making an initial cut in its global growth estimate for 2009 - to 2.2 percent from the 3.7 percent projected for 2008. The World Bank went even further, and by early December was projecting that world trade would fall in 2009 for the first time since 1982, with capital flows to developing countries being expected to plunge by around 50 percent. By March 2009 they were estimating that the volume of world trade, which had grown by 9.8 percent in 2006 and by 6.2 percent in 2007, was even likely to fall by 9 percent this year.

Having said this, and while fully recognising that the future is never an exact rerun of the past - and especially not the most recent past - given that emerging economies have been the key engines of global growth over the last five years, is there any really compelling reason for believing they won't continue to be over the next five? Could we not draw the conclusion that what was "unsustainable" was not the solid trend growth which we were observing between 2002 and 2007, but rather the excess pressure and overheating to which the key EM economies were subjected after the summer of 2007? And if that is the case, might it not be that the "planet" we need to find to do all that much needed exporting to isn't so far away after all, but right here on this earth, and directly under our noses, in the shape of a growing band of successful emerging economies.

According to IMF data, the so called BRIC countries actually accounted for nearly half of global growth in 2008 - China alone accounted for a quarter, and Brazil, India and Russia were responsible for another quarter. All-in-all, the emerging and developing countries combined accounted for about two-thirds of global growth (as measured using PPP adjusted exchange rates) . Furthermore, and most significantly, the IMF notes that these economies “account for more than 90 per cent of the rise in consumption of oil products and metals and 80 per cent of the rise in consumption of grains since 2002”.

But behind the recent emerging market phenomenon what we have is not only a newly emerging growth rate differential, since alongside this there is also alarge scale and ongoing currency re-alignment taking place, a realignment driven, as it happens, by those very same growth rate differentials. The consequential rapid and dramatic rise in dollar GDP values (produced by the combination of strong growth and a declining dollar) has meant that a slow but steady convergence in global living standards - at least in the cases of those economies who have been experiencing the strongest acceleration - has been taking place, and at a much more rapid pace than anyone could possibly have dreamed of back in the 1990s, even if the long term strategic importance of this has been masked by the recent collapse in commodity prices and the downward slide in emerging stocks and currencies associated with the post-Lehman risk appetite hangover. Which is why, yet one more time, that simple issue of sentiment is all important, or using the expession popularised by Keynes "animal spirits".

Carry On Trading

But now we have a new factor entering the scene. The US Federal Reserve, along with many of the world's key central banks, has so reduced interest rates that they are now running only marginally above the zero percent "lower bound", and the Fed is far more concerned with boosting money supply growth to fend of deflation than it is with restraining it to combat inflation. Not only that, Chairman Ben Bernanke looks set to commit the bank to maintain rates at the current level for a considerable period of time.

In this situation, and given the extremely limited rates of annual GDP growth we are likely to see in the US and other advanced economies in the coming years, all that liquidity provision is very likely to exit the first world looking for better yield prospects, and where better to go than to to look for it than those "high yield" emerging market economies.

The Federal Reserve could thus easily find itself in the rather unusual situation of underwriting the nascent recovery in emergent economies like India and Brazil , just as Japan pumped massive liquidity straight into countries like New Zealand and Australia during its experiment with quantitative easing between 2001 and 2006. And the mechanisms through which the money will arrive? Well, they are several, but perhaps the best known and easiest to understand of them is the so called carry trade, which basically works as follows.

Stimulus plans and near-zero interest rates in developed economies boost investor confidence in emerging markets and commodity-rich nations whose interest rates are often in double figures. Using dollars, euros and yen these investors then buy instruments denominated in currencies from countries like India, Brazil, Hungary, Indonesia, South Africa, Turkey, Chile and Peru - which collectively rose around 8% from March 20 to April 10, the biggest three-week gain for such trades since at least 1999 . A straightforward and simple carry-trade transaction would run like this: you borrow U.S. dollars at the three-month London interbank offered rate of (say) 1.13% and use the proceeds to simply buy Brazilian real, leaving the proceeds in a bank to earn Brazil’s three-month deposit rate of 10.51%. That would net anannualized 9.38% - under the assumption that the exchange rate between the two currencies remains stable, but the real, of course, is appreciating against the dollar.

Other options which immediately spring to mind are Turkey, where the key interest rate is currently 9.25 percent, Hungary (9.5 percent) or Russia (12 percent). And the cost of borrowing is steadily falling - overnight euro denominated inter-bank loans hit 0.56 percent last week, down from 3.05 percent six months ago after recent moves by the European Central Bank to cut interest rates and pump liquidity into the banking system. The London interbank offered rate, or Libor, for overnight loans in dollars is thus down to 0.22 percent from 0.4 percent in November. And while the ECB provides the liquidity, the EU Commission and the IMF provide the institutional guarantees which - in the cases of countries like Hungary or Romania - mean that even is such lending is not completely free from default risk, they are at least very well hedged.

Indeed Deustche Bank last week specifically recommended buying Hungarian forint denominated assets, and according to the bank the Russian ruble, the Hungarian forint and the Turkish lira are among the trades which offeri investors the best returns over the next two to three months. Deutsche Bank recommends investors sell the euro against the forint on bets the rate difference will help the Hungarian currency gain around 10 percent over the next three months (rising to 260 from around 285 to the euro when they wrote). Investors should also sell the dollar against the Turkish lira and buy the ruble against the dollar-euro basket, according to their recommendations.

And it isn't only Deutsche Bank who are actively promoting the trade at the moment, at the start of April Goldman Sachs also recommended investors to use euros, dollars and yen to buy Mexican pesos, real, rupiah, rand and Russia rubles. John Normand, head of global currency strategy at JPMorgan, is forecasting a strong surge in long term carry trading as the recovery gains traction. Long trading, he says, is decidedly "underweight" at this point. Long carry trade positions held by Japanese margin traders, betting on gains in the higher-yielding currencies, peaked at $60 billion last July, according to Normand. They were liquidated completely by February, and have subsequently increased to around one third of the previous value (or $20 billion). “Only Japanese margin traders and dedicated currency managers appear to have reinstated longs in carry,” Normand says. “Their exposures are only near long-term averages.”

And Barclays joined the pack this week stating that Brazil’s real, South Africa’s rand and Turkey’s lira offer the “largest upside” for investors returning to the carry trade. A global pickup in investor demand for higher-yielding assets and signs the worst of the global recession is over “bode very well for the comeback of the emerging-market carry trade,” according to analyst Anfrea Kiguel in a recent report from New York. In part as a result of the surge in carry activity the US dollar declined beyond $1.40 against the euro on Friday for the first time since January. Evidently the USD may now be headed down a path which is already well-trodden by the Japanese yen.

India on The Up and Up.

But some of these trades are much riskier than others. Many of the countries in Eastern Europe who currently offer the highest yields are also subject to IMF bailout programmes, so they are with good reason called "risky assets". But others look a lot safer. Take India for example. As Reserve Bank of Indian Governor Duvvuri Subbarao stressed only last week, India’s “modest” dependence on exports will certainly help the economy weather the current global recession and even stage a modest recovery later this year. Of course, "modest" is a relative term, since even during the depths of the crisis India managed to maintain a year on year growth rate of 5.3 percent (Q4 2008), and indeed as Duvvuri stresses, apart from the limited export dependence, India's financial system had virtually no exposure to any kind of "toxic asset".

As mentioned above, the rupee rose 4.9 percent this week to 47.125 per dollar in Mumbai, its biggest weekly advance since March 1996, while the Sensex index rallied 14 percent for its biggest weekly gain since 1992.

And, just to add to the collective joy, even as Indian Prime Minister Manmohan Singh began his second term, and stock markets soared, analysts were busy rubbing their hands with enthusiasm at the prospect that the new government might set a record for selling off state assets, and thus begin to address what everyone is agreed is now India's outsanding challenge: reducing the fiscal deficit.

Singh, it seems, could sell-off anything up to $20 billion of state assets over the next five years as he tries to reduce the central govenment budget shortfall which is currently running at more than double the government target - it reached 6 percent of gross domestic product in the year ended March 31, well beyond the 2.5 percent government target. The prospect of a wider budget gap prompted Standard & Poor’s to say in February that India’s spending plans were “not sustainable” and threaten that the country's credit rating could be cut again if finances worsen. But just by raising 100 billion rupees from share sales and initial public offerings in the current financial year would reduce the fiscal deficit by an estimated quarter-point, at the stroke of a pen, as it were. And there is evidently plenty more to come from this department.

As a result of the changed perception that the new Indian government will now - and especially with the elections and the worst of the global crisis behind it - seriously start to address the fiscal deficit situation, both S&P and Moody’s Investors Service, have busied themselves emphasising just how the outcome gives India's government a chance to improve its fiscal situation. The poll result gives the government more “political space” to sell stakes in state-run companies and improve revenue, according to Moody’s senior analyst Aninda Mitra, while S&P’s director of sovereign ratings Takahira Ogawa commented that the result means “there is a possibility for the government to implement various measures to reform for further expansion of the economy and for the fiscal consolidation.”

So off and up we go, towards that ever so virtuous circle of better credit ratings, lower interest rates, rising currency values, and ever higher headline GDP growth, which of course helps bring down the fiscal deficit, which helps improve the credit rateing outlook, which helps... oh, well, you know.

And it isn't only India which is exciting investors at the moment. Brazil's central bank President Henrique Meirelles went so far as to warn this week against an “excess of euphoria” in the currency market, implicitly suggesting the bank may engage in renewed dollar purchases to try to slow down the latest three-month rally in the real. The central bank began buying dollars on May 8, and Meirelles’s latest are evidently upping the level of verbal intervention. The real has now climbed 20.5 percent since March 2, the biggest advance among the six most-traded currencies in Latin America, as prices on the country’s commodity exports rebounded and investor demand for emerging-market assets has grown. The currency is up 14 percent this year, more than any other of the 16 major currencies except for South Africa’s rand, reversing the 33 percent drop in the last five months of 2008.

Carry Me Home

Despite a number of outsanding worries about the emerging economies in Eastern Europe, the general idea that countries like India, Brazil, Turkey, Chile, Peru etc are firmly at the top of the list of the economies where current growth conditions are generally favorable seems essentially sound. Additionally, if this sort of argument has any validity at all it is bound to have implications for what is sure to be one of the key problems we will face during the next global upturn: what to do with the financial architecture which we have inherited from the original Bretton Woods agreement (or Bretton Woods II as some like to call it).

The limitations of the current financial architecture have become only too apparent during the present recession, since with both the Eurozone and the US economies contracting at the same time, the currency see-saw between the dollar and the euro has failed to provide any adequate form of automatic stabiliser. And since Japan's economy is in an even more parlous state -deep in recession, and desperate for exports - having to live with a yen-dollar parity which is at levels not seen since the mid 1990s can hardly be fun. This has lead some analysts to start to talk of a new and enhanced role for China's currency, the yuan, in any architectural reform we may initiate. But obviously, beyond the yuan we should also be thinking about the real and the rupee. However,I would like to suggest the problem we now face is a much broader one than simply deciding which currencies should be in the central bank reserve basket, and it concerns the central issue of how to conduct monetary policy in an age of global capital flows. During the last boom, comparatively small open economies like Iceland and New Zealand were on this receiving end, but this time round we face the truly daunting prospect of having global giants thrust into the same position, while the USD gets pinned to the floor, just as the Japanese yen was previously.

The problem is evidenty a structural one. The euro hit 1:40 to the USD on Friday (at a time when Europe's economies are in deeper recession than the US one is), while - as I said - the Brazilian central bank President felt the need to come out and warn against an “excess of euphoria” in the local currency market following an 18% rise in the real over 3 months. Officially, the euro surged as a result of news that the US might receive a downgrade on its AAA credit rating, but this justification hardly bears examination, given that around half of the eurozone economies could be in the same situation. Obviously currency traders live in a world where the most important thing is to "best guess" what the guy next to you is liable to do next, and in this sense the rumour could have played its part, but the real underlying reason for the sudden shift in parities is the return in sentiment we have been seeing since early May, and the massive and cheap liquidity which is on offer in New York.

Of course, the impact spreads far beyond Delhi and Rio. Turkey’s lira is also well up - and has now advanced 10 percent over the last three months - while South Africa’s rand is up 22 percent, making it the best performing emerging-market currency during the same period.

All good "carry" punts these, with Turkey’s benchmark interest rate standing at 9.25 percent, and Brazil’s rate of 10.25 percent. Even the ruble is up sharply, just as Russia's economy struggles to handle the rapidly growing loan default rates. The currency climbed to a four-month high against the dollar on Friday, making for its longest run of weekly gains in almost two years, hitting 31.0887 per dollar at one point, its strongest level since Jan. 12. The ruble was up 3.2 percent on the week - closing with its sixth weekly advance and extending its longest rally since September 2007 - and has risen 16 percent since the end of January. Russia's central bank has cut base interest rates twice since April 24 in an attempt to revive the economy, but the refinancing rate is still 12 percent - well above rates in the EU, the U.S., Japan and even quite attractive in comparison with those on offer in other emerging markets. The basic point here is that carry trade players can leverage interest rate differentials and benefit from the changes in currency valuation that these very trades (along with those made by other participants) produce. So all of this is truly win-win for those who play the game, until, that is, it isn't.

Not all of this is preoccupying - far from it, since the issues arising are in many ways related to the problem I started this article with: namely, who it is who will run the trade and current account deficits and do the necessary consuming, to make all those export-lead recoveries (even in China, please note) possible. Evidently the core problem generated during the last business cycle was associated with the size of the imbalances it threw up, and the impact on liquidity and asset prices that these imbalances had. If I am right in the analysis presented here, then we are all on the point of generating a further, and certainly much larger, set of such imbalances as we let the process rip in the uncordinated and unrestrained fashion we are doing. As you set the problem up, so it will fall. Floating Brazil and India is a very attractive and very desireable proposition. Consumers in those countries can certainly take on and sustain more leveraging. The two countries can even to some extent support external deficits as they develop. But they need to do this in a balanced way, an they do not need distortions. The world does not need more Latvias, Estonias, Irelands or Spains (let alone Icelands, and let alone of the size of a Brazil or an India). So policy decisions are now urgently needed to impose measures and structures which help avoid a repeat of the same in what is now a very imminent future. And despite all the talk of reform, very little has been done in practice. Talk of "tax havens" and the like sounds nice, and is attractive to voters, but all this is on the margin of things. What we need is global architectural reform, and policy coordination at the central bank, and bank regulation level, not to stop the capital flows, but to find a more sophistocated way of managing them.

Brazil's Economy Enters The Eye Of The Storm

2008-10-04T12:53:00.000-07:00

by Edward Hugh: Barcelona

Brazil is in the middle of a storm at the moment, there can be no doubt about that. But the important point to note is that this storm is not of Brazil's making. The shock waves which are currently traversing all of Brazil's financial and banking institutions (as well as its real economy) are a reflection of a much broader "terremoto" which is erupting in all the major financial centres across the globe, from New York to London, to Frankfurt and on to Tokyo. And of course, when the developed world sneezes, it is the emerging markets who tend to catch the cold. So let's all just hope that this is all it is that the patient is suffering from at this point, a common or garden cold, and that we don't have an early case of pneumonia on our hands. Menawhile, botton down the hatches, since a hurricane is about to pass.

Response to the Crisis

Brazilian President Luiz Inacio Lula da Silva today authorized Brazil's central bank to buy loans from cash-starved banks and indicated the governments willingness to use the country's international reserves to ease a credit crunch that sent the Brazilian real to its lowest in two years and the stock markets right down. As part of the coordinated response to the crisis the central bank sold $1.36 billion in dollar swaps this morning, offering the contracts for a second straight day in an attempt to slow down the surging demand for dollars in the foreign exchange market. The bank sold 27,400 contracts of 46,050 on offer. On Monday the bank sold $1.47 billion of swaps, the first auction of the contracts since May 2006. The real gained more than 1 percent (to 2.176 per U.S. dollar) shortly after the sale of the swaps. The real plunged 7 percent yesterday.

The central bank has also announced it may also lend dollars to Brazilian institutions abroad. The government is also going to provide the state development bank with an additional 5 billion reais ($2.29 billion) to finance exports. The measures ``are important steps to shield the Brazilian economy from the impact of the international crisis,'' Meirelles told reporters.

Authorities are seeking to shore up confidence after Brazil's Bovespa benchmark stock index yesterday plunged to the lowest in 19 months, leading losses in emerging markets along with Russia. The Brazilian real dropped 6.2 percent as commodities, which account for about two-thirds of Brazilian exports, fell. Last week the central bank eased rules on reserve requirements for a second time in the same number of weeks to make more cash available for the banking system.

Stock trading was halted twice yesterday, for the first time since 1998. Trading was stopped after the Bovespa index dropped more than 10 percent at the open and then more than 15 percent in midday trading. The central bank sold $1.5 billion worth of currency swap contracts, the first sale of the kind since May 2006, to stem the real's losses. Brazil's currency has lost 21 percent in the past month against the dollar.

As a further indication of the extent of the present problem, the Brazil government today canceled a local bond sale. This was the first time this has happened in seven months, and offers a further sign of how the global credit crisis is beginning to squeeze Brazil's liquidity.

The Treasury shelved an auction of inflation-linked bonds, known as NTN-Bs, as the tumble in the real appeared to throttle demand for local assets. The Treasury had not announced the quantity of bonds it planned to sell.

The yield on Brazil's overnight futures contract for January 2010 delivery increased 28 basis points, or 0.28 percentage point, to 14.75 percent. The yield on Brazil's zero-coupon bond due in January 2010 rose 33 basis points to 14.88 percent, according to Banco Votorantim.

Emerging Market Bonds

But Brazil is not alone in being hit in this way, and emerging-market bonds had their worst week in four years last week as the deepening credit crisis raised global recession concerns and slammed the brakes on demand for higher-yielding securities. The extra yield investors demand to own developing-nation bonds instead of U.S. Treasuries has surged 109 basis points, or 1.09 percentage point, since the start of last week and reached 4.88 percentage points today (Tuesday), according to data from JPMorgan Chase and Co. The increase is the biggest since at least May 2004 and left the so-called spread at its widest since June of that year. The spread has swelled 1.89 percentage points since the end of August.

Until credibility is restored, we will not see people investing. Investors at this point seem to be unwilling to take any sort of visible risk. The cost of protecting developing nations' bonds against default rose considerably yesterday. Five-year credit-default swaps based on Argentina's debt soared 231 basis points yesterday, reach to 15.09 percentage points, the highest since the country restructured defaulted debt in 2005. That means it costs $1.509 million to protect $10 million of the country's debt from default. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Emerging Market Stocks

Emerging market stocks fell the most ever yesterday (Monday) and exchanges in both Brazil and Russia were forced to halt trading as the global banking crisis escalated in Europe and oil dropped below $90 a barrel. Brazil's Bovespa index was down 12 percent, while Russia's Micex Index dropped 19 percent after trading was halted three times. China's benchmark CSI 300 Index also fell 5.1 percent, its biggest one-day decline since August. The MSCI Emerging Markets Index slumped 11 percent, the biggest intraday loss since 1987.

This followed a week in which emerging-market stocks had the biggest weekly decline in seven years, led by banks and energy companies as commodity prices dropped on speculation the U.S. is headed for a recession. The MSCI Emerging Markets Index dropped 2.3 percent to 741.73, after a 3.4 percent decline yesterday. The index lost 10 percent this week, the most since the September 2001 terrorist attacks.

Brazil's Stocks

Trading on the Bovespa was halted twice yesterday as stocks tumbled 5,452.81 points to hit 39,064.51 at 1:50 p.m. New York. The Bovespa has now declined 36 percent in the past 30 days, and the index is now the world's worst performing major equity index in North and South America this year, down 51 percent on a currency-adjusted basis, after being the best-performing major market until June. Brazil's real plunged 6 percent against the dollar and Mexico's peso tumbled to a record low.

Emerging market stocks are now taking a severe hit after posting an annualized gain of 32 percent over the past five years as oil prices rose and commodities rose with oil hitting a record $147.27 and the Reuters Jefferies Commodities index reaching an all-time high in July. Brazil is the world's biggest producer of coffee, orange juice and sugar, and about half of Brazil's Bovespa index is constituted by raw material producers.

Central Bank Eases Reserves

Brazil eased requirements on reserves that banks must keep at the central bank for the second time in two weeks at the end of last week in response to worsening credit conditions sparked by the international financial crisis. The central bank now allows banks to meet up to 40 percent of their reserve requirements on time deposits by acquiring credit portfolios from other financial institutions. The measure is expected to free up to 23.5 billion reais ($11.6 billion) that are currently kept as government bonds deposited with the central bank, it said.

Interbank rates have soared as financial institutions worldwide hoard cash to meet future funding needs amid deepening concern that more banks will collapse. Governments in Europe and the U.S. rescued six financial institutions in the past week. The measure is ``intended to improve resources distribution in the national financial system in response to liquidity restrictions seen in the international market,'' the Brazilian central bank said.

On Sept. 24, policy makers delayed the introduction of higher rates for mandatory deposits from leasing companies by two months and raised the threshold on exemptions for cash, time and savings deposits. The measure added 13.2 billion reais to the financial system.

September Global Manufacturing PMI Shows Sharp Contraction

September seems to have been the ultimate "mensis horribilis" for industrial output internationally - and thus it is only natural to assume that Brazilian industry was also adversly affected - with global manufacturing activity contracting for the fourth consecutive month, and output falling to its weakest level in over seven years according to the JP Morgan Global Manufacturing PMI, which at 44.2 hit its strongest rate of contraction since November 2001, down from 48.6 in August (Please see the end of this post for some information about countries included and the JP Morgan methodology).

According to the JP Morgan report the retrenchment of the manufacturing sector mainly reflected marked deteriorations in the trends for production, new orders and employment. The declines in output and new work received were the second most severe in the survey history, while staffing levels fell at the fastest pace for over six-and-a-half years. The Global Manufacturing Output Index registered 42.7 in September, well below the 48.5 posted for August.

The sharpest decline in production was recorded for Spain, followed by the US, Japan and then the UK. Although the Eurozone Output Index sank to its second-lowest reading in the survey history, it was above the global average for the first time in four months. Within the euro area, France and Spain saw output fall at survey record rates, while in Italy and Ireland the contractions were the second and third most marked in their respective series. Germany, which until recently was the main growth engine of the Eurozone, saw production fall for the second month running and to the greatest extent for six years. Manufacturing activity in Japan fell to the lowest in over 6- years with the Nomura/JMMA Japan Purchasing Managers Index declining to a seasonally adjusted 44.3 in September from 46.9 in August.

At 40.8 in September, the Global Manufacturing New Orders Index posted a reading well below the neutral 50.0 mark. JP Morgan noted that the trends in new work received were especially weak in Spain, the UK, France and the US, with the all bar the latter seeing new orders fall at a series record pace (for the US it was the strongest drop since January 2001). The downturn of the sector led to further job losses in September, with the rate of reduction in employment the fastest since February 2002. Conditions in the Spanish, the UK and the US manufacturing labour markets were especially weak.

Russian manufacturing shrank for a second month in September, and in so doing registered its first back-to-back contraction since November 1998, as companies cut jobs and growth in new orders slowed, according to the latest VTB Bank Europe Purchasing Managers Report. The PMI came in at a seasonally adjusted 49.8, compared with 49.4 in August. The August reading was the lowest figure in three and a half years, according to the bank statement. On such indexes a figure above 50 indicates growth while one below 50 indicates a contraction.

Manufacturing in China contracted for a second month in August, underscoring the risk of a slump in the world's fourth-biggest economy. The Purchasing Managers' Index was a seasonally adjusted 48.4, unchanged from July, the China Federation of Logistics and Purchasing said today in an e-mailed statement.

India's industrial output growth bounced back again in July (the last month for which we have official data), reaching a five-month year on year expansion rate high of 7.1%. This follows a noted slowdown where output only rose by 5.4 percent gain in June, and 4.1% in May, according to data from the Central Statistical Organisation.

But if we come to look at the manufacturing PMI we will see that India's manufacturing output has also slowed somewhat, and expanded at its slowest pace in 14 months in September according to the ABN AMRO Bank purchasing managers' index. The PMI reading - which is based on a survey of 500 companies operating in India - fell to a seasonally adjusted 57.3 in September from 57.9 in August. This reading was the lowest since July 2007. Still 57.3 still suggests Indian industry continues to grow quite vigoursly, although the report did highlight the fact that the drop in the index was mainly the result of a decline in growth of new orders, and implied a deterioration in demand conditions, both locally as well as in export markets.

So basically this is where we get to learn what a global credit crunch means in terms of output and economic growth.

Brazil's's Industrial Output Weakens Too

Brazil's industrial output fell a seasonally-adjusted 1.3 percent in August from July, the largest monthly drop this year. On an annual basis, output rose 2 percent, the slowest pace since March, according to data from the national statistics agency in Rio de Janeiro.

And the situation seems to have deteriorated further in September, since the headline seasonally adjusted Banco Real Purchasing Managers’ Index (PMI) registered a 25-month low of 50.4, down from 51.1 in August.

GM And Fiat Cut Vehicle Output

One symptom of the way the slowdown is hitting the real economy is the recent announcement by General Motors and Fiat Spa's Brazilian units to cut vehicle output in the country in October and November after asking some workers to take vacations early. Last week GM asked workers at three of its plants in Sao Paulo state to take time off beginning this month. About 1,700 of Fiat's 15,000 workers at their Betim plant will take at least 10 days of vacation.

Car producers are cutting production after four central bank interest rates increases pushed car-loan costs higher and weakened demand. Auto registrations rose 4 percent to 244,800 units in August, the slowest pace in two years, according to Brazil's Automakers Association. That compares to a 33 percent increase in July. Fiat says the decision will lead to a 10 percent decrease in the company's daily production of 3,000 units.

JP Morgan Global Manufacturing PMI Methodology

The Global Report on Manufacturing is compiled by Markit Economics based on the results of surveys covering over 7,500 purchasing executives in 26 countries. Together these countries account for an estimated 83% of global manufacturing output. Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease.

The countries included are listed below by size of global GDP share, and the figures in brackets are the % og global GDP in each case (World Bank Data).

United States (30.5), Eurozone (18.7), Japan (13.9), Germany (5.6), China (4.9),United Kingdom (4.5), France (4.0), Italy (3.2), Spain(1.9), Brazil (1.9),India (1.7), Australia (1.3), Netherlands (1.1), Russia (0.9), Switzerland (0.7), Turkey (0.7), Austria (0.6), Poland (0.5), Denmark (0.5), South Africa (0.4), Greece (0.4), Israel (0.3), Ireland (0.3), Singapore (0.3), Czech Republic (0.2), New Zealand (0.2), Hungary 0.2.

Brazil's Mid-month Inflation Lowest Since March

2008-09-24T23:11:00.000-07:00

Brazil's inflation continues to fall back steadily. Brazil's mid-month inflation rate fell in September to its lowest level since last March, increasing speculation the central bank will take its time before deciding on future interest-rate increases. Consumer price inflation as measured by the benchmark IPCA- 15 index slowed for a third consecutive month to 0.26 percent, from 0.35 percent by mid-August, according to the latest data from the national statistics agency.

The annual inflation rate fell back to 6.2 percent from 6.23 percent at the end of August. The annual rate has now been reducing slowly but steadily since the July peak.

Inflation on non-food items accelerated to 0.41 percent in September, from 0.38 percent last month, the IPCA report said. The pressure on prices from strong demand was offset by a 0.25 percent drop in food prices, which compared with an equivalent increase last month.

Central Bank Reduces Reserve Requirements

An initial indication of the policy change which may be in the works came yesterday with a decision by the central bank to ease requirements for reserves that banks must keep at the central bank. In prinviple the decision is a response to the volatility in global financial markets following the uncertainty produced by the deepening of the financial turmoil in the United States.

Banco Central do Brasil have decided to delay the introduction of higher rates for mandatory deposits from leasing companies by two months and raised the threshold on exemptions for cash, time and savings deposits, according to a statement released yesterday. The measures will add 13.2 billion reais ($7.16 billion) to the financial system, the central bank said.

This move quite possibly represents an initial reversal of the central bank's policy of slowing domestic lending growth. Central bank policy makers began to tighten reserve requirements on cash deposits from lease underwriters last May, a move that was intended to remove as much as 40 billion reais from credit markets. Bank lending had climbed by a 33 percent annual rate in the 12 months ended July, following a 27 percent rise in 2007. The central bank will release August figures on Sept. 29.

Under the new rules, a reserve requirement of 20 percent of cash deposits from lease underwriters will now take effect on January 16, two months later than originally scheduled. The reserve requirement will then increase to 25 percent in March, according to the present central bank policy. Leasing is a common practice in Brazil, and effectively constitutes an alternative form of bank lending. Also under the new rules Brazilian banks will only have to keep part of their cash, time and savings deposits at the central bank if the reserve requirement exceeds 300 million reais, the central bank said. Previously, this threshold was 100 million reais.

Bank Lending Slows

The easing of reserve requirements is obviously an attempt to offset the impact of the credit and liquidity crunch on the real economy. Brazilian bank lending growth is already slowing, and lending growth this year is expected to fall to a 24 percent year on year rate, according to a recent survey of 26 banks by the Brazilian Banks Federation. This is down from the 27.8 percent growth rate registered in 2007, which was the fastest rate in the last 12 years. This drop is, in itelf, not such a bad thing, as one of the points we should be learning from the financial meltdown is that lending rates should not be allowed to increase dramatically, but the fall may indicate that there is more to come, and year on year lending growth rates of much below 20% would be a significant negative for the domestic Brazilian economy I think.

Lending in Brazil has now expanded more than 20 percent annually since 2004. The sharp increase in lending was driven by a decline in the benchmark lending rate to 13.75 percent from 25 percent. Job creation and higher wages have also contributed to credit expansion. On the other hand the price larger Brazilian companies are paying to raise money has risen to about 2 percent a year above the local interbank rate, up from 0.4 percent six months ago. This spike in risk premium is really a direct consequence of the financial turmoil which has followed the collapse of the U.S. subprime-mortgage market last year.

Car loans have been one of the main drivers of bank lending, and there are clear signs that these loans are now slowing, with evident negative consequences for the Brazilian automotive sector. According to Banco Itau Holding Financeira data - the bank is Brazil's second-biggest non-government bank by assets - their car loans were up by 62 percent in the second quarter, while Banco Bradesco posted a 49 percent car loan expansion.

This is the type of credit which may slow as the credit tightening bites. Domestic vehicle sales - which expanded an annual 33 percent in July - only grew by 4 percent in August, the slowest pace in almost two years.

The Real Continues To Wobble In The Wake Of Uncertainty

Brazil's real yesterday reversed earlier gains, falling on concerns the $700 billion U.S. financial system rescue may be delayed. The currency declined 0.5 percent to 1.8567 per dollar at 3:50 p.m. New York time, following the effective end to the day's trading in Brazil. The currency had earlier risen by as much as 1.4 percent following the announcement that Warren Buffett's Berkshire Hathaway was going to invest $5 billion in Goldman Sachs Group.

Brazil's real has been the biggest loser against the dollar among the 16 most-active currencies this month, declining by 12 percent. My view is that this volatility in the real will continue until the US financial markets stabilise, then, when the dust settles, we will really be able to see what the new global financial landscape looks like, but I am far from being pessimistic about the consequences for sound emerging markets like Brazil, au contraire, this is a developed markets crisis, not an emerging markets one. At the end of the day it is not unreasonable to imagine that some of the key emerging markets will be the net beneficiary of the turmoil, after all the uncertainty dies down.

Brazil Retail Sales Accelerated in July

2008-09-17T03:00:00.000-07:00

The rate of increase in Brazil's retail sales accelerated again in July, indicating t that sustained domestic demand may well allow Latin America's largest economy to weather the fall in commodity prices rather better than expected. Retail sales were up an inflation corrected 11 percent in July, following a revised 8.2 percent increase in June. Sales rose in June at the slowest pace in 14 months, according to data from the national statistics agency.

Evidently domestic demand is still robust and four central bank interest rate increases since April have far from throttled Brazilian domestic demand, which had been contributing to the upward movement in annual inflation - to around 6.5% - well above the mid-point of the central bank's target range (4.5 percent plus or minus 2 percentage points), but still significantly below the levels seen in some emerging market economies (especially in Eastern Europe).

At the same time we need to exercise a certain amount of caution in interpreting this data. Month on month retail sales fell 0.2 percent in July from June, and this was the first drop in five months. Thus in part the acceleration in July is due to base effects from 2007. On the other hand, when cars and construction materials are added-in, retail sales were up 1 percent from June.

Vehicle sales rose 4 percent in August from August 2007, and this was the slowest pace in almost two years. The slowdown in car sales is being widely attributed to the impact of interest rate rises on car loan rates.

The prospect of sustained consumer spending against the backdrop of slower growth overseas and lower commodity prices suggests that the economy is far from the oft predicted growth slump, and that the central bank may well use the dramatic fall in oil and other commodity prices as a pretext for moving forward prudently on the borrowing costs front.

The central bank last week raised the Selic rate to 13.75 percent (up from 13 percent), in an attempt to cool demand and slow inflation. Most economists expect policy makers to raise rates further - to 14.75 percent perhaps - by year-end, but looking at the financial turmoil of recent weeks (which has its origin in developed and not emerging economy issues) I can't help feeling prudence (and a more watch and wait approach) may now be called for.

Brazil's Finance Minister Guido Mantega yesterday said that the turmoil in U.S. credit markets would slow Brazil's economic growth to about 4.5 percent in 2009 from 5-to-5.5 percent this year. This is all hard to quantify at this point. But the central argument he was making - that the Wall Street crisis won't stop Brazil from expanding - seems extremely valid to me. He is quoted as saying that under "other circumstances, Brazil would be on its knees right now", and again I cannot help agreeing, and I also don't understand why so many analysts seem to have so much difficulty getting hold of what is happening. We still seem to be in the world of knee-jerk reactions.

Brazil Central Bank Raises Interest Rates Another 0.75%

2008-09-11T01:47:00.000-07:00

Brazil's central bank raised its benchmark interest rate three-quarters of a percentage point yesterday. Three of the eight directors expressed the view thatthe raise was excessive, which seems to indicate that the monetary tightening process may be nearing its close in this cycle. Policy makers voted 5-3 to raised the so-called Selic rate a fourth time since April to 13.75 percent from 13 percent in an attempt to keep a tight grip on inflation, and to confirm the Banks growing reputation as the "Bundesbank of Latin America". The decision raised Brazil's real interest rate - which is the nominal rate adjusted for the 6.17% CPI inflation - to 7.58, the highest among emerging and developed economies alike. The dissenters on the board voted for a half-point increase.

Real Decline

Despite the interest rate rise the real fell below the 1.80-per-dollar level today for the first time since January an indication more of deteriorating global sentiment - today's drop was triggered by speculation Lehman Brothers is about to collapse. The real dropped 1.8 percent to 1.8202 per dollar at 11:03 a.m. New York time, from 1.7878 yesterday. Earlier it touched 1.8374, the weakest since Jan. 22. Lehman's 38 percent fall today pushed the Standard & Poor's 500 Index to its lowest since November 2005. As wer can see in the chart below, the real had been rising steadily in 2008 until the start of August. Then the wind clearly changed, and the dollar had been rising and the real falling.

If we look at the three month chart things are even clearer, and we can see that sentiment had been deteriorating since mid July, and then really to a hard jolt downwards in late August. Most of this evidently has no direct relation with the strength of the Brazilian economy, or with any deterioration in the inflation outlook (quite the contrary, see below) but rather with global factors, like, of course, commodity prices, since the movement conforms reasonably well wilh the downward shift in the price of oil.

Brazil's stock market, the Bovespa index (about half of which consists of raw material companies), is also vulnerable to concerns about global growth, and the has dropped around 23 percent so far this year, hurt by both inflation concerns and a decline in commodity prices.

But we need to ask ourselves some basic questions about the current USD rally and the extent to which a continuing US slowdown would will lower growth in key global movers like Brazil and India. It is also worth asking the question whether there is any real danger of capital flight from either of these two economies to the dollar perceived as a safe heaven currency. This whole argument seems to be very overstretched at this point. Indeed it seems to be a real paradox that the USD continues to be considered a safe heaven despite US credit markets being the epicenter of the current global economic turmoil, and especially at a time when returns on USD assets continue to be negative, while any continuing upward movement in the dollar can only help the trade deficit deteriorate again, Thus it is my view that the current USD rally unsustainable as seen against a select group of emerging economy currencies (and in particular the rupee and the real, is not justified, and basically not sustainable with increasing all those imbalances people had been working so hard to try and correct.

And Is Inflation Already On The Wane?

At the same time Brazil's consumer prices rose at their slowest pace in 11 months in August after food and beverage costs fell for the first time in more than two years. The August price increase as measured by the benchmark IPCA index was just 0.28 percent, compared with 0.53 percent in July, as a result annual inflation slowed to 6.17 percent from a three-year high of 6.37 percent.

Food and beverage costs dropped 0.18 percent last month, the first decline since June 2006, after rising 1.05 percent in July. On the other hand, non-food inflation actually accelerated, indicating the central bank is quite right to try to squeeze out second round effects at this point. Service prices rose by 0.73 percent in August, up from 0.51 in July. Prices for non-food goods not subject to government regulation also rose 0.5 percent in August, up from 0.3 percent in July.

The Impact Of Energy Prices

Energy prices also seem to be easing, and rapidly.

Oil prices fell to their lowest level in five months today as investors worried that the ongoing economic slowdown would continue to chip away at the demand for energy. Light, sweet crude for October delivery fell $1.88 to $100.70 a barrel on the Nymex, after dropping as low as $100.10 a barrel at one point. The contract settled yesterday at $102.58 — the lowest close since April 1. The last time crude traded below the $100 mark was April 2 Oil prices have now fallen more than $40 from the record high of $147.27 a barrel on July 11, two months ago, as a struggling global economy has cut into demand for energy. The US is leading the way in the decline in demand for oil, and the US Energy Information Administration reported last week that imports of crude in August were 200,000 barrels a day below the same four-week period last year. This pattern is repeated to some degree or another in economy after economy across the globe.

Now this decline in oil will evidently have a floor, but where exactly does that floor lie? My own view is that the decline will continue, but that it may hit bottom around $80, since at some point inflation will ease back as a major problem in a number of significant economies, and growth will rebound in some key movers (deciding which those are going to be is the tricky issue at this point), and then of course the oil price will start to head up again.

My feeling is also that we could then see quite a quick turnaround in inflation in some emerging economies like India (from the current 13% to say 7%) or Brazil (back down to the 4.5% range?) and this will then mean the negative "lose-lose" dynamic we have been seeing across a number of emerging economies of rising inflation, rising trade deficits, rising interest rates, falling currencies and falling growth can transform itself once more into the "win-win" dynamic of falling inflation, falling trade deficits, slightly lower (but still very yield differential attractive) interest rates, rising currencies and rising growth.

The interesting question is when will we hit the inflection point? Well, if we look at the NYMEX chart below, we will see that oil prices really started to take off in October 2007, and that at current rates of decline in oil prices the two curves should cross (ie 2008 prices should be below 2007 ones) sometime between October and November. Now this will be quite an important event in the emerging market economies, since given the weight which has been attached to energy and food rises in the total inflation picture, once these (for so called base effect reasons) start to clock negative readings, headline inflation should start to sink back.

GDP Growth Remains Strong

The key question then is, of course, how much will Brazil's economic growth be negatively affected by falling commodity prices, and how much will it benefit from the easing back in inflation? In the short run this is a hard one to call (although I think in the longer run commodity prices are likely to remain relatively high, and this will be more to Brazil's advantage than anything, especially if the central bank can manage to squeeze second round inflation effects out of the system.

Brazil's economic growth actually accelerated in the second quarter, so at this point there is no great sign of any formidible slowdown. Gross domestic product in fact was up 6.1 percent from a year earlier, beating all the main forecasts. Growth was fueled by a mixture of investments and exports, and was up from a revised 5.9 percent rate in the first quarter. The economy was also up 1.6% quarter on quarter, from the first quarter of 2008.

Capital investment in Q2 was up an annual 6.2 percent, the fastest pace since the second quarter of 1995. Household spending grew 6.7 percent after a 6.6 percent expansion in the first quarter. The volume of exports rose 5.1 percent, reversing a 21 percent decline in the first quarter.

Finance Minister Guido Mantega argued today that he expected Brazil's economic growth this year to be above the current government's 5 percent forecast. Mantega, who has to some extent been a critic of central bank rate increases, said economic growth wasn't stoking inflation because supply was keeping up with demand.

The Iara Field

Basically it is hard to see why some people are so pessimistic for the outlook on the Brazilian economy. The favourable demographic moment Brazil is facing in terms of the share of the population in the working age groups means there is plenty of available capacity, and the continuing development of Brazil's oil industry means that there should be a constant and adequate inward flow of capital. As if to ram this point home, Petroleo Brasileiro, Brazil's state-controlled oil company (otherwise know as Petrobras), said yesterday that its Iara offshore field contains 3 billion to 4 billion barrels of oil, making it the second giant find in a year and offering enough oil on its own to keep Brazil supplied for up to five years.

The assessment is the first estimate of recoverable oil since the discovery of the field was announced on Aug. 11. Petrobras said in January its Jupiter field in the same region contained gas quantities similar to its Tupi area, the largest oil find in the Americas since 1976. Iara is in the Santos Basin to the north of Tupi, a 5 billion- to 8 billion-barrel field announced in November. If confirmed, Iara and Tupi, which sit in non-adjacent parts of the same exploration block, could almost double Brazil's 12.6 billion barrels of proven oil reserves.

The Iara estimate is based on a well drilled in 2,230 meters (7,315 feet) of water. The final well depth is 6,080 meters. Petrobras has not said whether Iara is an extension of Tupi. Unleased and unexplored areas sit between the two fields. The block, named BM-S-11, is in two, non-contiguous parts. The Iara portion is less than a quarter the size of the Tupi portion, according to a map supplied by Petrobras.

The Outlook Is Solid

So my feeling is that within six months or so of the oil "cross-over" we should see the Brazilian economy really start to pick up speed again, and in particular we should see a strong rebound in industrial output. Brazil, remember, is still growing at a 6.4% annual rate, and while this may well drop back in Q3 and Q4, this velocity will quite possibly be attained again as the key emerging economies start to "break sweat" and head upwards towards their earlier strong upward paths. Brazil will be there amonst the leaders, as will India. But when the role call is taken, just who will be present and who will be absent is going to make interesting reading.

Brazil Consumer Prices Fall In August According To The IGP-M Index

2008-08-27T08:51:00.000-07:00

Brazil's broadest measure of inflation fell in August for the first time in more than two years, led by a larger-than-forecast drop in food prices. Consumer, construction and wholesale prices, as measured by the IGP-M price index, decreased 0.32 percent when compared with July.

The country's benchmark index for consumer prices showed a 6.23 percent increase for the 12 months through mid-August, the central bank said last week.

Today's report obviously doesn't mean that the central bank should ease up on its bid to contain inflation by raising interest rates, but it is, nonetheless, welcome news. Policy makers have raised interest rates three times since April, to 13 percent from a record low 11.25 percent, to slow inflation running near the 6.5 percent upper limit of its target range.

Policy makers, led by bank President Henrique Meirelles, are still expected to raise the key rate 0.75 percentage point for the second consecutive time at their Sept. 10 meeting, and the rate may yet reach 14.75 percent by the end of the year according to the consensus view.

A 30 percent monthly drop in the wholesale price of tomatoes led all food items lower, helping reverse a 1.76 percent increase in the IGP-M in July. The index is measured by the Rio de Janeiro-based Getulio Vargas Foundation.

Mid August Brazil Inflation Slows

2008-08-22T07:15:00.000-07:00

Brazil's inflation through mid- August slowed for the second consecutive month, bolstering confidence that the central bank will bring consumer prices back to target next year. Brazil's inflation rate as measured by the benchmark IPCA-15 index decreased to a monthly 0.35 percent from a monthly 0.63 percent through mid- July as food prices eased, the national statistics agency said today.

Today's report showed that the annual inflation rate for the 12 months through mid-August slowed to 6.23 percent from 6.30 percent in mid-July. Month-on-Month food prices rose 0.25 percent, compared to 1.75 percent at the mid-July reading. Now we need to wait and see what the central bank decide to do about this.

Brazil Unemployment Rises In July

2008-08-21T05:27:00.000-07:00

Brazil's unemployment rate unexpectedly rose to 8.1 percent in July from the previous month, the national statistics agency said today. Unemployment in Brazil's six largest metropolitan areas was up from 7.8 percent in June.

This is a surprising number since we saw seasonally adjusted year on year job creation of 184,000 in July, down from the even higher 250,000 registered in June, but still pretty healthy I would have thought, and 3-month average continued to move up from 172,000 to 182,000. In fact on an unadjusted basis Brazil added 203,218 government- registered jobs last month, the best July performance ever.

That was a 60 percent over the 126,992 formal jobs created in July 2007, Labor Minister Carlos Lupi said in a statement. Brazil will add a record 2 million new formal jobs in 2008, according to Lupi, compared to his forecast of 1.8 million made at the start of the year. Of course, we need to remember the demographics here, which while they are currently extremely favourable to Brazil do mean that a very large number of new jobs do need to be created just to soak up the waves of new labour market entrants.

Meantime Brazilian Finance Minister Guido Mantega reiterated yesterday that Brazil's reference Selic interest rate will only begin to fall when inflation approaches the 4.5% center-point of the government's annual target. Until this happens, only then will interest rates be reduced” Mantega said in a nationally broadcast radio interview. He added that Brazil’s retail inflation would end 2008 at between 6% and 6.5%. The official IPCA index ended July at a 12-month rate of 6.37% fuelled by food prices.

In the minutes of its July monetary policy meeting, the Central Bank said it would aim to bring inflation to the 4.5% center-point of the government's official target range by the end of 2009. Brazil's inflation targeting program permits a margin of tolerance of two percentage points on either side of the center point, allowing annual inflation up to 6.5%.

Current Account Deficit Increase

Brazil's annual current account deficit widened to a six-year high in July, reaching$19.5 billion over the previous 12 months period. This compared with an $18.1 billion annual deficit June. The July deficit was $2.1 billion.

At the present time inflows of foreign direct investment and investments in fixed income are more than enough to cover the deficit, but in the longer term the government and central bank need to work together to bring it under better control.

Where Now for Brazil?

2008-08-18T02:37:00.001-07:00

By Claus Vistesen Copenhagen

In case you did not notice, the Eurozone recently slipped into a near recession and so did Japan. Together with an already limping and essentially recessionary US economy this has prompted some analysts to ponder the probability of a global recession or more aptly; a significant and serious widespread global slowdown. Nouriel Roubini, who recently got some fine words in the NYT by Stephen Mihm (hat tip: Stefan Karlsson), massages the probability of a global recession in a recent piece. This is a topic also taken up, in a US context, by Joachim Fels in his recent installment over at Morgan Stanley's Global Economic Forum.

Now, as Roubini points out, the global economy would "officially" be in a recession, according to the IMF, if global GDP were to decline to below 2.5% y-o-y. In general, one certainly has to agree with the main thrust of Roubini's argument in the sense that it is becoming increasingly difficult to spot the upside in what is increasingly becoming an all out hard landing across the board. In the context of this argument, I would add my own point which emphasises the extent to which the slowdown initially set in across countries with external deficits. It should be quite clear that surplus nations will suffer accordingly too. As such, the global economy is experiencing a widespread decline in the willingness and ability to absorb investment and credit (this really is the ultimate game of old maid) which in turn is naturally hurting both excess capacity and liquidity providers.

However, there are of course economies out there who may be able to weather the storm better than most in terms of the ability to maintain headline growth. This is to say then that there are some economies who, regardless of global credit and liquidity conditions, will have sufficient internal momentum to stay at reasonable growth rates. This, at least, is my hypothesis. I would highlight three economies (Turkey, India, and Brazil) here in particular, all of them singled out due to their relative clout in the global economy and the fact that they are, in these very years, experiencing their demographic dividend. In this small piece, we shall be looking at Brazil.

Recently, in an economic outlook on Brazil I emphasised how Brazil naturally was going to slow down due to the global correction, but also how I was more sanguine than many analysts with respect to Brazil's ability to avoid a sharp and volatile correction. Moreover, I have also detailed in a more general context how I really did not feel that Brazil could be branded as an "emerging" economy any more.

But is all that optimism really warranted?

In an analysis from Morgan Stanley, Marcelo Carvalho is not very optimistic when it comes to the immediate outlook for Brazil. The key component in Carvalho's analysis is the link between Brazil's growth performance and her export prices. More specifically the argument lays out how weakening commodity prices would strongly feed into export prices and subsequently rob Brazil of an important income effect. Moreover, it could also tip over the external balance into negative as the hitherto positive goods balance almost certainly would swing into negative. Of course, there is no such thing as unambiguouty in economics and in this way, weakening commodity prices would most likely ease the pressure on the Real's appreciation as the central bank would be able to leave its hawkish stance. This means that Brazil would be set to gain some lost competitivness against a rising USD.

Yet, retorts Carvalho. This is really a question of choosing your poison, since in the event of a resurgence in commodity prices the central bank would be forced into tightening even more to reign in runaway prices. This certainly seems to be true. At the last meeting, central bank governor Mereilles, along side his council, consequently opted to hike interest rates 75 basis points to bring the nominal rate to 13%. Furthermore, and even though headline inflation has shown signs of abation lately, it is widely held that Meirelles' gaze is firmly set for a target at around 15% to halt a core inflation rate running close to the threshold upper limit of the 4.5% target.

This specific set of fundamentals has obviously mad Brazil a virtual magnet for international funds and with a booming stock market [1] and a real rate on government bonds at around 7%, it is not difficult to see why one would want to park a bit of money in Brazil at the moment. A continuation of the central bank's hawkish position is likely to keep the fire going under the Real for a while although it does seem to be running a bit out of steam as commodity prices have fallen steadily. However and even though the Real looks set to lose some of its strenght, its recent impressive run is indicative, I think, of the role Brazil, whether it likes it or not, seems to be playing in the global economy.

In a more general perspetive, I find it difficult to disagree with Carvalho's main conclusion in the sense that Brazil looks set to slow down. However, I don't think that this point is particularly interesting in itself. More interesting is the point that while global economic conditions since 2003 have been very accomodative for Brazil, they are now set to become less so. I completely agree in the sense that Brazil, like everybody, else has been riding the recent expansion and perhaps benefitted more than most. The key question that remains though, is the extent to which Brazil has internal momentum to keep on going on its own. In this way, Brazil does not seem able to escape the fact that as long as the central bank stays in a hawkish mode, the currency will be supported and so, by derivative, will the consumers' purchasing power. Coupled with a potential drop in the windfall from oil in the form of a demand and valuation (income) effect it would tip over the external balance.

But would this be so bad or more aptly; should we expect it to be any other way? One interesting way to illustrate this would be to scrutinize the underlying argument for the central bank's hawkishness. A while back, economist Antonio Carlos Lemgruber consequently critisized the central bank's policy because he thinks it is based on a potential growth rate which is too low. According to Lemgruber the central bank is operating with 3-4% as the potential growth rate while he himself believes it to be closer to 7%. Accordingly, the central bank is keeping nominal interest rates high to reflect the perceived existence of a positive output gap. However, is this really the appropriate way to interpret the signal emmitted from Brazil? Not all think so. In a recent analysis Pablo Bréard from Scotiabank suggests that the high nominal rate maintained by the central bank, in part, is a hedge of future risk aversion and subsequent retrenchment of capital flows from emerging markets. I don't agree.

Personally, I would turn the conventional arguments around and claim that a high interest rate, in the context of Brazil, is a de-facto sign of the economy's high potential growth rate or at least this is the way capital flows react in the current global economic edifice. We could then consider a high nominal interest rate as a sign of capacity to grow and ultimately capacity to offer whatever yield the given nominal rate prescribes. Or put differently; if you offer high interest rates, you better be sure that you are able to suck up the ensuing inflows. Otherwise, the whole edifice may end up catching fire. I would peer wearily across Eastern Europe for confirmation on this.

This means that the effects from a high interest rate and subsequent strong currency is ambiguous when it comes to inflation. It is true that it makes imported goods cheaper, but it does not necessarily halt capial formation or build up of credit since these two components may well be supplied from external sources regardless of domestic capacity to muster the inflows.

Of course, some countries such as e.g. Iceland have recently (and will need to in the future) upped interest rates in a classic attempt to defend the domestic currency and the financing of the external deficit. We would thus always need to consider the risk of any given amount of yield. In this context, many have cautioned the recent upgrade of Brazil's local currency debt to invesment grade. It comes at a bad time they argue as Brazil may, at precisely this point in time, be on the verge of transisting towards a less favorable set of fundamentals than the ones which prompted the upgrade in the first place. This may be true or, at least, it does not seem to be completely wrong. Yet, I also have to say that the whole international global rating edifice is beginning to smack a bit of insignificance, in the sense that if India can receive a downgrade at the same time as Italy's and Japan's ratings are maintained, I really would like to know where capital is supposed to flow in order to reach its most efficient destination.

What all this means for Brazil in the coming slowdown is too early to say at this point. My guess is that the central bank, absent any major global deflationary rout, will maintain its hawkish position. In July, inflation rose another notch to 6.4% which is close to the upper range of the central bank's formal 4.5% target. Both JPmorgan and BNP Paribas expect the SELIC rate to move as far up as 15% (which is my formal target) due to recent data from Q2 pointing towards a continuation of inflationary pressures.

Generally, most of the sell side research I have been looking at suggests that Brazil probably peaked in H01 2008 with respect to headline GDP growth. Most analysts also concur that a likely halt in the appreciation of Real coupled with a slowdown in commodities will make for is likely to put a downward pressure on Brazilian growth. The argument here would be that a depreciation currency would stoke inflationary pressures even as commodities slowed which in turn would make the values of Brazil's exports lower. In this context, the worst scenario for Brazil would be a case where a slowdown coincided with a sharp retrenchment of capital to support the negative external balance (note that the while the goods balance is in surplus the current account is in the red mainly due to the income balance). This could force the central bank to keep rates higher than domestic inflationary pressures would otherwise merit.

In conclusion, there can be little doubt that Brazil, as with the rest of world, is heading for more lacklustre times with respect to economic growth. I am not sure however that Brazil may be in for such a tough time as many predicts. I would especially emphasise Brazil's ability to maintain growth on its own regardless of external factors. I consequently think that there are two crucial points to consider as we move forward.

One would be the meaning and interpretation of the central bank's high interest rate and indeed a high interest rate in general. In this way, we could also see Brazil's yield advantage over many of its peers as a simple reflection of the economy's capacity to grow. At least, I think this is an important perspective held together with the more traditional, and indeed valid interpretation that the central bank is trying to keep inflation in check. I would consequently argue that if you accept the tenets of my analysis (to some degree or the other), Brazil would be one of those global economies to which capital would simply have to flow. In fact, and this is ultimately what Lemgruber is talking about. I think that he (and others) worry that a high interest rate in the current global environment could lead to too much inflow of funds and thus a serious overshoot of the domestic currency. The risk is certainly there that Brazil may be taking on too much weight within the whole global imbalances structure, but my argument would simply be this is structurally buil into Brazil's growth path. Ironically of course, this general point means that a low potential growth rate would call for a lower nominal interest rate, but since this is currently unfeasible due to the global surge in headline inflation many central banks are finding themselves between a rock and a hard place.

The second point would be a simple test in the good spirit of falsification. My question would then simply be the extent to which we will see risk aversion shoot up to such a degree that an economy such as Brazil would find it difficult to finance a negative external balance. How much would those dreaded credit default swaps really rise and would it make sense at all to imagine that Brazil had to raise rates, 1980s style, to avoid a capital flight. Clearly, if we assume that Eastern Europe, Iceland, etc are already dead and gone at this hypothetical point, even a retrenchment of funds from the likes of India, Brazil, and Turkey would mean a rather violent surge in traditional safe havens in the form of the US, Japan, the Eurozone. I guess, what I am really asking is whether Brazil could be seen as a safe haven in what comes next or more precisely how will Brazil's relative standing in the global economy look during and after what is clearly a quite severe global slowdown?

I clearly have my bias and some have theirs; now let us wait and see what happens. It will be an important test for many hypotheses and views.

Notes

[1] - Although not so booming as of late.

Brazil Retail Sales Slow In June

2008-08-14T13:12:00.000-07:00

Brazil's retail sales increased in June at the slowest pace in 14 months as higher interest rates and faster inflation cooled domestic demand. Retail, supermarket and grocery store sales volume rose 8.2 percent in June from a year earlier. The increases follows a revised 11.1 percent jump in May according to data drom the national statistics agency in Rio de Janeiro. Sales rose 1.3 percent from May.

Three central bank rate increases since April to bring inflation down from a three-year high are starting to curb household spending and reduce earnings. Inflation accelerated to 6.37 percent in the 12-months through July from an eight-year low of 2.96 percent in March 2007 on higher food prices, cutting into workers' income.

Despite the slowdown retail sales in the first six months of 2008 expanded 10.6 percent, the fastest pace since the statistics agency began keeping records in 2001.

Brazil Annual Inflation Rises To 6.37% In June

2008-08-08T14:43:00.000-07:00

Brazil's annual inflation accelerated slightly to 6.37 percent in July, inching closer to the 6.5 percent upper end of the central bank's tolerance range of 2 percent on either side of the 4.5 percent target.

Monthly inflation as measured by the benchmark IPCA index was 0.53 percent in July, down slightly from the 0.74 percent registered in June, according to the national statistics agency earlier today. Brazilian inflation slowed in July for a second consecutive month largely on moderating food prices, raising confidence that the central bank will manage to bring consumer prices back towards the target by next year.

Brazil Country Outlook August 2008

2008-07-31T02:08:00.000-07:00

Claus Vistesen: Copenhagen

Brazil is a resource rich country in transition towards a much more diiversified economy where industry and high value services will begin to play an increasing role. Brazil has ample supplies of energy and agricultural products, and is currently hitting that “sweet spot” where a demographically driven growth dividend becomes available. Thus we can increasingly expect to see above trend “catch up” growth as the Brazillian economy benefits from the new wealth which accrues from the rapid global rise in commodity prices while the strong supply of young labour underpins the labour market and significant productivity improvements become available as the economy generally moves towards ever higher-value-added sectors of activity.

Perhaps the most telling sign of Brazil's rising status as a new global force to be reckoned with was the recent announcement by the National Petroleum Agency (ANP) of the discovery of a new offshore oil field (Carioca) which potentially holds as much as 33 billion barrels of oil - enough to supply every refinery in the U.S. for six years - making it the third-largest oil field ever discovered (only Saudi Arabia's Ghawar and Kuwait's Burgan fields are bigger). This, coupled with the discovery last year of the Tupi field - which has an estimated reservoir of between 5 and 8 billion barrels of oil – is now fast forwarding Brazil rapidly up through the ranks of global oil producing nations. Such new found oil prowess has even prompted president Lula da Silva to suggest that Brazil enter OPEC.

But Brazil is not only rich in energy; agriculture – that new high-value sector – is also an important contributor to Brazil’s rapidly growing GDP. Agricultural income should total 155.27 billion reais (US$ 71.4 billion) in Brazil in 2008, according to the Ministry of Agriculture. The estimate is based on crop surveys by the National Food Supply Company (Conab) and the Brazilian Institute for Geography and Statistics (IBGE).

And with global agricultural prices continually hitting record highs Brazil’s agricultural exports were up 15.22% in June over June 2007, and by 5.6% over May. The government estimate for this year’s total output includes 20 crops, some of them temporary ones such as soybean, maize, rice, wheat, sugarcane, and others permanent like coffee, cocoa, and oranges. Compared with 2007, the figure represents growth of 17.11% after inflation. The largest increases were expected to be in beans (87.78%), coffee (48.69%), wheat (40.79%), soybean (31.83%) and maize (30.65%). Brazil is now even producing grapes, and output is growing rapidly in the northeastern states of Pernambuco and Bahia.

Also Brazil's economy created a record 309,442 government-registered jobs in June as higher domestic demand coupled with revenue flows from rising commodity prices lead companies to add staff and increase output. Of these new jobs Brazil's agricultural sector accounted for the lions share, with 92,580 new jobs being created in June, the highest monthly figure recorded since the start of the current time series in 2003.

Recent Economic Indicators

The Brazilian economy continued to expand strongly in the first quarter of 2008, and turned in a respectable 5.84% increase in GDP when compared with the same period a year earlier. Looking at quarter on quarter growth on a seasonally adjusted basis (quarterly growth gives a much clearer “as things are now” snapshot of the current state of an economy at any point in time), the 0.71% reading reflected a moderate slowdown in the economy over the previous quarter. Consumption and investment both contributed to the quarterly growth rate, but it was government consumption which did the heavy lifting in Q1. The negative trade balance also acted as a drag on growth as exports declined while imports rose. Since Brazil is strong on commodity exports, and commodity prices have been very high in recent months, the underlying momentum is positive, although were inflation not to be kept in check some variant of the “dutch disease” could undoubtedly become a problem. At the present time however this danger should not be exaggerated, since underlying investment in capital goods is reasonably healthy, rising at rate of about 19% (12 month average) as compared to a rise of around 6.5% for industrial output generally.
The main driver of economic activity continues to be domestic demand. Private consumption rose in Q1 by 6.% (y-o-y) while investment held up well - rising by 15.2%. Nevertheless, the externally oriented sector has continued to weaken, largely because of the pressure on exports caused by the high Real, and exports were down 2.1% year-on-year. Imports, however, rose steeply - by 18.9%. The other aspect of growth was public consumption, which was up by 5.8%, which was the fastest rate since the middle of 2002.

One notable recent development has been the decision by ratings agency Standard & Poor’s to award Brazil investment grade, with the foreign currency debt rating being raised to BBB- from BB+. This decision has produced considerable debate as many long term Brazil watchers believe that the upgrade comes at a time when Brazil has all the cyclical winds blowing in her favour, and ask the not unreasonable question what happens when the weather shifts? It is clear however that Brazil has made tremendous improvements over the past decade in terms of central bank independence, reigning in inflation and setting public debt on a sound footing, so whatever the fine print details, Standard and Poor’s decision can surely not be considered an imprudent one.

As regards its external balance Brazil is rather different from many other large emerging economies since while the central bank (which has a high level of independence from government) does intervene in the spot market to try to keep a lid on the Real’s rise and to built up a “war chest” of international reserves the bank has allowed the currency to rise substantially against the US dollar (as of July the Real had appreciated by some 13% against the dollar in 2008) and Brazil has also recently opened a small but quite manageable deficit on its current account, which means that Brazil as it develops is becoming a net consumer of excess capacity in the global economy. A break-down of the current account position reveals that Brazil continues to retain a surplus on the goods balance due to the importance of commodities and food but that services and in particular a negative income account are now gradually pulling the overall balance into negative territory. This is really what one could reasonably expect in the context of an emerging economy at Brazil's stage of development.

On the monetary policy front the central bank is rapidly earning a reputation for itself as Latin America’s new Bundesbank, and governor Henrique Meirelles delivered a decisively hawkish message during the last monetary council meeting to accompany the decision to hoist rates by 75 basis points to the current 13% level. Brazil's interest rate is now the the second-highest inflation-adjusted one in the world after Turkey's. Brazil's real interest rate, or the benchmark 13 percent rate minus annual inflation of 6.06 percent, is 6.94 percent. Turkey currently has the world's highest so-called real interest rate at 7.55 percent.

This decision is the continuation of a hiking campaign set in motion in order to establish strong credentials for the central bank as an inflation fighter, and to prevent generalised inflation expectations from taking a hold among the population. The central bank is attempting to keep inflation within the the official target of 4.5% and with inflation forecast to be somewhat above that figure in 2009 the central bank is simply acting accordingly.

Such aggressive tightening is, however, not without its problems, and policy makers now face a serious dilemma. Predictably, given the state of the current global environment, the central bank's larger than expected interest hike was rapidly translated into an appreciation of the Real – pushing it to its strongest level since 1999. So far, the 13% rise against the USD this year puts the real in the pole position amongst emerging market currencies versus the USD. This position is reasonably comprehensible taking into account the recent decision to award Brazil investment grade status; this coupled with a nominal yield on 10 year government notes at about 15% and a benchmark stock index – the Bovespa – which is up approximately 10% from its January level, implying a 20% gain in US dollar term, basically mean that international investors are finding it hard not to put money into Brazil at this point in time.

Consequently, with a global credit crisis far from over, a hawkish central bank, and a hard currency making exports more difficult one could only reasonably expect the economy to slow in line with weaking global momentum. The key point with respect to the Real would be that a continuing rise will push the external balance further into negative territory. Moreover, in a likely scenario where global commodity prices somewhat pare-back their recent impressive upward movement Brazil’s external bookkeeping will further come under pressure.

Outlook on Key indicators

Following the most recent rate hike market expectations have now solidified towards further interest rate increases in the pipeline. The driving orce here will, as ever, be inflation running above the central bank's nominal target. Here at Emerginvest we see the Central Bank of Brazil aiming for a nominal rate of 15% which should be reached over the course of the next three meetings.
The Real is likely to continue to be supported by a hawkish central bank but as the external balance moves steadily into negative territory macro-fundamentals may take over, and as the economy slows and inflation comes into the target zone the central bank will once more move into loosening mode pushing the Real down in the process. A violent correction however is not expected.
GDP growth is expected to moderate in 2008 compared to the levels seen in 2007 but at this point growth projections remain solid, and we certainly see Brazil’s mid term sustainable growth rate as being above the consensus 3%-5% rate once inflation is firmly under control.

2007 Data

GDP (2007) - 5.4%
Inflation (2007) - 3.6%
Current Account Deficit -0.27% of GDP
Fiscal Deficit - 2.27% GDP
Debt to GDP ratio - 42.8%

Debt Ratings (local currency, long term)

Fitch - BBB-
S&P - BBB+
Moody- Ba1

2008 Central Bank Inflation Target - 4.5% (+ or – 2pp)

Population Median Age -29 years
Total Fertility Rate (2007) -1.88 child per women
Male Life Expectancy - 68.57 years

Development Indicators Rank (131 economies in total)

Global Competitiveness (World Economic Forum)
72/131 (2007-08)
Business Competitiveness (World Economic Forum)
59/131 (2007-08)

Selected Sub-components

Institutions - 104/131
Infrastructure - 78/131
Macroeconomic Stability - 126/131
Health and Primary Education -84/131

Short Term Data

Retail Sales Growth (May, y-o-y, volume index) - 10.5%
Industrial Output (May, y-o-y) - 2.4%
Inflation (July 2008) - 6.3%
Central Bank Interest Rate (SELIC Rate) - 13.0%

Brazil Central Bank Raises Interest Rates Again In July

2008-07-24T13:39:00.000-07:00

Brazil's central bank, raising interest rates more than expected for the second time in three meetings yesterday, wrong footing a lot of analysts (myself included) and justifying the nickname the "Bundesbank of Latin America" as it showed it is ready to push up lending costs as fast as it feels necessary to fight inflation. The real rose to a nine-year high on the back of the news.

Policy makers led by President Henrique Meirelles raised the overnight rate by three quarters of a percentage point to 13 percent in a bid - as they put it - to bring inflation back to target in a "timely fashion".

The increase aims to slow domestic spending as food and energy costs continue to rise. Consumer prices rose 0.63 percent in the month through mid-July, pushing annual inflation to a 32-month high, according to the latest data from the national statistics agency. Inflation as measured by the benchmark IPCA-15 index quickened to annual rate of 6.30 percent, close to the upper end of the central bank's 2.5 percent to 6.5 percent target range.

On the present showing Mereilles and his team look set to miss their inflation goal for the first time since 2003 this year. For 2009, inflation forecasts are on the rise and consumer prices and many economists expect inflation to increase in the 5 percent range. Yesterday's increase from the central bank, which was the biggest in more than five years, puts the key rate at the same level it was in January 2007, canceling the effect of five of the six rate cuts last year.

Brazil's interest rate is now the the second-highest inflation-adjusted one in the world after Turkey's. Brazil's real interest rate, or the benchmark 13 percent rate minus annual inflation of 6.06 percent, is 6.94 percent. Turkey has the world's highest so-called real interest rate at 7.55 percent.

Also we learn that Brazil's economy created a record 309,442 government-registered jobs in June as higher domestic demand coupled with rising commodity prices lead companies to add staff and increase output according to a July 17 Labor Ministry report showed. Of these new jobs Brazil's agricultural sector accounted for the lions share. The agricultural sector was responsible for the creation of 92,580 of the new jobs created in June, the highest monthly figure recorded ever since the current time series began in 2003.

Agricultural exports are up 15.22% on June 2007, and 5.6% over May. One highlight of Brazil's new agricultural prosperity is grape production, which registered the highest job generation rates in the northeastern states of Pernambuco and Bahia.

Agricultural income should total 155.27 billion reais (US$ 71.4 billion) in Brazil in 2008, according to the Strategic Management Advisory (AGE) at the Ministry of Agriculture, Livestock and Supply. The income is calculated based on crop surveys by the National Food Supply Company (Conab) and the Brazilian Institute for Geography and Statistics (IBGE).

The estimated value for this year includes 20 crops, including temporary ones such as soybean, maize, rice, wheat, sugarcane, and permanent ones such as coffee, cocoa, orange and grape. Compared with last year, the figure represents growth of 17.11% after inflation.

Another 14 products saw an increase in income in 2008. The greatest increments were those of bean (87.78%), coffee (48.69%), wheat (40.79%), soybean (31,83%) and maize (30.65%). Income results per region show that the Midwest and the South have the highest income expansion rates in comparison with last year.

The overall economy grew 5.8 percent in the first quarter after expanding 6.2 percent in the fourth, the fastest in 3 1/2 years. Unemployment rate fell to 7.8 percent in June, its second-lowest level in more than six years, the statistics agency said today.

In Q2 business confidence - as calculated by CNI - dropped from 62 to 59, in line with seasonal patterns. The index did however remain well above the 50 break-even level. The fall was clearest among the larger corporation (down from 64.4 to 60.3), followed by medium companies (down from 60.5 to 57.8). Confidence among the small businesses also diminished, albeit at a lower pace, dropping from 60.2 to 58.4.

Consumer confidence (FGV) also fell sharply in June. The index tumbled from 107.2 to 101.9, - mostly as the result of a deterioration in the current assessment, which fell from 112.9 to 101.2. However, future expectations were also down - from 104.2 to 102.3. Th sharp slowdown in the current assessment suggest that inflation is having a corrosive impact on the disposable income of the population.

Brazil's real rose to a nine-year high after the central bank increased its benchmark interest rate advancing 0.4 percent to 1.5767 per dollar at 3:34 p.m. New York time, after most trading in Brazil had ended, from 1.5836 the day before.

The real has now gained 12.9 percent this year, the biggest rise against the dollar among the 16 most-actively traded currencies, while the Bovespa is up approximately 10% from its January level, implying a 20% gain in US dollar terms.

Brazil Retail Sales May 2008

2008-07-16T03:41:00.000-07:00

Retail sales volume was up 0.6% month-on-month in May, on higher sales of food, beverages, personal items and office equipment. Data from government statistics agency IBGE said six of the eight sectors surveyed showed higher growth during the month. Sales were up a strong 10.5% when compared with May 2007. The sales growth was led by a 1.1% rise in sales of supermarket sales, which rebounded from a 0.2% drop in April. Sales of personal items rose 2% in May, after a 1% fall in April. And sales of office equipment rose 5.1%, rising from a 3.7% growth in April.

Brazil Monthly Inflation Falls Back (Slightly) In June

2008-07-12T04:53:00.000-07:00

Brazil's monthly inflation rate slowed slightly in June from May, though prices still registered their second-biggest rise of 2008. On an annual basis inflation rose at the fastest pace since November 2005, underscoring central bank concern about price pressures.

The benchmark IPCA consumer price index was up 0.74 percent in June, down slightly from the 0.79 percent increase registered in May, according to the statistics agency IBGE. Annual inflation in June rose to a 31-month high of 6.06 percent.

Slowing inflation may give the the central bank - which the Economist wryly refers to as the new Bundesbank - room to pause on the current pace of rate increases which have seen policy makers push up the so-called Selic rate from a record low 11.25 percent to 12.25 percent this year.

Food and beverage prices jumped 2.11 percent in June after a 1.95 percent increase the May and there was a generalised gain in most items surveyed. Prices of staple foods, such as rice and black beans, surged last month, rising 9.9 percent and 7.54 percent, respectively. Clothing prices rose 0.42 percent in June, slowing from a 0.98percent monthly rate in May, while personal spending costs climbed 0.54 percent after a 1.11 percent rise in May, helping the slowdown in the month-on-month IPCA data.

Brazil's annual inflation rate has been running above the 4.5 percent midpoint of the central bank's annual target range throughout 2008.

Despite the strong commitment from the central bank to fighting inflation, my feeling is that the bank will now be more cautious about raising rates too fast. Interest rate hikes need time to have an impact - The central bank estimates that the impact of interest rates starts to be felt on real GDP with a lag of about one quarter - and there are now accumulating signs that Brazil's economy is slowing.

Retail sales growth eased up in April, rising by 8.7 percent from April 2007, was down from the 11 percent increase registered in March.

Also Brazil's industrial output expanded less than most economists expected in May, and this again may well reduce the appetite at the central bank to press ahead rapidly with interest-rate increases. Industrial production rose a mere 2.4 percent on a year on year basis, down considerably on the revised 10 percent increase in April.

The trade surplus was also down in May, and again I think there will be nervousness about any move which can push the real further upward and make exporting for nascent industries more difficult. In addition the finance ministry is now busy tightening fiscal policy, raising its target for the primary surplus (ie, before debt payments) from 3.8% of GDP to 4.3%. The increase represents 14.2 billion reais ($8.83 billion) in savings, and these could be used to further plans to build a sovereign wealth fund, according to Brazil's Planning and Budget Minister Paulo Bernardo Again this fiscal claw-back will tend to slow the economy yet further, and this may well be a more effective way of doing so - ie weakening demand-pull pressure for inflation pass-through - than raising interest rates excessively and in the process further raising the real making exports more difficult, especially since the yield differential only attracts additional funds which simply add to demand side pressures and make the upward move in interest rates counterproductive.

Brazil received $37.2 billion of foreign direct investment in the 12 months through April, a record annual inflow, and foreign exchange reserves were up to $195 billion in March 2008.

Despite the fact that Brazil's Planning and Budget Minister Paulo Bernardo is constantly stressing that the government will take ``all necessary measures'' to curb inflation I would be cautious about any overly rapid judgement that central bank President Henrique Meirelles and his team are about to raise rates for a third time in 2008 when the Monetary Policy Committe meets on July 22-23 next.

Interestingly Morgan Stanley's Marcello Carvalho in a recent piece for the GEF comes down on the side of upside (and not downside) risks on the rate hike front. While he accepts growth is slowing, he still feels:

Risks for rates seem biased to the upside. In all, recent inflation data, trends in expectations and policy signs consolidate the notion that the Copom could have to hike for longer than it originally envisaged. Our forecast continues to assume a full hiking cycle of 300bp, to 14.25%, by end-2008. But risks around our call remain biased to the upside. Depending on how inflation expectations evolve, our econometric work suggests that the hiking cycle could prove to be in the range of 400-500bp (see “Brazil: Taylor-Made Monetary Policy”, This Week in Latin America, June 2, 2008).

Basically Cavalho is skeptical that the potential non-inflationary growth rate is as high as many imagine, and I suspect this is the difference between my view and his.

To keep things in perspective, 3% real GDP growth in 2009 should be interpreted as a sign of success for Brazil, given a darkening global outlook and Brazil’s own lackluster average growth performance in recent decades − not to mention outright recessions during previous downturns....Estimates for potential growth in Brazil may well be revised down, as a consequence. Most estimates would appear to put Brazil’s real GDP growth potential currently in the 4-4.5% range. We would not be surprised to see a downgrade in such estimates to the 3-4% range by the end of next year.
Marcello Carvalho

I think capacity growth in Brazil is now higher than many imagine, and I also think that the slowdown in growth in the developed economies (and possibly China at some point) will take a lot of the sharp sting out of upward pressure on global commodity prices a lot sooner than pergaps many imagine. Remember energy and food prices remaining comparatively HIGH is not the same thing as inflation (which is the rate of increase) remaining high. Absent second round effects inflation in those economies which are not pushing capacity limits (and Brazil would be the locus classicus here) can susbside as rapidly as it surged up. Indeed only yesterday Societe Generale SA's Albert Edwards - the analyst who predicted the Asian currency crisis a decade ago - was out there warning central bankers that deflation may soon overtake surging prices as the biggest risk to the world economy.

Brazil Trade Surplus, June 2008, Industrial Output and Retail Sales

2008-07-01T10:03:00.000-07:00

Brazil's trade surplus narrowed to $2.7 billion in June from May as a rising currency and expanding domestic demand boosted imports. Imports rose to a record $15.9 billion from $15.2 billion in May, according to the trade ministry today. Exports fell to $18.6 billion from $19.3 billion. The May surplus was $4.1 billion.

Brazil's 12-month trade surplus narrowed to $30.8 billion in June, the smallest in four years, from $31.9 billion in May. The 12-month indicator has been shrinking since May 2007, when it peaked at $47.8 billion.

The Brazilian real has risen 20 percent against the dollar in the last 12 months, the best performance among the 16 most- traded currencies.

Brazil's industrial output expanded less than economists expected in May, possibly reducing the pressure on the central bank to accelerate interest-rate increases. Industrial production rose 2.4 percent in May on a year on year basis, down considerably on the revised 10 percent increase in April, according to the latest national statistics agency report.

One indicator that economic growth may now be slowing is that car production fell 5.5 percent in May from April. Another 15 of the 27 industrial activities tracked by the government also experienced monthly declines.

Further indication of the slowdown comes to us from Brazil's retail sales, which rose at the slowest pace in seven months in April, as rising consumer prices and tighter credit deterred household spending. The country's retail sales rose 8.7 percent in April year on year, down from a revised 11 percent gain in March.

Brazils central bank increased rates in June,to 12.25 percent from 11.75 percent, and it is clear more increases are in the pipeline. This batch of data may simply mean that rates neither rise so far, nor rise so fast as was previously being anticipated.

Brazil Inflation Mid-June 2008

2008-06-26T02:22:00.000-07:00

Brazil's mid-month consumer prices jumped by the most in four years in June, and the central bank forecast the fastest year-end inflation since 2004, cementing expectations that policy makers will push interest rates higher.

Inflation as measured by the IPCA-15 index rose 0.9 percent through mid-June, up from 0.56 percent a month earlier, the government said. It was the biggest jump since July 2004 when prices rose 0.93 percent. The annual inflation rate for 12 months through mid-June accelerated for the third straight month to 5.89 percent, up from 5.25 percent in mid-May.

Brazilian policy makers in the central bank's quarterly report on inflation released today said they expect rising food prices and domestic demand to push up the annual inflation rate to 6 percent by year-end. Looking ahead, annual inflation will slow to 4.7 percent by the end of 2009, remain unchanged in the first quarter of 2010 before rising to 4.8 percent in the second quarter of the year, the bank said.

The bank's previous quarterly inflation report, released in March, also put year-end inflation above the mid-point of policy makers' target of 4.5 percent, plus or minus 2 percentage points. Policy makers in March had forecast year-end inflation of 4.6 percent for 2008 and 4.4 percent for 2009.

Brazil Retail Sales April 2008

2008-06-17T06:41:00.000-07:00

Brazil's retail sales rose 8.7 percent in April from April 2007, according to the latest data from the national statistics agency. The April increase was down from a revised 11 percent increase in March, according to data from the national statistic office in Rio de Janeiro.

Brazil IPCA Consumer Inflation May 2008

2008-06-13T00:21:00.001-07:00

Brazilian consumer prices rose more than expected in May, led by higher food costs, adding pressure on the central bank to raise its benchmark interest rate again. Consumer prices as measured by the benchmark IPCA index increased 0.79 percent month on month. This was the biggest monthly jump in prices since April 2005.

The increase pushed the annual inflation rate to 5.58 percent, the fastest since January 2006, from 5.04 percent in April. Accelerating inflation may prompt central bank President Henrique Meirelles to raise the benchmark rate for a third time next month.

The central bank targets inflation of 4.5 percent, plus or minus 2 percentage points. The central bank has raised interest rates twice in recent months, by half a percentage point each time, in April and in May, taking the rate to 12.25 percent from the earlier 11.25 percent.

The central bank finds there is evidence that inflation is "diverging" from their targets and expect consumer prices to rise more than previously forecast in 2008 and 2009 according to the minutes of the June 3-4 meeting.

"The recent behavior of the IPCA price index has been notably less favorable than in the previous quarters....Inflation is showing signs of diverging from the target trajectory."

Interestingly policy makers, in addition to the normal points about global food and energy prices, note the existence of capacity constraints on the Brazilian economy. They suggest that there is a mismatch between supply and demand and that capacity constraints may limit industrial output growth in the coming months. Evidently institutional and infrastural policies which can help increase the potential output growth rate should be an important agenda item for Lula's government at the present time.

Brazil Central Bank Raises Interest Rates to 12.25%

2008-06-04T23:02:00.001-07:00

Brazilian central bank President Henrique Meirelles and the other seven members of the central bank board raised the benchmark lending rate a half percentage point to curb accelerating inflation fueled by higher food costs and record consumer demand. The central bank increased rates to 12.25 percent from 11.75 percent.

"Continuing the adjustment process of the benchmark interest rate, which was initiated at the April meeting, the Copom decided unanimously to raise the Selic rate to 12.25 percent a year without bias" the bank said in a statement.

Henrique Meirelles also indicated policy makers are very likely to raise the benchmark lending rate further to contain inflation. The bank removed language from its April 16 statement saying it had carried out a ``significant part'' of the tightening process and in that sense the `rocess is much more ``open-ended.'' and the tightening cycle may well be longer than the previous statement indicated. The central bank are effectively going to increase the rate as much as they feel is needed.

Meirelles told the Brazilian parliament at the end of May that the bank will act to prevent rising wholesale industrial and agricultural costs from spreading to consumers as household demand expands at a record pace. The IGP-M inflation index, which has a 60 percent weighting in wholesale prices, rose to a three-year high of 11.53 percent in May.

Consumer prices had their biggest increase in four months in April on the back of of higher food costs. Consumer prices, as measured by the government's benchmark IPCA index, climbed 0.55 percent In April - up from 0.48 percent in March. Brazil's inflation rate in the 12 months to April was 5.04 percent.

Most of the macro economic indicators are showing signs of strong demand. Lending by banks has climbed at least 20 percent in each of the past three years. Retail sales jumped 11.4 percent in March, capping the strongest quarter on record. Industrial production jumped 10.1 percent in April from a year earlier, the highest in six months.

This picture is only completed when you think about the large inflows of funds Brazil is receiving at the present time. Brazil received $37.2 billion of foreign direct investment in the 12 months through April, a record annual inflow, and foreign exchange reserves were up to $195 billion in March 2008.

The half-point rate increase pushes Brazil's real interest rate, which is the rate after adjusting for inflation, to 7 percent, the highest among the world's leading economies.

Meirelles is also receiving significant backing from Brazil's President Luiz Inacio Lula da Silva who, after being re-elected to a second term in 2006, vowed to accelerate growth to a 5 percent annual pace through 2010. Economic growth accelerated last year to 5.4 percent and Brazil's economy grew at a 6.2 percent rate in the fourth quarter, more than twice the average pace of the past decade.

The principal problem facing monetary policy is that as interest rates rise external funds are attracted by the yield differential which can be obtained and this only adds to internal inflationary pressure.

The only real tools left to the government are institutional reforms to increase capacity and fiscal surpluses to drain some of the excess internal demand. Allowing the currency to rise further can also help, but again there is a delicate balance to be struck here between soaking up imported inflation and creating structural distortions in the development of the economy such that industrial growth is curtailed by problems created for manufactured exports by a strong currency and the excessive growth of financial services and construction fuelled by the availability of cheap borrowing (made possible by the achievement of investment grade) and the consequent acceleration of internal demand.

There is a real Scylla and Charybdis to be steered here between being export driven and excessive dependence on domestic demand, and I don't think anyone has found the "best path" here yet, but we do need to realise - as my colleague Claus Vistesen keeps emphasising (and see here for the Japanese case) - that someone needs to soak up the world's growing surpluses somewhere, and Brazil certainly seems to be one of the stronger candidates in the short term.

Brazil's politicians do seem to be on a learning curve here, and Finance Minister Guido Mantega, who only last February was questioning the need for more rate increases, this month reversed course and decided to cut the fiscal deficit at a faster pace to help rein in inflation. Yielding to calls by Meirelles, Mantega announced last week the government would cut spending by an additional 13 billion reais this year, boosting the budget surplus before interest payments to 4.3 percent of gross domestic product from 3.8 percent.

Brazil Industrial Output April 2008

2008-06-03T14:30:00.000-07:00

Brazil's industrial output in April expanded at the fastest pace since last October, leading to speculation that the central bank may raise interest rates more than expected when policy makers meet tomorrow. Industrial production jumped 10.1 percent in April, up from a revised 1.5 percent increase in March, the government said today. However the early calendar date of easter has undoubtedly been a factor here.

As the press release from the statistics office, apart from the fact there were two less working days in March 2008 than in March 2007, and also a transport strike affected the production of ethanol and petrol refining, so in some ways the upsurge in output in April is only the corrolary of the declone in March.

Na comparação março 2008/março 2007, o setor registrou um acréscimo de 1,3% marca bem abaixo das observadas em meses recentes. Essa redução acentuada no ritmo do índice mensal pode ser explicada pelos seguintes fatores: menos 2 dias úteis em março de 2008 em relação a março de 2007, forte queda na atividade de refino de petróleo e produção de álcool e, em menor medida, as dificuldades no fluxo de matérias-primas importadas para consumo industrial, em função do movimento grevista dos auditores da Receita Federal iniciado em 18 de março. O menor ritmo também se confirma no índice de difusão (percentual de produtos em crescimento), que após chegar aos 65,6% em fevereiro recua para 44,1% em março, seu menor nível desde abril de 2006 (40,0%).

Of the 27 industrial sectors tracked by the statistics office, 16 showed growth from the previous month, led by a 7.3 percent increase in oil and ethanol output. In March, oil and ethanol production had fallen 10 percent.

Production of pharmaceuticals rose 8.1 percent in April, automobile output increased 2.3 percent and production of foodstuffs expanded 2 percent.

In broader categories, output of capital goods such as machinery increased 1.6 percent, expanding for the fourth straight month. Production of consumer goods fell 1.9 percent and output of intermediate goods slipped 0.2 percent.

Industrial output rose 7.3 percent in the first four months of the year and 7 percent in the 12 months through April, up from growth of 6.6 percent in the 12 months through March.

Brazil Wholesale Inflation May 2008

2008-05-29T09:47:00.000-07:00

Brazil's broadest price index rose at the highest monthly rate in five months in May, increasing speculation that the central bank will raise interest rates for a second straight time at its meeting next week. Wholesale, consumer and construction prices, as measured by the IGP-M price index, rose 1.61 percent in May, the Rio de Janeiro-based Getulio Vargas Foundation said today on its Web site.

Consumer price increases, as measured by the government's IPCA, quickened to 5.25 percent in the 12-month period to mid- May, the fastest pace in more than two years, the national statistics agency said yesterday.

Central Bank President Henrique Meirelles, in testimony to the Brazilian Congress yesterday, said wholesale prices were rising faster than overall inflation and that policy makers have acted preemptively to prevent the increases from spreading to other parts of the economy. .

Meirelles' comments were more evidence that policymakers will raise their benchmark interest rate for the second consecutive time, possibly by 50 basis points to 12.25 percent when they meet next week.The central bank raised the benchmark rate to 11.75 percent from 11.25 percent for the first time in three years last month.

Brazil Current Account Deficit April 2008

2008-05-26T14:02:00.000-07:00

Brazil posted the widest annual current account deficit in almost six years as faster economic growth spurred imports and the remittance of profits abroad. Brazil's current account deficit, which offers us the broadest measure of trade in goods and services, increased to $14.7 billion in the 12 months through April, up from $9.54 billion in March, accoding to the latest data from the central bank. This if the widest gap since August 2002. The fastest economic growth in more than three years and a cheap dollar boosted demand for imports, which jumped almost 45 percent in the first four months of this year. Companies benefiting from the expansion are also sending more of their profits abroad to meet the financial needs of their head offices amid an international credit crunch.

It is important to realise that Brazil has been running a current account surplus in recent years, although the IMF are currently forecasting a deficit of 0.7% GDP for 2008.

Record inflows of foreign direct investments have covered the gap, easing concern the existence of a current account deficit will create a shortage of dollars, but at the same time raising concerns about the long term dependence on such flows. Brazil received $37.2 billion of foreign direct investment in the 12 months through April, a record annual inflow.

Brazil's Economy - Not Emerging Anymore?

2008-05-20T13:04:00.000-07:00

By Claus Vistesen: Copenhagen

Brazil is interesting; not only because of its fabulous nature, its rhythmic and musical heritage, and its (alleged) repository of beautiful women but also because of the position it commands in the global economy, the latter topic being the focus of this note. Consequently, Brazil's economy represents an excellent point of departure for the evaluation of many highly strung discourses in the context of the global economy and her financial markets. These discourses include the debate on de-coupling/re-coupling, global inflation, Bretton Woods II/global imbalances, and global liquidity/SWFs just to name a few. In what follows, I will try to present an argument to explain why it is that I am so very constructive on the upside potential for Brazil's economy, while at the same time trying to untangle (as I have tried so many times before) some of the above mentioned areas of discussion and debate in the context of the global economy and Brazil.

Perhaps the most telling sign of Brazil's increasing status as a global force to be reckoned with was the recent announcement by Brazil's National Petroleum Agency (ANP) of the discovery of a new oil field (Carioca) which potentially holds as much as 33 billion barrels of oil - enough to supply every refinery in the U.S. for six years - making it the third-largest oil field ever discovered (only Saudi Arabia's Ghawar and Kuwait's Burgan fields are bigger - Ghawar reputedly holds as much as 83 billion barrels of crude, while Burgan is claimed to have up to 72 billion). Coupled with the discovery last year of the Tupi field - which has an estimated reservoir of between 5 and 8 billion barrels of oil, and could itself produce output at the not to be sneezed at rate of a million barrels a day - this is very likely to fast forward Brazil rapidly up through the ranks of global oil producing nations. This new found oil prowess even prompted the president Lula da Silva recently to suggest that Brazil enter OPEC.

Such oil discoveries come at a near-perfect time for Brazil who thus seems set not only to enjoy the upward march of commodities such as sugar, rice, beef, soya, oranges, iron ore etc but now also the black gold. Of course, the set up of a proper supply chain in the context of oil production takes time and it will take at least one year before we see the first barrels rolling in from Tupi not to speak of Carioca. However, Petrobras (Petroleo Brasileiro SA) is not sitting idle and the effects of Brazil's oil discoveries are already rippling through the market. Extraordinary evidence of this was delivered in the context of Petrobras' demand for the world's deepest-drilling offshore rigs to put action behind the recent discoveries. Petrobras is rumored to be hawking as much as 80% of global capacity as a function of the company's demand for deep drilling rigs and given the fact that these things don't exactly come off the shelf with the same ease as flat screens it will take some time for supply to respond to the increased demand thus pushing up rent for these vessels.

In many ways, as Edward also hints in a recent article the oil discoveries mentioned above represent a good initial image of Brazil's growing role in the global economy. Petrobras thus projects investments to the tune of 112 billion USD between 2008 and 2012 which, if realized, are sure to calm down even the most careful treasurer in the Brazilian finance ministry.

Thus assured of Brazil's current economic potential we should take a few steps back and have a look at the historical economic performance of Brazil, how it got to where it is today and where it is likely to go in the future? First, why not take a glance at some charts?

It does not take much of a macroeconomist to see how the stories above tell a story of rapid economic development. Obviously, it is difficult to make solid conclusions solely on the basis of growth figures but as can readily be observed Brazil is moving up in the world. Especially, the figures for PPP adjusted GDP are interesting since they show how Brazil is steadily and unrelentlessly creating an ever larger share of global GDP. The inflation figure also shows that almost a decade's worth of rampant inflation has now receded to much more comfortable levels. As for the allure of Brazilian asset markets the last figure just about sums it up. Over the three year period a US investor investing 1 mill USD the 16th of May 2005 would have been able to walk away with just shy of 4.5 mill USD the corresponding date 2008 (note that the exchange rate is with our US friend here too). Of course, such examples are not kosher as we are not looking at risk (e.g. standard deviation or global beta) but the rate of expansion in the main stock index is still quite remarkable, even border lining on a bubble if you look at the growth rate alone. This performance is, of course, to some extent shared by the other usual suspects who make up the notorious BRIC group, as originally coined by Goldman Sachs. I would not want to take anything away from GS here but simply note that the BRIC narrative is not exactly fitting for what is happening in the global economy. It is indeed true that the four economies are amongst the fastest growing economies of the world but they are very difficult in terms of structural setup which tends to blur the analysis. Specifically, I would distinguish between Brazil, India, and China on one side and Russia on the other. Soon in fact China may join Russia's side of the fence if the inflation bonfire currently experienced proves inextinguishable.

Brazil's rise not only in terms of GDP at constant prices but also in PPP terms cuts right across the whole debate on de-coupling which at times has developed into a rather badly played football match between the US and Europe. In this way, I never really was a fan of the original idea of de-coupling whereby the Eurozone ascended to take over from the US as the new global economic power train (and reserve currency repository). I simply think that this debate was principally flawed in its foundation. As such, it was never about whether the Dollar should fall or not, but given that it was always going to adjust downwards, against who and against what was it going to adjust? What we are currently observing in the global economy is then a process of recoupling of unprecedented proportions. Basically, the big economies of Latam and Asia not only want to be rich on population but also on economic wealth and what we are observing across the global economic edifice is the unwinding of the post WWII imbalances in which one half of the world got economic growth whereas the other got population growth. Brazil's rise in terms of purchasing power is a clear sign of this and in this light, the rise of big economies such as China, India, Brazil, and Turkey will change the tectonic plates of the global economy. Ultimately this process may be a difficult transition for the global economy and in particular for those countries yielding their ranks but it should not be lamented.

Too Much of a Good Thing?

Alas, this global process of re-coupling is not a linear and steady one, and it is getting clouded by the Bretton Woods II edifice in which Asian economies alongside petro exporters maintain a fixed exchange rate policy to the US accumulating vast reserves in the process. Brazil finds itself right smack in the middle on an unprecedented global hunt for nominal yield as excess liquidity, wide global interest rate differentials, and key fixed exchange rate regimes determine the global flow of funds. Especially, as the US economy falters, the shift of capital flow to snub the return to negative real yields in the US is piling the pressure on asset markets in countries who maintain open capital and financial accounts. This has prompted many analysts to lament the inflation targeting policy of the central bank as it serves to keep nominal interest rates too high thus sucking in too much capital for the economy’s own good.

The recent lingering backdrop of the external balance into deficit (see below) is among other things used as ammunition. Current interest rates are at a hefty 11.75% and it does not take much financial literacy to spot the carry trading (see appendix) plays available. Recently, Antonio Carlos Lemgruber voiced a similar critique in the context of RGE's Latin America monitor. Mr. Lemgruber's main argument is pinned on one of the most illusive of economic concepts in the form of the output gap which measures the divergence between the potential output and actual output. According to him Brazilian monetary authorities are too pessimistic on behalf of the economy's capacity to grow. Currently the interest rate is set on the basis of a potential growth rate of 3-4% while Lemgruber believes it to more like 7%. This would require a lower nominal interest rate to keep the economy growing without stoking 'inflationary pressures.' In terms of the actual numbers for potential output I tend to side with Lemgruber but we need to realize, I feel, that the measure of capacity in an economy such as Brazil's is tremendously difficult. The reason for this is simple and relates to the process known as the demographic dividend.

This note shall not dwell extensively by the pace of the demographic transition in Brazil but simply note that Brazil quite like almost all of the other socalled emerging economies is closing the demographic gap with the rest of the OECD quite rapidly. The figure below shows this process quite neatly even though we should be very careful about extrapolating on general population momentum on the basis of fertility numbers.

As can be observed there is some uncertainty as regards to the pace of fertility decline going into the 21st century. What can see however is that Brazil is steadily nearing the sub-replacement level and based on expectations we should expect her to continue. In fact, according to the US Census Bureau database Brazil's TFR is already below replacement levels at this point (1.86) although a more detailed analysis is needed to tell for sure. This means that the demographic dividend by which falling fertility provides a period in which the non-working age dependency ratio of the economy declines is now occurring in the context of Brazil. However, we also know that there are no free lunches and the favorable environment provided by the DD is also followed by a less favorable environment as the age dependency steadily rises as well as the productive profile of the country shifts as the age structure effects ripple through. In this light, the DD becomes an opportunity to lock-in the highest possible growth path and this is exactly what Brazil now needs.

It is in this specific context that I see the difficulties in estimating capacity in Brazil since no one really knows at this point. We know however, that capacity is growing in Brazil and that at the present time it is probably somewhat larger than the 3-4% currently fielded by the central bank. The debate thus shores up in a somewhat circular reasoning exercise. There is no doubt that the increasing purchasing power of Brazil's currency (more about that below) is warranted (see Macro Man for a semi-empirical account of this). But in a world where yield is the name of the game inflation targeting policies become virtual magnets for funds at the same time as the policy itself brings little relief in terms of inflation which springs from external headline pressures.

Lowering interest rates could help here but it would hardly stem the flow of carry trades and at the moment inflationary tendencies does not seem to warrant such moves. The crucial question is simply whether Brazil's fundamental growth path and inherent ability to create investment opportunities merit a base return of 11.75% (or similar)? In reality of course this is the same discussion as with the output gap as well as it is a discussion of what the base nominal rate actually consists of in terms of a measure of domestic investment capacity (i.e. a demand perspective) and/or foreign investors view on business risk (supply side perspective). We should also remember that the PPP model is an equilibrium model which predicts parity driven by inflation differentials. This is very difficult to discern in the context of Brazil though if we accept the premises that the economy itself is in a transition. More importantly, how well does the PPP fit the actual realities of the global economy? As recent as yesterday Stephen Jen wrote a neat piece in which he argued that currency appreciation might actually be inflationary in the current context of the global yield hunt. Through such a lens PPP hardly seems to be the right measure to gauge the ‘true’ value of the currency. Yet, as we turn to the next subject we shall see that the real issue here is not so much whether to be optimistic or pessimistic on Brazil's future economic prowess but rather whether Brazil should submit itself to rules of the game which would entail a transition towards a growth path by which internal investment exceeds internal savings, on a flow basis, ... in short, how much of a negative external balance can and should Brazil run?

As I will sketch out below I believe that Brazil can now, in broad terms, go two ways and it is in the distinct interest for Brazil herself and the global economy that Brazil is encouraged on to one road rather the other.

Letting the Capital Flow?

Consequently as we home in on the issues of global imbalances, Bretton Woods II, excess liquidity Brazil becomes an important litmus test for the choices many big countries with comparatively young populations face. Let us begin with the visual inspection to get us off the mark.

As can be observed the appreciation of the Real and the subsequent increase in purchasing power has resulted in a deterioration of Brazil's external balance although as I have argued before endogeous life cycle effects which spring from demographics may be equally as important. The trade balance in goods is not yet in the red most likely due to the push from commodities; if Brazil is now set to enjoy an oil windfall the trade balance in goods can perhaps be kept in the plus. The current account however is now firmly in negative on the back of deficit in services trade and the income balance. The latter subcomponent is not without interest here since a negative income balance is exactly what we would expect in the context of a country such as Brazil with a comparatively young population. If we look at the financing of the deficit we can see that the inflow of FDI has been steadily positive for a number of years which provides initial support for a solid base of financing. Portfolio investments have been somewhat more volatile which is quite as expected but the recent years seem to have seen a sustained and increasing inflow. After all, if I can make a graph of Bovespa such as the one above, so can others. The recent retrenchment of inflows seems to have come as a result of the jitter in credit markets. In this light what we have now is an important test case in terms of just how much capital that will leave Brazil in the context of global turmoil in credit markets. Conventional wisdom would hold that Brazil should suffer an exodus of capital but I am not so sure. In fact, given the amount of liquidity bouncing around I don’t see where portfolio managers would put their money even though, of course, the recent surge of commodities can in some ways be seen as a flight from traditional risky assets.

In terms of the amount of carry trade which seems to worry many an observer I have to note upfront that this is really difficult to read out of macroeconomic data. The real juicy data series here would be high frequency FX data on retail and institutional positions in the spot market. Having said that loans have indeed recently been an increasing part of the financing of the Brazilian external deficit which may hint to carry trading positions. If we further consult the subcomponents in the form of short term loans and currency deposits there seems to be an increasing volatility which may hint to a lot of activity on the short end of the maturity curve. This could be akin to carry trading activity. The big spike which shows a large repatriation of funds could be indication of unwinding of short positions in the money market as the realities of the credit turmoil became apparent. The main quibble with this carry trade analysis is that carry trade usually is carried out in the spot market where, in periods of low volatility, highly leveraged positions earn a hefty daily roll (or so I would imagine). In fact, I would imagine that such strategies frequently form a part of many beta (market) portfolios since when volatility is low and it is clear that the uncovered interest rate parity does not hold carry trading profits are too good not to be had. Obviously, since the credit turmoil washed in on the shores of financial markets I imagine that investors and hedge funds are becoming more careful.

If these are the realities of the current external position of Brazil is there something to be worried about? Should we fret a Brazil with an external deficit due to boom/bust effects from volatile capital flows?

A crucial first step to make here is to pin down the position in which Brazil finds itself with respect to the ability to issue debt since it forms an important part of the overall picture in terms of investor confidence. My feeling here is that a lot of the worry on behalf of Brazil is rooted in history and thus a once bitten twice shy mantle. In this way, many emerging economies can be said to suffer from the so-called original sin which alludes to their creditors’ demand that loans be repaid in foreign currency from the point of view of the issuing economy. Of course, this can quickly turn into a self-fulfilling prophecy since with a large stock of loans denominated in foreign currency a rapid deterioration of the fundamentals of the domestic currency may sharply increase the costs of servicing the debt. Nowhere is this more important than in the context of Latin America in general. On the back of the global recession in 1981-1983 and Volcker’s interest rate hikes the debt burden increased sharply for Latin American countries. Coupled with foreign investors’ flight to safety this pushed Latin America into the so-called debt crisis whose aftermath, among other things, included the subordination to IMF’s and the World Bank’s policy decisions (known as the Washington consensus) since these were the institutions coming to the aid of many the Latin American countries.

However, that was back in the 1980s. Today the global capital markets look decisively different. Not only do IMF’s reserves resemble little more than a minor Asian nation’s war chest but Brazil itself has changed strikingly. Recently, we got Brazil’s upgrade to investment grade by Standard and Poor and if you look at the debt to GDP ratio it does not come off as particularly alarming and has even fallen in the recent years. The ever careful analysts over at RGE’s Latin America Monitor do not seem too convinced however. Thomas Trebat consequently questions the soundness of S&P’s decision to grand Brazil the IG batch. Trebat’s principal worry is that the upgrade comes at a time when Brazil has all the cyclical winds blowing her way and consequently voices caution as to what may happen if Brazil suddenly sees less vibrant times. One example here could be a fall in commodity prices which would widen the external position even more as well as it could bring into question foreign capital’s willingness to buy Brazilian debt. Some part of Trebat’s analysis is no doubt perfectly valid and the investment grade feather should not be seen as an excuse to increase public spending without keeping the balance between receipts and expenses in check. Ultimately, it is also a question of what importance we ascribe to this investment grade edifice. Personally, I feel that the whole global sovereign debt structure may soon move into limbo since if you extrapolate the debt position of countries such as Italy, Japan, and Germany you end up in la-la land as it is clear that at some point, due to their rapid demographic decline, they simply won’t be able to pay. In such a perspective I certainly don’t see why Brazil should not, at least, enjoy the same categorical debt rating. Another theme which Trebat latches onto relates to Brazil’s growing foreign reserves which still cannot match the likes of the USD peggers but still amount to a good cushion. Trebat on the other hand sees it differently as he points to the rather technical point that the reserves, in terms of import coverage, represent a low and highly cyclical factor. I can see the mechanics here but I disagree with the point inferred from them. Basically, Brazil’s ability to sustain an external deficit must, at least in part, depend on the economy’s ability to generate positive NPV projects that can attract foreign capital. Also and perhaps equally as important demand in Brazil for imports must be seen in the context of other nations’ propensity to export and not within a rather arbitrary reference frame of the FX reserves’ import coverage.

In many ways, the mentioning of Brazil’s foreign exchange reserves brings us to the pinnacle of this discussion and Brazil’s role in the global economic edifice of macroeconomic imbalances, excess liquidity, and Bretton Woods II. In this way, the description above could seem to vindicate the idea that Brazil is now submitting itself fully to the global flow of funds. This is not quite true however.

As we can see there is a clear structural break in the pace of accumulation and if we home in on 2007 and 2008 in terms of monthly data this becomes clearer. The recent step-up in reserve accumulation clearly has something to do with the Real’s flight upwards against the USD and on several occasions have heard about Brazil’s plight in trying to stem the flow of capital inflows. We know in this context that the Central Bank on occasions have been dipping its toe engaging in countervailing market operations to put a leash on the Real. A year ago Brad Setser put words on Brazil’s possibilities as he asked …

I wonder when Brazil will start to contemplate an investment fund. Brazil's reserves are mostly in depreciating dollars and it too will soon have more than it really needs.

Now, this proposition is in itself very interesting since it latches on to the whole flurry about state backed investment vehicles known as sovereign wealth funds and where those bulging coffins of FX reserves should actually go. In Brazil’s concrete case the potential deployment of the reserves no doubt links in with the charts shown above of the external balance. As such, it does indeed seem tempting to try to reign in that deteriorating income balance through the placement of some 200 billion worth of reserves. Moreover, as Brad Setser points out most of the reserves is in USD which has not exactly been a fun asset to be stocking as of late.

In the grand scheme of things Brazil’s decision on this is intimately tied in with the discourse on global capital flows. At the moment Brazil is then a net importer of capacity through its negative external balance. If commodity prices suddenly take a dip this role is certain to be intensified. Is this necessarily a bad thing or perhaps more timely should we expect it to be otherwise? After all a negative external balance is not only about an endogenous process of over consumption and under saving but also about the country’s consumption profile as per function of its demographic profile which translate into distinct lifecycle dynamics. I, at least, tend to believe this to be the case. Also, if we accept this view we must also recognize that other countries will have a propensity to export as per function of their age structure. As I have argued many times before this perspective on global imbalances and how demographics affect capital flows is important to slot in alongside the more traditional narrative on Bretton Woods II and USD peggers.

With these points in mind we could return to my original question of what in fact Brazil should or can do. There are two options. One is to accept the rules of the game and let the capital flow freely in turn making sure to keep the domestic books in order. Another would be to ramp up intervention in the currency markets and to start deploying a state backed investment vehicle to scour the global asset markets for yield. Obviously, this is not entirely a choice to be made at this point but Brazil can still choose to look in either direction I feel. The road taken, be it forced or chosen, will matter a lot however. First of all it will matter for the global economy since the last thing we need at this point is for a country with so favorable growth conditions as Brazil to revert into a growth path driven by excess savings. If Brazil is currently passing through its demographic dividend and even striking oil in the process it also means that the country has a golden opportunity on its hands. One obvious policy proposal I have voiced in the context of other countries is to make sure that fertility does not plunge too far. If the US Census Bureau's estimate is valid and we are already at a TFR at 1.88 it indicates that the process is moving fast indeed. In terms of more plain vanilla economic reforms I would like to reiterate that institutions do in fact matter and now would thus be the time that Brazil enacted those much hailed liberalization reforms and developed efficient markets. In this context the growing size of the public sector as a result of commodity windfall should be watched I feel.

Keep Drilling; when an Ugly Duckling turns into a Swan?

As you can see above I am rather bullish on Brazil from a structural point of view. When I look at Brazil and its underlying economic fundamentals I think that the outlook looks remarkably well. Obviously, there is no automaton here and Brazil may soon enough be struck by a wayward lighting in the context of the global credit turmoil. Yet, current market events are also a test in this case since it will indeed be interesting to see just how much turmoil Brazil will feel if the sh*t does decide to hit the proverbial fan again. How much will the Real really fall and how much of those incoming funds will really leave? Pessimists tend to argue that nothing material has changed in Brazil’s context and that moving into the current patch of slow growth with a widening external deficit presents a large peril. I don’t see it like this at all.

As can be observed however in the references above not everybody agree. One important narrative here is that Brazil has enjoyed a remarkable stint of growth on the back of favorable global conditions which is now set to come to an end. Morgan Stanley’s Marcelo Carvalho recently voiced such an opinion in a slew of notes where he points out that Brazil, although better shielded than before, is far from immune from global financial headwinds. Far be it from me to disagree with a general note of caution. Things may indeed turn for the worse as we progress into the real economic effects of the financial crisis. However, the global economy is now in a position where it needs a Brazil with an external deficit much more than it needs a Brazil with a pegging exchange rate amassing and investing reserves.

I don’t think that Brazil was ever an ugly duckling and while we should not dismiss the voices of caution out there I remain positive on behalf of Brazil. It won’t be easy for Brazil to submit to rules of the global economy where money goes for top line yield. The potential skewness in terms of capital inflows may turn out to be quite large with all the downside risk it brings. However, I don’t quite see how it can be any other way given the economic fundamentals.

Appendix – So what the hell is a carry trade?

Carry trading links in to the principle in the UIP (uncovered interest rate parity) and essentially how this does not hold. The UIP states that the expected change in the spot rate must reflect the interest differential between the two currencies. More specifically the theory predicts that in the context of interest rate differentials the country with the high interest rate will see its currency depreciate (i.e. as it is assumed ex ante that the higher interest rate is a compensation for this depreciation). In formal terms:

If the UIP does not hold we can attempt a carry trade which essentially exploits the interest rate differential between the two countries. Note that in the example below our domestic investor (Ms Watanabe) lose money as the funding currency (the Yen) appreciates.

Assume:

USD/JPY: 120 (indirect quote)

USD/JPY: 115 (indirect quote) - after one month

Monthly USD rate: 0,6%

Monthly JPY rate: 0,012%

We progress in the following steps (amount invested 100 USD)

1. Borrow amount equal to 100 USD (i.e. 12000 yen) in domestic money market and convert spot to invest in the US (i.e. invest 100 USD in US money market)

2. After one month you will have earned 100USD*(1+0,06) which equals 100,6 USD.

3. Convert this amount back to Yen at the prevailing spot rate which in period two is 115. Thus, you convert back to get 100,6*115 which equals 11596 Yen.

4. Use the proceeds for the carry trade to pay back domestic loan. You will have to pay back 12000*(1+0,012) which equals 12014,4 Yen.

In this case we consequently lose as Japanese investors. The percentage lost can be calculated as follows. [(result from carry-payback on domestic loan)/result from carry]*100

i.e. [(11596-12014,4)/11596]*100 = -3,61%.

Note here that the main risk is for an appreciation in the funding currency/low rate currency. In essence there is an almost linear relationship between the % change in the spot rate and the % interest differential spread. I.e. the % deviation from the theoretical prediction of the uncovered interest rate parity. Let us demonstrate.

Over the period in question we observe an appreciation of the Yen to the tune of (115/120)-1 which equals 4,167%. The interest rate differentials earned amounts to 0,588% (0,6-0,012). Now, if we subtract 0,588 from the percentage change in the spot rate we get approximately the loss calculated above (i.e. 3.57%). As such the main risk is (and this is almost always the case) that when volatility is high the spot rate will change much more than can be compensated by the interest rate differential thus resulting in a large potential loss.

Digging deeper into the theory what would be the future spot rate implied by this information given an assumption that the UIP holds? Well, given the fact that the interest rate differential is in favor of the US we should expect the USD to depreciate against the Yen in order to negate the interest spread which could have otherwise been earned. This was what was built into the model but by how much should the USD depreciate as implied by the UIP? As a very rough and ready approximation we can say that the expected change in the exchange rate (E)ΔS is equal to the interest differential; in this case (0.6-0.012) which is equal to 0.588%. A depreciation of the USD of 0,588% would imply a USD/JPY rate of 120*(1-0.00588) which is equal to 119.304.

Brazil's Big PC Tune-in and Turn-on

2008-05-20T05:54:00.000-07:00

Brazil ranked as the fifth-largest PC market last year as bank credit offers, installment plans and growing prosperity fueled purchases, especially among low-income consumers. The shift is a boon to Hewlett-Packard and Dell Inc., the world's top PC makers. A tax break for PC makers has allowed them to cut prices and compete with unregulated sellers whose so-called gray- market machines dominated the market.

``You have a consumer market that's exploding as people have more access to credit,'' said Mario Anseloni, managing director of Hewlett-Packard's Brazil division. ``That's transforming the whole economy.''

Total Brazilian PC shipments rose 38 percent to 10.7 million units last year, according to research firm IDC in Framingham, Massachusetts. That marked the first time that shoppers bought more PCs than television sets in the country. Brazil's PC market, which ranked seventh in 2006, is poised to take third place by 2010, behind the U.S. and China. Japan and the U.K. are now third and fourth, IDC said.

Low-income families, eager for Internet access, are buying PCs at a faster pace than any other group, according to the Brazilian Internet Steering Committee. Spending by Brazilian businesses on software, services and computers rose 12 percent to $20.7 billion last year, IDC said. Brazil accounted for almost half of technology purchases in Latin America. Outlays may rise another 12 percent this year to $23.3 billion, IDC said, compared with 4 percent in the U.S.

Brazil, Petrobas, Investment Grade, Soya Exports, Shipbuilding and Consumer Demand - We Have Take-Off!

2008-05-17T01:40:00.000-07:00

Petroleo Brasileiro SA, Brazil's state-controlled oil company, continues to drill away and is now about halfway through its offshore Carioca deposit according to Mines and Energy Minister Edison Lobao said. Carioca forms part of Brazil's new pre-salt region, which lies beneath 2,000 meters of water and as much as 4,000 meters of seabed. The pre-salt region is also home to the Tupi field, which holds an estimated 8 billion barrels of oil and is the largest Western Hemisphere oil discovery in three decades. Lobao is also quoted as saying that Betrobras will need more time to determine the size of the Carioca field, so I suppose for the time being it's just a question of "on we go with the drilling".

Following up on my post about oil rigs earlier in the week, Petrobras have also announced plans to lease 146 Brazilian-built ships over 6 years to support offshore oil exploration and production. The purchases will be paid for in part with some of the $50 billion Petrobras has earmarked for investment on Brazilian oil equipment over the next four years. It is Petrobras' intention to offer long-term leases to companies that agree to build the ships in Brazil with 70 percent to 80 percent local material.

Petrobras expects to spend $112 billion on expansion in the 2008-2012 period, helping support efforts by the government, its controlling shareholder, to maintain GDP growth rates of 5 percent or more a year. The ship-building plan is part of an industrial policy program which was announced by Brazilian President Luiz Inacio Lula da Silva earlier last week.

To boost shipbuilding in Brazil, Petrobras is helping finance the construction of new shipyards and the renovation of old facilities, including yards in Rio Grande in Brazil's south and in Suape, near the northeastern port city of Recife.

In the 1970s, Brazil was the world's second-largest shipbuilder. Its industry was almost wiped out by the oil shocks of the 1980s, debt defaults and inflation. A key plank in Lula's first-term victory in 2002 was revitalization of the shipbuilding industry. A $3 billion plan for tankers is already under way.

Clearly this rapid expansion is being financed by the ongoing commodities boom, and sustainability will depend with some high degree of sensitivity on the evolution of that boom. Brazilian exports have tripled since President Luiz Inacio Lula da Silva took office in January 2003 on rising world demand for soybeans, iron-ore, beef and cars. The economy expanded 5.4 percent in 2007, the fastest rate in three years, buoyed by rising exports and falling interest rates.

Obviously were there to be a negative commodities shock caused by a rapid slowdown in global growth and large scale capacity overhangs then all of this could go the same way as the 1908s boom, but there are reasons for thinking that this time round - and despite a possible short term slowdown in global growth in 2009 and a temporary downward adjustment in commodity prices - that the mid- to longer-term outlook (5 to 10 year horizon) is pretty bullish. I have elaborated on some of the relevant points in this article/post.

Also Bloomberg today have a very interesting interview with Roberto Egydio Setubal, head of Brazil's second-biggest non-government bank (Banco Itau Holding Financeira). Setubal said his nation is in a "transformation" that's creating the best conditions for business he's ever seen.

Brazil, Latin America's largest economy, has broken a cycle of boom and bust because of rising commodity exports and will enjoy sustainable annual growth of 4 percent to 5 percent, Setubal said in an interview this week in Sao Paulo. An investment-grade rating granted by Standard & Poor's last month will make Brazil a magnet for foreign investors.

Setubal is expanding abroad and at home, capitalizing on the 31 percent rise in Brazil's real against the dollar since May 2006, the collapse of inflation from almost 5,000 percent in 1994 to 5 percent now, and losses at global competitors. He's opening offices in the Middle East and Asia, hiring bankers from Deutsche Bank AG and Merrill Lynch & Co. and looking to buy Brazilian assets that may get dumped by foreign firms at discount prices.

``I don't see Brazil going back,'' the 53-year-old chief executive officer said at his office in Sao Paulo. ``The strong currency and investment grade are here to stay.''

Brazil's $1.07 trillion economy grew 5.4 percent in 2007, the fastest in three years. Controlled inflation led the central bank to cut the benchmark interest rate to as low as 11.25 percent in September, encouraging people and companies to borrow record amounts and boosting profit at Brazilian banks. Lending has increased every month since February 2004 to 992.7 billion reais ($600.8 billion) in March.

Brazil, the biggest debtor among emerging markets for decades, became a net foreign creditor in January after international reserves surged to a record $195.8 billion.

Brazil was the third-biggest market for initial public offerings globally in 2007, according to Bloomberg data. This year, only three companies went public, reflecting the reduced appetite for risk by international investors. Foreign investors bought 75 percent of the shares sold in public offerings in Brazil last year and 49 percent of the ones sold this year, according to the local stock exchange, Bovespa.

``This is a big change in Brazil,''Setubal said. ``Politicians used to believe spending was very popular and nowadays they learned that stable prices is much more popular.''

Update Tuesday 20 May 2008

I another "sign of the times" piece of news Petroleo have today passed both Microsoft and Industrial & Commercial Bank of China to become the world's sixth-largest company by market value.

Petrobras, as Brazil's state-controlled oil producer is known, climbed 3.8 percent to 50 reais, pushing its capitalization to 487.9 billion reais ($295.6 billion), according to data compiled by Bloomberg. Microsoft, which yesterday revived the possibility of purchasing Yahoo! Inc., fell 1.8 percent to $29.46, lowering its overall value to $274 billion. ICBC's A shares listed in Shanghai rose 0.2 percent to 6.22 yuan. The market value of the world's largest bank is 2.02 trillion yuan ($289.3 billion).

Six of the top 10 companies by market value are energy or mining companies, while three are from China.

Petrobras, which has seen its market value quadruple since 2004, is worth 41 percent less than Exxon Mobil, the world's largest company at $498.6 billion. By overtaking Microsoft, Petrobras also becomes the third-largest company in the hemisphere after Exxon and General Electric.

Brazil Retail Sales March 2008

2008-05-15T08:56:00.000-07:00

Brazil's retail sales rose 11.4 percent in March, capping the strongest quarter on record, as a credit and investment boom fuels what is Latin America's largest economy. The March gain was led by computer and office equipment sales, the national statistics agency said today in Rio de Janeiro. That put the quarterly expansion at 12 percent, the most since the agency began records in 2000.

Policy makers last month raised the overnight rate a half- point to 11.75 to rein in inflation. Economists are predicting the central bank will increase lending rates further to 13.25 by year end, according to the median forecast in a central bank survey of 100 financial institutions published this week.

Brazilian consumer prices rose 0.55 percent in April, the most in 2008 to date. The annual rate of inflation was 5.04 percent last month, above the mid-point of the central bank's target of 4.5 percent target plus or minus 2 percentage points.

Petrobas Deep Sea Drilling Capacity

2008-05-15T08:49:00.000-07:00

Petroleo Brasileiro SA, Brazil's state-controlled oil company, has reportedly leased about 80 percent of the world's deepest-drilling offshore rigs to explore prospects including the Western Hemisphere's biggest discovery in decades. Petrobras is hiring rigs that can drill in at least 3,000 meters (9,800 feet) of water according to Chief Executive Officer Jose Sergio Gabrielli. The world has 21 such vessels, according to Rigzone.com, which tracks the offshore drilling industry.

Petrobras is reportedly negotiating for as many as 17 more vessels to probe the Tupi discovery and neighboring fields. The company already controls almost seven times as much capacity as the next biggest user of rigs that can drill in 7,500 feet of water. U.S. and European oil companies are likely to have to pay $50,000 more per day to lease deepwater rigs during the next three years because Petrobras has already contracted for so much of the worldwide fleet. Such units are designed to cope with high seas and hold equipment needed to bore beneath the seafloor and identify oil and gas deposits as much as 6 miles below the ocean surface.

Petrobras has signed leases this year for six deepwater rigs, more than twice as many as any other producer, according to Dahlman Rose. The contracts have an average duration of five years and four months at rates of $410,000 to $580,000 a day.

Petrobras plans to start pumping oil in the first quarter of 2009 from Tupi, the biggest find in the Americas since Mexico's 1976 discovery of the Cantarell field in the Gulf of Mexico. Petrobras also is evaluating as many as seven nearby fields, including the Carioca prospect, according to Gabrielli who said Petrobras began signing multiyear drilling leases as far back as 2004 because it foresaw a shortage of deepwater vessels.

Well done Petrobras.

Brazil Inflation April 2008

2008-05-09T09:02:00.000-07:00

Brazilian consumer prices had their biggest increase in four months in April because of higher food costs. Consumer prices, as measured by the government's benchmark IPCA index, climbed 0.55 percent last month from 0.48 percent in March, the government's statistics agency said in a report distributed today in Rio de Janeiro. Brazil's inflation rate in the 12 months through April was 5.04 percent.

Brazil's central bank policy makers increased the benchmark interest rate for the first time in three years last month in an attempt to contain inflation. Inflation is emerging as a threat to economic stability after years of ``quiescence,'' and officials must be wary of policies that stoke consumer prices, the International Monetary Fund's deputy chiefJohn Lipsky said yesterday.

``This inflation speed-up must be taken seriously as it creates potentially significant challenges to economic stability,'' John Lipsky, the IMF's first deputy managing director, said in a speech in New York today. A return to 1970s-style high inflation and rising price expectations ``cannot be discarded out of hand,'' he said.

While the surge in energy and other commodity prices is the main cause of the danger, low central bank interest rates and a falling dollar are also contributing, Lipsky said.

Brazil's food prices climbed 1.29 percent in April from the previous month, up from the 0.89 percent increase in March. The central bank targets inflation of 4.5 percent plus or minus 2 percentage points.

Brazil Government To Auction Rice in An Attempt To Stabilise The Price

2008-05-05T01:42:00.000-07:00

Brazil's state-owned National Supplies Co. will auction 55,000 metric tons of rice today, the country's ministry of agriculture said yesterday. The government currently has a stock of 1.4 million tons of rice, equivalent to 10 percent of Brazil's annual consumption. The stocks to be auctioned are held in Rio Grande do Sul and Santa Catarina states.

The measure is an attempt to keep prices down and establish a reference price for rice, the statement said, citing Paulo Morceli, basic foods manager of Conab, as the supplies company is known. According to information on the Conab Web site, the rice will be auctioned at 28 reais ($16.98) for a 50-kilogram bag.

The most recent decision of the Brzilian government is just one more example of the way national governments are coming under pressure to offer a response to what is now a global problem: the rising demand for energy and agricultural products. One of the obvious reasons for the sharp rise in demand for agricultural products is the rise in living standards of much of the planet's population when coupled with the fact that food consumption forms a much greater part of the extra income earned in a poor country than it does in a rich one. As a rough and ready rule, the poorer the country the greater the share of every extra dollar earned which will be spent on food.

The poorest of the world’s poor are the 1.1 billion people with income of less than a dollar a day. Around 700 million—almost two-thirds—of these people live in rice-growing countries of Asia. Rice, the dominant staple in Asia, accounts for more than 40% of the calorie consumption of most Asians. Poor people spend as much as 30–40% of their income on rice alone. Ensuring sufficient supplies of rice that is affordable for the poor is thus crucial to poverty reduction. Given this, the current sharp increase in rice price is a major cause for concern.
International Rice Reasearch Institute

Rice As An Example of What is a Global Problem

Thailand's benchmark 100 percent B grade white rice was quoted at a record high of more than $1,000 per tonne recently as a result of constrained supply and rising demand as governments in one rice producing country after another consider taking steps to restrain exports. The price was up from around $950 per tonne a week earlier and $383 per tonne in January. Thailand is the world's number one rice exporter and exports almost twice as much rice as India, its nearest rival.

(please click over image for better viewing)

In fact Thailand produces about 22 million tons of milled rice annually and exports about 10 million tons. The sharp spike in prices was produced by a report from a World Bank official earlier in the week, and prices did subsequently fall back again after Finance Minister Surapong Suebwonglee siad reassuring words to the effect that Thailand has no plans to limit rice exports.

``If a key exporter like this limits foreign sales, it would be very much like Saudi Arabia reducing oil exports,'' said James Adams, vice president of the bank's East Asia and Pacific department.

Several of the world's food producers - including Egypt, Vietnam, China and India - have recently placed restrictions and limits on food exports in an attempt to contain domestic prices and to reduce protests from urban consumers. Brazil - which this year should harvest an 11.9 million ton rice crop, up from 11.3 million last season - was busy backtracking at the end of last week on an earlier decision to restrict exports. Brazil's Agriculture Minister Reinhold Stephanes followed the example of his Thai counterpart and stated that Brazil would not, in the end, curb exports. Pakistan is also stepping up to the plate in what has virtually become a global emergency and has stressed it has plans to export 2.5 million metric tons this year, according to farm minister Chaudhry Nisar Ali last week.

Vietnam, however, which is the world's third-biggest rice exporter (after Thailand and India), is going to go ahead and reduce rice shipments by 11 percent this year to 4 million tons to ensure supplies and attempt to curb inflation that is its highest in more than a decade (see more on Vietnam in this post). In doing this Vietnam is following in the footsteps of the world's number two rice exporter - India - whol last month put significant restrictions on the export of rice.

Indonesia, which is the world's third-largest rice producer (as opposed to exporter), also intends to hold back surplus rice from export this year in order to bolster domestic stockpiles, according to President Susilo Bambang Yudhoyono speaking on April 18. Export restrictions are particularly threatening to the large rice importers whose populations ofetn depend of the staple for their basic food supply. The Philippines was the world's largest largest importer last year, followed by Nigeria. The Philippines received offers for only two-thirds of the grain it sought to buy on April 17.

Rice is in fact - after wheat - the world's second cereal product. At the beginning of the 1990s, annual production was around 350 million tons and by the end of the century it had reached 410 million tons. World production totaled 395 million tons of milled rice in 2003, compared with 387 million tons in 2002. This reduction in total output which occured around the turn of the century is largely explained by the strong pressure which have been placed on land and water resources, which led to a decrease of seeded areas in some Western and Eastern Asian countries.

Production is geographically concentrated in Western and Eastern Asia, and these retgions now account for more than 90 percent of world output. China and India, between them host over a third of the global population and supply over half of the world's rice. Brazil is the most important non-Asian producer, followed by the United States. Italy ranks first in Europe.

Growth in rice production has, however, been far from linear. Historically, production in ex-Japan Asia has increased steadily but at the end of the 1990s Asian output started to stagnate and in particular in China where rice areas have declined as a consequence of water scarcity and competition from more profitable (oleaginous) crops.

The international trade in rice is estimated between 25 and 27 million tons per year, which is only a very small part (5-6 percent) of total world production., and this makes the international rice market one of the smallest in the world when compared with other grain markets such as wheat (113 million tons) and corn (80 million tons). It also means that the price level is very sensitive to comparatively small changes in the level of exports coming from some key exporters. As can be seen from the chart below, global stocks of rice have declined substantially since the turn of the century. While in part this can be explained by product market efficiencies and the sustainability of lower inventories, it does mean that the sensitivity of the traded rice price to any supply side products has risen considerably of late. Also of note is the way in which stocks of rice have fallen inside China, reflecting the problems the country is having in finding the food to meet the needs produced by the rising living standards of its population (with pressure to transfer land from rice production to other crops or to commercial uses).

(please click over image for better viewing)

Besides the traditional main exporters (Thailand, Vietnam, India and Pakistan), a relatively important but still limited part of the rice which is traded worldwide now comes from developed countries in Mediterranean Europe and the United States. There are two major forces behind this: new food habits in developed countries and new market niches in developing countries.

(please click over image for better viewing)

As we have seen, rapid eceonomic growth across Asia is now putting enormous pressure on food prices. Consumer prices in China, the world's fastest-growing major economy, soared 8.7 percent in February, the fastest pace in 11 years. In Thailand, inflation is running at 5.3% (March) but this is still enough to worry the government, while in Vietnam, inflation jumped to 19.4 percent this month, the fastest pace since July 1995. Vietnamese food prices jumped 30.6 percent from a year ago, with the component including rice leaping 30.1 percent from March 2007 and 10.5 percent from February 2008.

The Food and Agriculture Organization said in February that 36 nations including China face food emergencies this year. World rice stockpiles may total 72.1 million metric tons by end of July, the lowest since 1984, the U.S. Department of Agriculture said.

Prices of agricultural commodities are also being driven by investors looking for alternatives as the dollar and stocks drop. Global investments in commodities rose almost 33 percent to $175 billion last year, according to Barclays Capital. The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials climbed to a record on Feb. 29 and is up 16 percent so far this year.

But not everyone wants to restrain exports. Rubens Silveira commercial director of Rio Grande do Sul state's Rice Institute said the state - Brazil's No.1 rice grower - should export about 10 percent of this years crop at current prices, and argued that these exports will both help support domestic prices and provide incentives to producers to invest in improving output. Mainstream economists tend to agree with him:

``Limiting exports is pure politics and bad economics since export controls destroy the incentive of farmers to plant more rice,'' Nobel laureate Gary Becker, an economist at the University of Chicago, said in an interview. ``But governments tend to favor the urban workers over the farmers, since urban groups are more politically active.''

And it isn't only rice that is under pressure. Wheat prices are also rising fast. Wheat for July delivery was trading at around $8.1750 a bushel on the Chicago Board of Trade last week, down from the February peak, but still up 62 percent in the past year. Global wheat production is expected to rise 6.8 percent in the 2008-09 season as record prices spur farmers to sow more, the International Grains Council said last week. Wheat output is expected to climb to 645 million tons from 604 million tons this season, according to the London-based council. Inventories are forecast to gain 12 percent to 128 million tons, led by an increase in the U.S.

Global wheat production will advance approximately 6 percent in 2008 over 2007 - to an all-time high of 640 million metric tons - as record prices spur farmers to grow more according to Rabobank estimates. That is 37 million metric tons up on output in 2007 . Plantings will also gain 5 percent and global stockpiles will rise 9 percent they suggest. But then we might like to note that even with a 6% growth rate in output (which is no mean rate of increase) prices have still risen by 62 percent. This gives us some measure of the scale of the problem.

The prices of wheat, corn, rice and soybeans have all risen to record levels this year on shrinking global stockpiles and rising demand from the food, feed and biofuel industries. The rally has meant higher costs for everything from Italian pasta to Japanese noodles, and spurred street protests from Haiti to Ivory Coast.

``We have been neglecting our basic rice production infrastructure and research and development for 15 years,'' said Robert Zeigler, director-general of the International Rice Research Institute in the Philippines. ``

India's output is increasing rapidly, but so is demand there, as high rates of economic growth boost incomes. Indian wheat output may climb to 76.8 million tons this year, according to India's agriculture secretary PK Mishra. That's up on the 74.8 million tons estimated in February and up from 75.8 million tons last year. Indian rice output is also expected to rise to a record 95.7 million tons, from the 94.1 million tons estimated on Feb. 7. That's 2.5 percent more than the 93.6 million tons produced a year earlier, but still far from enough to stabilise Indian wholesale prices which are now running at the fastest pace in nearly three years.

I have a much fuller study of the whole issue of global living standards, population growth and agricultural output in my "Food Prices, Farmland, Global Rebalancing and Rural Labour Shortages" post on the Demography Matters blog.

Petrobas Stock on the Way Up

2008-05-01T23:39:00.000-07:00

The biggest oil discovery in the Western hemisphere in three decades and speculation about the existence of an even larger deposit has turned Petroleo Brasileiro SA into the world's most expensive energy producer, at least in terms of its share price to profits ratio. Petrobras shares currently trade at 17.2 times profits after rallying 87 percent over the last year. (By way of comparison Petrobras's price-earnings ratio was 8.77 a year ago and under 5 back in June 2004).This makes Petrobas shares effectively twice as expensive as Russia's Lukoil and or the netherland's Royal Dutch Shell, and 50 percent more expensive than Exxon Mobil - which only this week announced that total output was down 10% in the first three months of 2008 when compared with a year earlier - as investors focus on the Rio de Janeiro-based company's oil finds rather than its falling profits. Lukoil trades at 7.77 while Royal Dutch Shell is at 7.6 times earnings. Irvine, Exxon's PE ratio is 11.60. The remainder of the world's 10 largest oil producers are also cheaper than Petrobras at this point.

Exxon’s overall oil and gas production fell 5.6 per cent from the year-earlier quarter. Production in Africa, a key new area of investment, fell 20 per cent as high oil prices and contract stipulations forced it to hand over more of its production to host country governments. Venezuela’s nationalisation of its oil fields also hurt the group’s volumes, as did declines at Canadian gas fields. Unlike Royal Dutch Shell, which is stressing its research in second generation biofuels, and is a leader in making natural gas into transport fuels, Exxon has long argued that traditional alternatives, such as wind power, have proved uneconomic. But it says it is researching future fuels that it is less ready to talk about publicly. The figures are likely to increase pressure from investors for Exxon to raise dividends. It devoted $8bn to buying back its own shares and $1.9bn to dividends while adding another $6.9bn to its now $40.9bn cash pile.

The Brazilian government's controlling stake in Petrobras may add to the stock's attraction on speculation the company will get favorable treatment in exploiting oil. President Luiz Inacio Lula da Silva's administration pulled 41 exploration licenses from an auction after Petrobras found the Tupi oil field Nov. 8, a discovery that caused the stock to jump 14 percent, the biggest rise in nine years. Tupi, 155 miles (250 kilometers) off Brazil's coast, may have 8 billion barrels of recoverable oil.

Petrobras shares rose another 5.6 percent on April 14 after the head of Brazil's oil agency said the offshore Carioca prospect may hold the equivalent of 33 billion barrels of crude, large enough to be the world's third-biggest field. Chief Executive Officer Jose Sergio Gabrielli said later Petrobras is still exploring to determine Caricoa's size.

The strong performance by Petrobas helped lead Brazil's Bovespa to a 6.3 percent jump on April 30, making it the world's best-performing equity index this year among the 20 biggest markets, after Standard & Poor's assigned the country an investment grade credit rating. Brazilian markets were closed yesterday for a holiday.

Petrobras, now the world's ninth-biggest company, with a market value of $248.3 billion, is still half the size of Exxon, the largest oil producer. However Petrobas's valuation surpassed PetroChina's last November - after shares of the Beijing-based oil company posted their biggest monthly retreat ever.

Fourth-quarter profit at Petrobras declined about 3 percent as costs increased faster than sales. The company produced an average 2.34 million barrels of oil, natural gas and natural-gas liquids a day in March, down from 2.35 million barrels a day the month before.

However Brazil's biggest company by market value looks less expensive when viewed relative to the oil it owns. Petrobras trades for the equivalent of 34.91 reais (or $20.58) per barrel of proven reserves. That's cheaper than Exxon's $22.19 a barrel and Royal Dutch Shell's $23.80 per barrel of oil equivalent in reserve. Under this measure, Petrobras is still more expensive than BP and Lukoil, which fetch $14.75 and $4.71 a barrel.

It should not be forgotten however that pumping oil from the most recent Brazilian discoveries, parts of which are 32,000 feet (9,800 meters) below the ocean's surface, will require boring almost twice as far down as the world's deepest offshore well. So there are tachnological issues to take into account here. But still, once these are resolved (assuming they are) Petrobas seems to have its hands on rather a lot of oil at just the time when global demand seems set to rise and rise.

Brazil Debt Raised To Investment Grade By Standar and Poor's

2008-05-01T08:59:00.000-07:00

Brazil yesterday received an investment grade credit rating for the first time from Standard & Poor's, sending the benchmark stock market index to a record and yields on dollar bonds to an all-time low.

Brazil, whose economy grew last year at the fastest pace since 2004, should be able to maintain annual growth of as much as 4.5 percent, S&P said in a statement. The country's long-term foreign currency debt rating was raised to BBB-from BB+. Foreign direct investment, which reached a record of $34.6 billion last year, is likely to cover the country's current account deficit this year, the ratings company said.

Brazilian exports have tripled since President Luiz Inacio Lula da Silva took office in January 2003 on rising world demand for soybeans, iron-ore, beef and cars. Brazil, once the world's largest emerging-market debtor, became a net foreign creditor for the first time in January as international reserves swelled to a record $171.6 billion from $37.6 billion at the start of Lula's first term. Credit-rating increases usually result in lower borrowing costs for nations and companies.

The Bovespa climbed 6.3 percent to 67,868.46 in Sao Paulo trading, making the index this year's best performer among the world's 20 biggest stock markets. The real strengthened 2.6 percent to 1.6623 versus the U.S. dollar, the biggest one-day gain in the currency since Aug. 17, when the Federal Reserve unexpectedly cuts its discount rate.

The yield to the 2015 call date on Brazil's 11 percent bonds due in 2040 fell by 21 basis points to 5 percent in New York, according to JPMorgan Chase & Co. The price rose 1.602 cents on the dollar to 136.301 cents, the highest since the country issued the securities in 2000.

Brazil's federal debt was 1.36 trillion reais ($813.8 billion) in March, the Treasury said April 24. Foreign debt was 106.3 billion reais. Brazil is rated Ba1, or one level below investment grade, by Moody's Investors Service. Fitch Ratings ranks the country at BB+.

Brazil's rating is now in line with those of Colombia and Romania and is four steps higher than its level in July 2002. In Latin America, Mexico and Chile, whose economies are smaller than Brazil's, have a higher rating.

Brazil's economy expanded 5.4 percent in 2007 and is expected to grow 4.6 percent in 2008, according to estimates of about 100 economists in a central bank survey.

The acceleration in growth prompted Brazil's central bank on April 16 to raise its benchmark lending rate for the first time in three years as inflation accelerated above their 4.5 percent target. Rising food costs and consumer demand pushed inflation to a two-year high of 4.73 percent in March from an eight-year low of 3 percent in the prior year's period. Economists now expect policy makers to raise their target rate to 13 percent by year- end, with annual inflation estimated to reach 4.79 percent this year, a central bank survey published April 28 showed.

High government spending and public debt remains Brazil's ``foremost credit weaknesses," S&P said. Net government debt reached 47 percent of the country's gross domestic product in 2007, ``higher than in similarly rated credits and above 20 percent for the BBB median,"

Update

The FT had an interesting article on this topic today. Perhaps the central point was this one:

Brazil is still a long way from the top-notch triple A ratings of the developed economies, such as the US, Britain and Germany, but its rise out of junk or speculative grade is important as it allows some of the biggest pension and insurance funds to invest in the country. Many of these big institutions are not allowed to channel funds into countries rated below investment grade because of the dangers that these economies will default, losing their clients vast sums of money.

Also today Moody's announced their view on investment grade for Brazil. Moody's - which rates Brazil's foreign currency debt Ba1, one rank below investment grade - stated that Brazil must reduce debt and spending while lengthening the maturity of its government securities before it can earn an investment-grade credit rating. Standard & Poor's last week raised Brazil to investment grade, citing pragmatic fiscal policies and stronger economic growth.

``There are two elements that are important when you move a rating -- you need all the support behind the improvement of fundamentals, and those elements are there in Brazil,'' according to Mauro Leos, vice president and senior credit officer at Moody's in New York. ``You also need a serious reduction of liabilities.''

An increase in government spending as a percent of gross domestic product over the last five years, largely because of higher pension payments, is the principal challenge, according to Moody's.

``The upward trend in primary spending, which went from 15 percent of GDP in 2003 to 18 percent in 2007, reflects the evolution of pension payments.... Still, Brazil's debt ratios remain high relative to the Baa investment-grade peer group and, in some cases, when compared with the Ba non-investment-grade peer group......Standing at some 56 percent of GDP, Brazil's government debt ratio compares with a 34 percent debt-to-GDP ratio for the Baa investment-grade peer group.''

Moody's will evaluate improvements in Brazil's fiscal accounts through the third quarter this year and then decide if the country can receive a positive outlook.Should a positive outlook be awarded, Brazil would then be placed under review before it could claim an investment rating.

Pension payments, which account for more than 40 percent of primary government spending, have increased in absolute and relative terms because more than half of benefits paid are indexed to the minimum wage, Moody's said. The minimum pension has experienced over 10 percent real annual growth since 2003 when President Luiz Inacio Lula da Silva took office.

A commitment to primary surplus targets and declining interest rates have been helping contain the debt-load, and the ratio of gross debt to GDP declined to 55.6 percent in 2007 from 58.4 percent in 2003.

Brazil Central Bank Raises Interest Rates

2008-04-16T23:38:00.000-07:00

As indicated on this blog yesterday Brazil’s central bank have increased interest rates - although they surprised markets with a 0.5 percentage point increase, double the amount most economists expected. The rise brought to an end more than two years of rate cuts amid mounting concerns that consumer price inflation will exceed the government’s target this year.

The bank’s monetary policy committee (Copom) had held its target overnight rate, known as the Selic, at 11.25 per cent since the autumn of last year, after two years of cuts from a peak of 19.75 per cent. The bank in October held the benchmark rate at 11.25 percent, ending the longest monetary easing cycle since Brazil adopted inflation targets in 1999.

The real closed at R$1.66 to the dollar on Wednesday, its strongest level in nine years, on the back of the expected rate increase.

The Copom said it had opted for a 0.5 point increase as it wished to act immediately by introducing significant part of the monetary tightening that would be necessary to reduce the risk of rising inflation and reduce the size of the total increase to be implemented in the Selic rate.

Latin America's biggest economy grew 6.2 percent in the fourth quarter of 2007, more than twice the pace of the past decade. Bank lending, which has almost doubled in the past three years and is fueling purchases of cars and other big-ticket items, is powering economic growth and sparking inflation. Brazil's economy expanded an average of 3.8 percent from 2003 to 2007, the second slowest in South America. Argentina led the region with 8.8 percent, followed by Venezuela with 7.9 percent and Uruguay with 6.9 percent, according to International Monetary Fund data.

A surge in food prices and rising consumer demand have pushed annual inflation in Brazil from an eight-year low of 3 percent in March 2007 to a two-year high of 4.73 percent in March, above policy makers' year-end target for a third month. Brazil has the second slowest inflation in the region, after Mexico, according to Bloomberg data. In Chile, inflation has jumped to 8.5 percent in March from 2.6 percent in the year- ago month.

Over the past two years consumer demand has taken over from the export sector as the main driver of growth in Brazil. Falling unemployment, rising salaries and cheaper credit have driven a consumption boom, especially of credit-sensitive items such as cars and household electrical goods. About 2.4m vehicles were sold in Brazil last year – an increase of nearly 28 per cent over 2006. Strong demand continues across the economy this year. Retail sales in February were up by 12 per cent, year on year.

Lending by banks has climbed at least 20 percent in each of the past three years. Car sales jumped 30.5 percent in February from the year ago month, while home appliance and furniture sales climbed 17.8 percent, according to figures from the national statistics agency.

Brazil Retail Sales February 2008

2008-04-15T23:05:00.000-07:00

Brazil's retail sales in February rose at the fastest pace since June 2004, raising expectations that the central bank will raise interest rates tomorrow. Retail, supermarket and grocery store sales, as measured by the volume index, jumped 12.2 percent in February from February 2007, the national statistic agency said this morning. The pace of economic expansion does seem to be slowing, however, since seasonally adjusted sales fell 1.5 percent on a month by month basis in February from January. Sales in the quarter which ended in February were up 0.3 percent compared with a 1.4 percent jump in the previous quarter.

Policy makers, led by central bank President Henrique Meirelles, are now widely expected to increase the benchmark interest rate tomorrow for the first time in three years. The consensus seems to be an expectation for the bank to increase the rate to 11.50 percent from the current record low 11.25 percent.

Brazil's annual inflation has steadily accelerated since November. Consumer prices in the 12 months through March rose 4.73 percent, the highest since March 2006, and greater than the central bank's target of 4.5 percent, plus or minus 2 percentage points.

What is Latin America's biggest economy grew 6.2 percent in the last quarter of 2007, more than twice the pace of the last decade. Commodity exports and bank lending, which has almost doubled in the past three years and is fueling purchases of cars and other big-ticket items, is powering economic growth.

Yields on interest-rate futures rose after the report was released. The yield on the overnight contract for May delivery increased 2 basis points, or 0.02 percentage point, to 11.43 percent.

The yield on Brazil's zero-coupon bonds due in January 2010 rose 4 basis points to 13.37 percent, according to Banco Bradesco SA.

Brazil's real gained on the news and was up 0.2 percent to 1.6832 per dollar at 4:48 p.m. New York time, from 1.687 yesterday. It had risen by as much as 0.6 percent earlier in the day. Brazil's currency has appreciated by 20.2 percent over the past 12 months, the second-best performance (after the Swiss franc) among the 16 most traded currencies.

Brazil's Bovespa index also rose for the first time in three days, gaining 464.94, or 0.8 percent, to 62,618.39. 37 stocks rose and 26 fell.

Brazil Inflation March 2008

2008-04-09T23:10:00.001-07:00

Brazil's annual inflation rate, as measured by the government's IPCA index, climbed to 4.73 percent in March, the highest rate in two years and above the central bank's 4.5 percent annual target. Consumer prices rose 0.48 percent in the month, increasing speculation the central bank will raise interest rates next week for the first time in three years.

Yields on Brazil's overnight interest-rate futures contract for January delivery jumped 10 basis points to 12.46 percent. That's more than 1 percentage point above the central bank's benchmark overnight rate of 11.25 percent.

Central bankers considered raising the benchmark rate last month to slow demand and curb inflation, minutes of the march 4-5 meeting showed. Policy makers boosted their 2008 inflation forecast on March 27 to 4.6 percent, above their annual target rate.

Brazil's real strengthened for a seventh day, gaining 0.3 percent to 1.6885 per dollar. It has advanced 19.9 percent in the past 12 months, the third-biggest gain among the 16 most-traded currencies against the dollar.

Brazil Industrial Output February 2008

2008-04-02T00:50:00.000-07:00

Brazil's industrial output climbed the most in four months in February, increasing expectations policy makers may raise interest rates to rein in the economy's expansion as inflation remains above the central bank target. Output climbed 9.7 percent in February from February 2007, the government said today. It was the 20th straight gain in year-on year industrial production. The annual rate of increase for 2007 was 6 percent, twice the pace of 2006, this was the fastest rate since 2004, when output grew by 8.3 percent.

Cheaper credit and record low unemployment rates have bolstered domestic demand and industrial production. The February gain was more than the revised 8.7 percent increase in January. Driving overall production up in February was the output of capital goods, which rose 25 percent from the year ago month, the agency said. Production of durable goods, such as cars, jumped 20.7 percent.

Brazil's trade surplus also widened to $1.01 billion in March from $882 million the previous month, the Trade Ministry said in a separate announcement. However it is far from clear how this position will evolve moving forward, and Brazil's trade surplus is expected to narrow to $27 billion this year from $40 billion in 2007, according to the most recent central bank forecast. The smaller surplus may lead Brazil to have a current account deficit in the region of $12 billion this year compared with a surplus $1.46 billion surplus in 2007, the bank said.

Coffee exports from Brazil, the world's biggest producer, also weakened last month, falling 5.4 percent in March from February, according to Brazil's Coffee Exporters Council. Brazil shipped 1.72 million bags of coffee beans last month, compared with 1.82 million bags a month earlier.

On the other hand Brazilian inflation accelerated in annual terms in February - although it slowed slightly in monthly terms when compared with January. Consumer prices, as measured by the benchmark IPCA index, rose 0.49 percent in February, compared with a 0.54 percent increase in January, the national statistics agency said last month. The annual inflation rate in February remained above the central bank's 4.5 percent target for a second straight month. Inflation quickened to 4.61 percent in the 12 months through February from 4.56 percent in the previous period.

The central bank said in the minutes of its March 4-5 meeting it considered raising the benchmark interest rate to hold demand, as inflation remained above the 4.5 percent annual consumer prices target. Policy makers, led by central bank President Henrique Meirelles, target annual inflation of 4.5 percent, plus or minus 2 percentage points to accommodate unexpected price shocks.

At the bank's March 4-5 meeting, the board considered raising rates for the first time since October, when they snapped the longest monetary easing cycle since the adoption of inflation targets in 1999. The board voted unanimously to keep the rate unchanged at 11.25 percent for the fourth straight meeting. On March 27, policy makers in their quarterly report increased their forecast for 2008 inflation to 4.6 percent from a previous 4.3 percent.

Brazil's Central Bank Raises Inflation Forecast

2008-03-28T00:24:00.000-07:00

Brazil's central bank sees 2008 inflation rising above its annual target of 4.5 percent, increasing speculation the monetary policy board may raise interest rates in the months ahead in an attempt to contain prices. Policy makers increased their inflation forecast for this year to 4.6 percent from 4.3 percent today. The bank also increased this year's growth forecast to 4.8 percent from 4.5 percent.

The bank's policy makers this month considered raising interest rates to stem inflation for the first time since ending two years of cuts in October, the minutes of their March 4-5 meeting showed, but they chose to keep the rate unchanged at a record-low 11.25 percent.

The yield on the overnight interest-rate futures contract for January delivery rose 2.5 basis points, or 0.025 percentage point, to 12.260 percent at 10:56 a.m. New York time That's more than 1 percentage point above the bank's target overnight rate of 11.25 percent, signaling investors are betting that policy makers will boost the rate this year. The yield on the January contract has risen 50 basis points this month.

Brazil's annual inflation rate, as measured by the benchmark IPCA index, climbed to 4.61 percent in February from an eight-year record low of 2.96 percent in March 2007.

The central bank targets inflation of 4.5 percent, plus or minus 2 percentage points to accommodate price shocks.

Separately, the national statistics agency said today that unemployment had risen to 8.7 percent in February, from 8 percent in January. The jobless rate was down from the 9.9 percent registered in January 2007.

Brazil Retail Sales January 2008

2008-03-14T05:27:00.000-07:00

Brazil's retail sales rose 11.8 percent in January from January 2007, the national statistics agency said. Retail, supermarket and grocery store sales, as measured by units sold, rose more than the revised 9.5 percent increase in December, the national statistic agency said today.

Brazil Consumer Inflation February 2008

2008-03-11T05:26:00.000-07:00

Brazilian inflation slowed in February for a second straight month, reducing the likelihood that the central bank won't be raising rates in the immediate future. Brazil's consumer prices rose 0.49 percent in February from January, the national statistic agency said today. Inflation, as measured by the benchmark IPCA index, decelerated from 0.54 percent month on month rate in January. The annual inflation rate in February remained above the central bank's 4.5 percent target for a second consecutive month, and the year on year rate was up to 4.61 percent in the 12 months up to February from 4.56 percent between January 2007 and January 2008.

The central bank ended its longest cycle of monetary easing last October after a surge in food prices coupled with rising consumer demand raised the chances inflation could accelerate above the 4.5 percent annual target. Policy makers voted last week to hold rates at a record low 11.25 percent for a fourth straight meeting.

Education prices, fueled by seasonal tuition increases, jumped 3.47 percent in February, accounting for almost half of the gain in the IPCA index last month.

Food and beverages inflation, largely responsible for putting the annual rate over target this year, slowed to 0.60 percent in February from 1.52 percent in January.

Brazil's Central Bank Holds Interest Rates

2008-03-06T01:19:00.000-08:00

Brazil's central bank kept the overnight rate unchanged for a fourth straight meeting as slowing inflation bolstered confidence the bank's annual target will be met. Policy makers, led by bank President Henrique Meirelles, held the benchmark interest rate at a record low 11.25 percent. Monthly inflation, measured by the benchmark IPCA index, slowed in January to 0.54 percent from 0.74 percent a month earlier.

The central bank brought Brazil's longest cycle of monetary easing since at least 1999 to a halt last October after higher food prices coupled with the fastest economic expansion in more than three years raised concern that inflation could overshoot policy makers' 4.5 inflation target.

Annual inflation in Brazil has been steadily increasing from an eight- year low of 2.96 percent last March to 4.74 percent through mid-February. Since January, the 12-month inflation rate has persistently exceeded the mid-point of the central bank's target of 4.5 percent plus or minus 2 percentage points.

Meat and milk prices were the main driver of inflation in the second half of last year. Food prices in 2007 jumped 10.8 percent, the most in five years, fueled by rising worldwide consumer demand for commodities. Monthly food price inflation decelerated to 1.52 percent in January from a five-year high of 2.06 percent in December.

The yield on the inter-bank deposit contract for Jan. 2, 2009, which reveals trader's future interest rate bets, fell to 11.69 percent from 12.07 percent on Dec. 28. Record-low interest rates coupled with record bank lending has stoked a surge in demand for consumer goods such as home appliances and cars in what is Latin America's biggest economy.

Retail sales were up by 9.6 percent in 2007, the biggest gain since the national statistic agency started the current series in 2001, while industrial output rose less than expected in January, increasing by 8.5 percent from January 2007.

The Real Continues Its Upward March

2008-02-27T09:31:00.000-08:00

Brazil's real strengthened for an eighth straight day today, alomst reaching a nine-year high, as a tumbling U.S. dollar and surging commodity prices boosted demand for the currency. The real has jumped 4.8 percent since Feb. 15, making it the biggest gainer against U.S. dollar among the world's 16 most actively traded currencies during the period. The consecutive gains are the longest winning streak since November 2005.

Bolstering the currency's allure today were comments from U.S. Federal Reserve Chairman Ben S. Bernanke suggesting that the Federal Reserve will continue to lower US interest rates, widening the yield advantages of Brazilian bonds and equities.

The real rose 0.65 percent to 1.6731 per dollar at 10:28 a.m. New York time, up from 1.6839 per dollar yesterday. At one point it touched 1.6734, the most since May 1999. The currency has strengthened 28 percent in the past 12 months, also the biggest gain among the major currencies against the dollar.

Brazil's real interest rate, calculated by subtracting annual inflation of 4.56 percent from the 11.25 percent Selic benchmark lending rate, is 6.79 percent.

Crude oil also rose above $102 a barrel today, the highest dollar level ever, as the weakening dollar led investors to buy commodities as a hedge against inflation. Brazil exports the crude oil it pumps from what are the deepest waters in the world, with recent discoveries in fields as deep as 6 kilometers (3.7 miles).

Commodity sales helped Brazilian exports rise to a record $160.6 billion in 2007. Brazil will export as much as $180 billion this year, according to Trade Ministry estimates.

Brazil Becomes Net Creditor for First Time in January 2008

2008-02-22T00:35:00.000-08:00

Brazil, the world's largest emerging-market debtor for decades, became a net foreign creditor for the first time in January. International reserves, swelled by investment inflows and record exports of agricultural commodities and oil, probably exceeded gross foreign liabilities last month by about $4 billion, the Banco Central do Brasil said today in a report.

Brazil's shift to net creditor status may add to already growing investor confidence in what is Latin America's largest economy and help the country achieve investment-grade rating. Brazil finished paying off its debt to the International Monetary Fund in December 2005.

Brazilian exports have tripled since President Luiz Inacio Lula da Silva took office in 2003 on rising world demand for soybeans, iron-ore, beef and cars. An accompanying surge in foreign direct investment, including stock and bond purchases by non-residents, has led the currency to appreciate to what is its strongest level in more than eight years.

International reserves, including cash and other financial assets, rose to a record $171.6 billion in January, more than ten times the $17 billion that the country had when Lula assumed power. At the end of 2003, Brazil's debt topped international reserves by $165 billion, the bank said.

Foreign bond buyers have been lured by the prospect Brazil could attain an investment grade rating this year or next, making the country's bonds the world's second-best performer over the past five years, returning 191 percent, according to JPMorgan Chase & Co. data. Only Ecuadorean bonds, which gained 234 percent, rose more.

Brazil's foreign currency debt rating of BB+ by Standard & Poor's and Ba1 by Moody's Investors Service are both one level below investment grade. Investment-grade standing gives a country greater access to international capital at lower borrowing costs.

The yield to the 2015 call date on Brazil's 11 percent bonds due in 2040, one of the most widely traded emerging-market securities, fell 9 basis points, or 0.09 percentage point, to 5.59 percent, according to JPMorgan Chase & Co. The bond's price rose 0.6 cent to 132.65 cents on the dollar.

The world economic slowdown may test whether Brazil's efforts to diversify export markets and bulk up reserves are enough to safeguard long-term growth after almost five years of record commodity exports and low borrowing costs.

An over-dependence on commodity sales abroad may cut Brazil's growth to 3 percent this year from about 5 percent should a slowing U.S. economy reduce demand, according to a Morgan Stanley report released Dec. 10.

The real rose for a fourth straight session, advancing 0.8 percent to 1.7095 per dollar today. It touched 1.7046 earlier in the day, the strongest level since May 1999. The central bank has purchased U.S. dollars in currency markets almost every day since July 2006 to slow the real's appreciation and increase international reserves.

In a separate report, the bank and the National Treasury said that local and foreign debt fell 1.7 percent to 1.31 trillion reais in January from December. The stock of local debt, which makes up 90 percent of total Brazilian liabilities, fell 1.7 percent and foreign debt dropped 1.4 percent last month, both institutions said.

Brazil Industrial Output December 2007

2008-02-08T12:59:00.000-08:00

Brazil's industrial production in 2007 expanded at the fastest pace in three years, fueled by domestic demand and investments to boost production. Output rose 6.4 percent in December from December 2006, pushing the annual rate for 2007 up 6 percent, twice the pace of 2006, the national statistic agency said in a statement distributed today in Rio e Janeiro. In 2004, output grew 8.3 percent.

Brazil's unemployment rate fell in December fell to the lowest since at least 2002 as companies added staff to step up output. More jobs coupled with record bank lending boosted consumption and spurred investments. Output of capital goods, which increased 19.5 percent in 2007, led industrial growth. Production of durable goods, the second best performer, rose 9.2 percent.

Brazil's central bank has kept the benchmark interest rate at 11.25 percent since September and the possibility of rate increases in 2008 to keep inflation under control remains.

Brazil Trade Surplus January 2008

2008-02-01T11:59:00.000-08:00

Brazil's trade surplus narrowed to a 5 1/2-year low in January as a cheaper dollar and rising consumer demand pushed imports to a record high. Imports increased to $12.3 billion in January from $10.6 billion in December, according to the Trade Ministry today. Exports fell to $13.3 billion in January from $14.2 billion in December.

Brazil's real has appreciated 20 percent against the dollar in 12 months, the best performance among the 16 most-actively traded currencies. The cheaper dollar coupled with the fastest economic expansion since 2004 has boosted demand among Brazilian consumers for imports.

At the same time we learn that coffee exports from Brazil, which is the world's biggest producer, fell 11 percent in January from December, according to Brazil's Coffee Exporters Council.

Brazil shipped 1.81 million bags of coffee beans last month, compared with 2.03 million bags a month earlier, the council, known as Cecafe, said today in a preliminary report.

``The situation can deteriorate if the global economy slows,'' Agostini said.

Brazil's monthly imports exceeded $10 billion for the first time ever in July and have since remained above this threshold.

Agostini expects the country's annual surplus to narrow to $30 billion this year from $40 billion last year.

Brazil Central Bank Likely to Keep Rates On Hold

2008-01-23T01:47:00.000-08:00

Brazil's central bank will probably keep its benchmark interest rate unchanged at 11.25% today for a third straight meeting as policy makers gauge whether the recent acceleration in inflation is sustained. Against the backdrop of rising prices and Brazil's fastest growth since 2004, central bank President Henrique Meirelles decided on Oct. 17 to pause after a string of 18 straight cuts, the longest cycle of easing since Brazil adopted inflation targets in 1999.

Brazil's overnight rate has fallen by more than half over this period. The real interest rate, however, - or the difference between the 11.25 percent Selic benchmark lending rate and 4.46 annual inflation - is the sill highest in Latin America at 6.79 percent.

Policy makers will probably take the view that a worldwide economic slowdown will reduce Brazil's inflation rate by cutting demand for commodities, even after consumer prices jumped the most in more than two years in December. Inflation accelerated to 0.74 percent last month, led by food, the fastest pace since October 2005.

Rather than raising the central bank is much more likely to say that it will continue to monitor inflation to see whether it threatens its 4.5 percent target.

On the other hand, traders are forecasting higher rates. The yield on the interbank deposits future rate contract due January 2009 traded at 11.97 percent yesterday, above the current Selic rate.

Capital Flows Into Brazil

2008-01-18T04:03:00.000-08:00

The following article from the Financial Times provides more information and details on this process:

Brazil surprises with surge in foreign cash

Barely a day goes by in São Paulo, Brazil’s biggest city, without news of more foreign investment, and this week has been no exception.

Anglo American, the mining giant, said on Thursday it would pay $5.5bn (€3.7bn, £2.8bn) to buy control of two iron ore mines from Brazilian company MMX. And a couple of days ago, news emerged that Symetrix, a US chip company, was investing $1bn to make smart cards.

Flows of foreign direct investment are surging. For much of this decade Brazil’s attractions have paled beside those of other gigantic emerging markets, China, India and Russia, hitherto the most rapidly growing of the BRIC countries. But in the past few months Brazil has begun to do better.

Figures published last week by the United Nations Conference on Trade and Development showed Brazil won twice as much foreign direct investment as India in 2007 and its investment grew at a faster rate than that of Russia or China.

Total flows of $37.4bn were more than double the amount Brazil attracted in 2006 and also, in nominal terms at least, higher than flows attracted at the beginning of this decade when a privatisation campaign was in full swing.

Chinese investment dipped to $67.3bn compared with $69.5bn in 2006, while Russia brought in $48.9bn, 70 per cent more than in 2006.

“It was a surprise,” says Antonio Côrrea de Lacerda, an economist with Sobeet, a Brazilian think-tank on transnational companies, who had been expecting Brazil to attract only about $25bn. “The rest of the world is growing but Brazil is now getting a good share of the increase.”

Why has Brazil been doing so well? Part of the story is that the country is rich in the natural resources – such as oil, soya beans and iron ore – for which world demand has been growing. In the first 11 months of 2007, Brazil attracted $3bn into its mining sector, almost six times as much as in 2006.

The recent investment success is much broader, however. Central bank figures for the first 11 months show that more than a third of overall inflows have been directed to manufacturing.

Brazil’s highly competitive steel industry is one focus. Lakshmi Mittal, president and chief executive of Arcelor Mittal, the world’s biggest steel company, is an enthusiast.

Last year, he oversaw a big expansion at his company’s Tuburão complex and in December made a $1.75bn offer to buy the 43 per cent stake Arcelor Mittal did not already own in Acesita, a stainless steel maker.

Mr Mittal plans to spend another $5bn over the next five years to increase annual capacity by more than 40 per cent.

Billions of dollars have been pumped into the ethanol sector, where Brazil’s experience and technical expertise is an important advantage.

As Andrew Liveris, chairman and chief executive of Dow Chemical, explains: “When it comes to biofuels and related products, Brazil is the leader. The US is thinking about it. Brazil is doing it.”

But much of the interest is related to Brazil’s own im-proving macroeconomic prospects. Cautious monetary and fiscal policy has stabilised the economy and paved the way for a steady expansion of domestic credit.

Sectors oriented to the domestic market, such as construction, are surging. Growth, which reached 5 per cent in 2007, is disappointing compared with that of China or India, but investors are increasingly confident that the wider domestic demand and rising rates of capital formation will allow Brazil to survive a slowdown in the US economy relatively unscathed.

Yet even some who are investing in Brazil express concern about obstacles to growth.

Marcelo Mosci, head of GE for Latin America, says failure to improve business conditions through labour and other reforms will create trouble ahead. “There are two Brazils. Investment is growing, the private sector is doing a terrific job. But [because of lack of reform] Brazil is hitting a big road block,” he says.

For the moment, none of this is denting enthusiasm. As Emy Shayo, an economist with Bear Stearns, puts it: “People are totally in love with Brazil. Investors come here and they think it is the best country in the world.”

Brazil Inflation December 2007

2008-01-12T11:18:00.000-08:00

Brazil's consumer prices rose at the fastest inter-monthly rate in over two years last month, making it harder for the central bank to further cut Latin America's highest benchmark lending rate. Consumer prices, as measured by the IPCA index, jumped 0.74 percent in December, the biggest increase since October 2005, the national statistics agency said. The gain, fueled by food prices, was almost twice the 0.38 percent increase in November and pushed the annual rate to 4.46 percent.

Higher food prices accounted for most of the inflation increase, climbing 2.1 percent in December, the biggest gain since January 2003. Food prices climbed 10.8 percent last year and were responsible for almost half the increase in the annual rate, which accelerated for the first time in five years.

The central bank ended a two year cycle of interest rate cuts on Oct. 17 2007, after inflation began to accelerate. With both economic growth and annual inflation picking up speed, the central bank is unlikely to make further reductions to the overnight rate, which is already at a record low of 11.25 percent, and may be forced to raise rates at some point this year.

Brazil's central bank targets annual inflation of 4.5 percent. A plus or minus 2 percentage point range can be used to accommodate unexpected price shocks. ABN Amro expects inflation to quicken to 4.8 percent this year, up from an earlier forecast of 4.3 percent.

The real gained 0.5 percent to 1.7501 per dollar at 12:15 p.m. New York time yesterday, following a gain of 20 percent last year.

Inflation and Interest Rates

2008-01-11T01:30:00.000-08:00

Brazil's real rose again yesterday after Federal Reserve Chairman Ben Bernanke signaled the U.S. central bank may cut interest rates further this month to shore up growth in the world's largest economy. The real rose 0.6 percent to 1.7570 per dollar at 2:26 p.m. New York time after weakening as much as 0.2 percent earlier.

The outlook for lower interest rates in the U.S. makes Brazilian domestic fixed-income assets more attractive. Brazil's real interest rate, or the difference between the central bank's 11.25 percent benchmark lending rate and the country's 4.19 percent annual inflation, is 7.06 percent, the highest in any emerging market. In the U.S., the benchmark borrowing cost is 4.25 percent and on its way down, since Bernanke's comments have greatly increased speculation the policy- setting Federal Open Market Committee will cut the federal funds target by a half-percentage point on Jan. 30.

``Additional policy easing may well be necessary'' to offset ``downside risks'' to U.S. growth, Bernanke said in his first speech on the economy since the Fed's Dec. 11 meeting. Lower interest rates may be required ``in light of the recent changes in the outlook for and the risks to growth,''

Yields on Brazil's zero-coupon bonds rose on speculation Brazil's IPCA consumer price index will probably show inflation accelerated more than economists forecast.

The Real Slips a Little

2008-01-04T23:17:00.000-08:00

Brazil's real fell yesterday on concern that the latest U.S. jobs report signals the U.S. economy may slip into a recession, reducing demand for Brazilian exports and local financial assets. The real fell 0.2 percent to 1.7547 per dollar at 1:30 p.m. in New York after rising 1.1 percent earlier. The currency gained 20 percent against the dollar in 2007, which was the the biggest advance among the 16 most-actively traded currencies.

The vlaue of the real has been rising on the back of record sales abroad and growing interest in Brazil's high-yielding bonds following the sub-prime bust.

Brazil's benchmark stock index, the Bovespa Index, fell as much as 3.7 percent at one point.

The yield on Brazil's zero-coupon bonds due in January 2009 rose 10 basis points, or 0.1 percentage point, to 12.08 percent, according to Banco Votorantim SA.

Despite the slowdown in global growth that we'll see this year, Brazil may well be one of the emerging economies whioch is able to decouple to some extent from the path of the G7 economies. At least that is the idea which will be put to the test in 2008.

The outlook for the maintenance of Brazil's 11.25 percent benchmark lending rate to fend off inflationary pressures also favors the real while the U.S. overnight lending rate may fall below 4 percent in the not to distant future.

Brazil's central bank bought U.S. dollars in the spot market yesterday as part of a strategy to slow the currency's appreciation. The bank bought dollars at 1.7590 reais apiece at auction. The bank has bought dollars on an almost basis daily since Oct. 8.

Merry Xmas and A Happy New Year

2007-12-24T15:01:00.001-08:00

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?

Brazil Inflation December 2007

2007-12-21T01:14:00.000-08:00

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.

Brazil's economy expanded 5.7 percent Q3 2007

2007-12-12T03:44:00.000-08:00

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.

Brazil to Create SWF?

2007-12-09T23:19:00.000-08:00

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.

How Sensitive Is Brazil To A Global Slowdown?

2007-12-07T06:17:00.001-08:00

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.

The Future Is No Longer What It Used To Be

2007-11-15T03:35:00.000-08:00

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

2007-11-15T00:46:00.000-08:00

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.

Brazil and Safe Havens

2007-09-18T23:22:00.000-07:00

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

Banco Santander in Brazil

2007-09-17T23:23:00.000-07:00

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.''

Brazil Q2 2007 GDP

2007-09-12T22:03:00.000-07:00

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.

The Real and the Trade Surplus

2007-09-03T23:56:00.000-07:00

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.

Brazil Treasury Purchases Jump to Record

2007-08-16T01:28:00.000-07:00

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

2007-08-16T01:25:00.000-07:00

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

2007-08-16T01:18:00.000-07:00

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.

Liquidity, Fund Inflows and Consumption

2007-06-25T02:11:00.000-07:00

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.

Unemployment in Brazil

2007-06-21T23:40:00.000-07:00

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%.

Biotech and Dollar Purchases

2007-02-09T04:02:00.000-08:00

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.''

Brazil Selling Reais-Denominated Bonds

2007-02-08T02:59:00.000-08:00

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.

Government Deficit Increases

2006-12-25T01:10:00.000-08:00

Brazil's budget deficit widened in November as the government increased public spending and tax collection fell:

The deficit, including federal and local governments and state companies, widened to 6.52 billion reais ($3.03 billion) last month from 2.79 billion reais in October, according to a report distributed in Brasilia today.

The federal government transferred more cash to state governments in November to pay salaries and social benefits, said Altamir Lopes, head of the central bank's economic research department. The increase doesn't threaten the government's targets, he said.

``The higher costs won't stop us from reaching the fiscal targets for the year,'' Lopes told reporters in Brasilia.

The budget surplus before interest payments, known as the primary surplus, narrowed to 5.61 billion reais in November from 10.5 billion reais in October. That's more than the median forecast of 4.8 billion reais in a Bloomberg survey of 14 economists.

Brazil's President Luiz Inacio Lula da Silva has pledged to post a primary surplus -- the surplus before debt payments -- of 4.25 percent of gross domestic product this year.

Brazil's net debt as a percentage of gross domestic product fell in November to 49.3 percent from 49.5 percent in October.

November Unemployment Falls

2006-12-21T04:45:00.000-08:00

From Bloomberg:

Brazil's unemployment rate fell to 9.5 percent in November, the lowest rate in 10 months, the national statistics agency said.

Unemployment in Brazil's six largest metropolitan areas declined from 9.8 percent in October, the Rio de Janeiro-based agency said in a statement today. The rate was less than the median forecast of 9.7 percent in a Bloomberg survey of 20 economists. The jobless rate was 9.6 percent in November 2005.

Household monthly income, adjusted for inflation, rose 5.7 percent from the same month of last year to 1,056.60 reais ($489), the agency said. It increased 0.6 percent from October.

Industrial Output Rises 4.8 Percent in October

2006-12-17T08:54:00.000-08:00

Brazil's industrial output rose 4.8 percent in October, which was the fastest pace in five months. It seems the impact of 12 interest rate cuts in a row are now beginning to filter down into the economy.

Output expanded 4.8 from the same month last year, compared with 1.3 percent rise in September, Brazil's National Statistics Agency said in Rio de Janeiro today. The increase was in line with the median 4.8 percent forecast in a Bloomberg survey of 21 economists.

``Recent economic reports, such as faster job creation in manufacturing, point to stronger industrial production in the fourth quarter and make me believe that the worst is over,'' Zeina Latif, an economist with ABN Amro Bank NV's Brazilian unit, said in a phone interview from Sao Paulo.

The central bank has slashed the benchmark lending rate 6.5 percentage points to 13.25 percent since September 2005 in a bid to bolster a flagging economic recovery. The lowest lending rates in at least two decades and the prospect of additional cuts in 2007 has begun to stoke consumer demand for goods such as cars, thus helping boost production, Latif said.

Registrations of new cars, sport utility vehicles and trucks made in Brazil and abroad rose 15 percent in November to 182,732, the highest level this year, after expanding 27 percent in October from a year earlier, the fastest pace in more than two years, according to the country's automakers association, known as Anfavea, in a report published today.

Manufacturing employment increased 3.3 percent in October from a year earlier, the fastest pace since in seven months, a Confederation of Brazilian Industry report said Dec. 5.

Brazil Coffee Scarcity Looms

2006-11-28T02:35:00.000-08:00

Again from Bloomberg:

October rains came too late for trees in Brazil's prime coffee-growing region to recover from the driest winter in two decades. Few of the plants have flowered properly, meaning next season's harvest will be meager.

Forecasters say output in the world's largest coffee- producing nation will fall to a four-year low. That has pushed up futures prices by 10 percent in the past month to $1.2265 a pound on the New York Board of Trade. Prices may rise to as much as $1.35 a pound in coming months as farmers like Oliveira hold back supplies.

From May to September, Guaxupe received only 80.6 millimeters (3.2 inches) of rain, compared with 250 millimeters a year earlier, according to Cooxupe's Web site. The rainfall was the lowest since 1985.

Given the forecast drop in production, Cooxupe is advising farmers to sell the minimum from this year's harvest, says Mario Ferraz de Araujo, another of the cooperative's agronomists.

``We try to show them how to manage the sales to avoid financial difficulties later,'' says Araujo, 43. ``The farmers have become more aware of the advantage of selling at the right time.''

Global warming may lead to recurrent droughts, reducing world supplies of Arabica, says Jose Francisco Pereira, general director at Fazenda Monte Alegre, Brazil's third-largest coffee farm. That would lead roasters to increase Robusta coffee, which is more resistant to heat and drought, in their blends, Pereira says. The biggest producer of Robusta coffee is Vietnam, followed by Brazil and Indonesia.

Brazil 2006 CPI Forecast Raised (Slightly)

2006-11-28T02:32:00.000-08:00

According to Bloomberg Brazilian economists have increased their 2006 inflation forecast for a fifth week because of a rise in the cost of food.

Consumer prices in Brazil, Latin America's biggest economy, are forecast to rise 3.15 percent through the end of this year, more than a previous estimate of 3.08 percent, according to the median projection of about 100 economists in a central bank survey taken Nov. 24 and released today.

Brazil's monthly inflation, as measured by the government's IPCA-15 consumer price index, rose 0.37 percent in the 30 days through Nov. 13, compared with a 0.29 percent increase in the month ended Oct. 11, the National Statistics Agency said on Nov. 24.

``This hiccup in the prices of food will likely be reversed by yearend, reinforcing the view that the central bank will keep the current pace of rate cuts at its next policy meeting this week,'' Solange Srour, chief economist at Mellon Global Investment Brazil, said. She expects the central bank to lower the benchmark overnight rate a half-percentage point to 13.25 percent at its Nov. 29 policy meeting.

Brazilian economists also raised their 12-month inflation forecast to 4.17 percent from a previous estimate of 4.13 percent, the survey showed. They held 2007 inflation forecast at 4.1 percent. The central bank has an inflation target of 4.5 percent for 2006, 2007 and 2008.

``As the inflation outlook is still benign for next year and economic growth is moderate, monetary easing should continue in 2007,'' Srour said in a phone interview from Rio de Janeiro.

Brazil's economy will expand 2.94 percent this year, according to the survey, compared with the previous estimate of 2.95 percent. Economists predict growth will quicken to 3.5 percent in 2007.

The economists estimated the Brazilian currency will end this year weaker than previously forecast, with the real at 2.16 per dollar, compared with an earlier estimate of 2.15 per dollar, the survey showed. The currency, which traded at 2.1715 at 9:42 a.m. New York time, has fallen 1.3 percent this month, the second-worst performance of the 16 most-traded currencies.

The economists also raised their 2006 foreign direct investment forecast to $15.9 billion from $15.6 billion the previous week.

Brazil's Inflation

2006-11-26T07:36:00.000-08:00

Brazil's inflation rate rose to an 8-month high of of 0.37% in November, while the y-o-y rate dropped to 2.99%, the lowest since 1999. This certainly takes the pressure off the central bank on interest rate policy:

Brazil's monthly inflation rate rose to an 8-month high through mid-November as the cost of food items such as meat and chicken soared.

Consumer prices, as measured by the government's IPCA-15 price index, rose 0.37 percent in the 30 days through Nov. 13, compared with a 0.29 percent increase in the previous month ended Oct. 11, Brazil's National Statistics Agency said today on its Web site.

The inflation rate is still low enough to allow the central bank to keep cutting its benchmark lending rate, said Joel Bogdanski, a senior economist at Banco Itau Holding Financeira SA. Annual inflation slowed to 2.99 percent in the 12 months through mid-November, the lowest since June 1999, from 3.26 percent at the end of October.

The central bank has trimmed the benchmark lending rate 6 percentage points in the past 14 months to 13.75 percent, the lowest in at least two decades. Bogdanski expects policy makers to cut the rate a half-percentage point at a meeting next week and reduce it to as low as 11 percent by the end of next year.

OECD Brazil Survey

2006-11-24T21:14:00.000-08:00

The OECD has a new survey out on Brazil. Bloomberg have a rough summary here:

"Brazil's economy will slide further behind its peers unless the government limits spending, especially on pensions, the Organization for Economic Cooperation and Development said today in a report."

Of course the interesting question that this raises is who exactly Brazil's peers are?

If we look at the key demographic indicators the counry which most resembles Brazil in its present profile is Turkey. Both have fertility levels which are rapidly approaching replacement level - and of course may well soon follow the global pattern of below replacement fertility - since both currently have a 2.4 TFR (and dropping fast). In terms of life expectancy Brazil is around 71 and Turkey 72, and of course these ages are rising comparatively rapidly as economic conditions improve. As far as median age goes both countries are now entering the age range during which the phenomenon known as the 'demographic dividend' can be expected to operate (Brazil 27.81, Turkey 27.7, for the importance of median ages in macroeconomic analysis see this post here). So the similarity at this level between these two countries is in fact striking and remarkable. Turkey in recent years has enjoyed far stronger rates of economic growth when compared to Brazil, but it is not clear to what extent the 'anchor' of the EU accession process (and the consequent surge in domestic investment) has been responsible for this, and equally how this process might be affected by any distancing between Turkey and the EU which could result from 'enlargement fatigue' or a worst case scenario in Iraq might impact on this.

In cultural terms the countries which most resemble Brazil would of course be the other two Latin American 'tigers' Chile and Argentina. And again, these countries, possibly for different reasons, have enjoyed rather higher growth rates than Brazil. So in this sense the OECD may well be right to describe Brazil as something of a laggard. The key question is just how long this position will continue.

In these terms the OECD report is revealing. At a superficial level the OECDs key point would seem sound enough:

``Brazil's growth performance needs to improve to close a widening income gap relative'' to other countries in the group, the OECD said in the report. ``Despite reforms implemented since 1998, the deficit of the social-security regime for private- sector workers continues to rise.''

Clearly this is the case, though I doubt the validity of making a direct comparison with the OECD 30 at this point. Brazil is a relatively poor developing country, it is starting on the round to becoming a developed economy, but this road is likely to be a long and hard one. As has already been noted the population is still comparatively young - Brazil is just entering the demographic dividend range - and the still fairly large young cohorts undoubtedly place special pressures on the labour market, and exert a somewhat negative influence on employment rates and income growth. This position will to some extent correct itself automatically as the shape of the pyramid changes, however the OECD is undoubtedly right in stressing the need for a balanced policy environment so as to leverage this process to the maximum.

Brazil is the biggest debtor among emerging market nations with about 1.06 trillion reais ($494.2 billion) in public federal debt in October. The country's 2.5 percent annual growth rate since 1995 lags the global average by more than a third.

Obviously it is clear that Brazil needs to get a better hold on its public finances and that increased taxes are not the best solution, but I do feel that both the above statistics are a little misleading since in the first place Barzil is a large country and hence proportionally the debt is not as big as this makes it seem, and secondly Brazil has only really started to take off in the last couple of years, so the average growth rate since 1995 is not a particularly informative number.

In fact the OECD says the following:

Fiscal performance remains strong. The consolidated primary budget surplus target – which has been raised repeatedly since 1999 to ensure the sustainability of the public debt dynamics – continues to be met and sometimes exceeded by wide margins. The net public debt has fallen in relation to GDP since the 2003 peak and has now stabilised, albeit at the comparatively high level of around 50% of GDP by emerging market standards. The government has been able to sustain fiscal adjustment, despite the limited room for manoeuvre caused by a ratcheting up of current spending over the years and Brazil’s notorious budget rigidities. Nevertheless, fiscal adjustment has been achieved at the expense of cutting back on public investment and by increasing the tax burden. The revenue-to-GDP ratio rose by about 5 percentage points during 2000-05 to nearly 37.5% in 2005 – a level that is one of the highest among countries with comparable income levels. A durable reduction in public indebtedness on the back of a retrenchment of current expenditure, rather than tax hikes, would serve to facilitate a swifter fall in real interest rates and to permit the channelling of domestic saving to finance growth enhancing investment. It would also lay the groundwork for removing distortions in the tax system, including by broadening tax bases.

So progress is being made on the deficit front, and the real issue is about the structure of public spending with more emphasis needed on infrastructural investment rather than on current spending. The politics of this are, however, complex.

Also on the monetary policy front the OECD is fairly positive:

The perception that the authorities are committed to a monetary policy framework combining inflation targeting and a flexible exchange-rate regime appears to be suitably well entrenched. The central bank enjoys de facto, but not yet de jure, operational autonomy. The policy regime has been working well, delivering continuous disinflation since 2003 and anchoring expectations. Notwithstanding these achievements, which should not be underestimated, the conduct of monetary policy is complicated by cumbersome regulations on the allocation of credit to selected sectors, especially agriculture and housing, including through mandated saving arrangements. Compulsory reserve requirements on commercial banks are also burdensome for a variety of deposit categories, although most countries that have adopted inflation targeting as the framework for monetary policymaking have now reduced or eliminated such requirements. These restrictions act as an implicit tax on the financial sector, against the backdrop of an already relatively high tax burden on financial transactions, including that of the bank debit tax (CPMF).

So changes are needed:

Consideration should be given to gradually removing the extant directed credit and reducing compulsory reserve requirements so as to improve the efficiency of the financial sector and adequately reward long-term saving, an aspect of the problem that is often overlooked. The favourable domestic macroeconomic environment, with falling inflation and improving growth prospects, appears propitious for further liberalisation in this area. At the same time, the consolidation of macroeconomic stability not only creates a need to move forward but also provides an opportunity to go beyond the current policy achievements as a means of eliminating the remaining distortions inherited from the pre-stabilisation period. The payoff from reform in this area can be considerable in terms of reducing Brazil’s stubbornly high real rates of interest, which weigh heavily on growth.

Essentially the real rate of interest needs to come down.

Jonathan Wheatley, Brazil and the BRICs

2006-09-14T06:31:00.000-07:00

I have always thought that the idea of the BRICs group of economies was an ill-born child. On the one hand China, India and Brazil, partly because they are large countries, and partly because they are in the process of getting their demographic dividend , are bound to grow in importance, and, each in their own way, become growth engines of the future (I made part of this argument yesterday in this post on Indian Economy Blog). On the other hand Russia is big, but getting smaller, and is experiencing a demographic penalty, not a demographic dividend.

That Goldman Sachs didn't quite get this thing a little wrong is one thing (they were at least early in recognising the importance of India and China) , and reading this kind of silliness from Jonathan Wheatley in the FT this morning really quite another:

When Goldman Sachs coined the term BRICs for Brazil, Russia, India and China in 2001, it did so to call attention to the four countries’ potential for fast and sustained growth. By 2041, it predicted, their economies would be worth more than those of the US, Japan, Germany, the UK, France and Italy put together.

The BRICs are on target to fulfil that prediction. But they would do so more quickly if their average rate of growth were not being held back by Brazil.

Firstly it is obvious that Brazil isn't holding anyone else back, anyone else apart from Itself. Secondly it is clear that the chap doesn't know that this isn't only about size, but also about demography.

China’s economy grew by 11.3 per cent year on year in the second quarter. Brazil’s grew by 1.2 per cent. It is set to grow by a miserly 3 per cent this year, probably making it the laggard not just among the BRICs but among all the world’s emerging markets.

Something struck me as odd about this growth rate, Brazil isn't China, but still, it isn't doing that badly. So I couldn't help noticing on Bloomberg that the IMF in its World Economic Outlook predicts that

"Economic growth in Latin America will slow to 4.2 percent next year......This year, Argentina's economy will expand 8 percent, Venezuela's will grow 7.5 percent, Brazil's 3.6 percent, and Mexico's 4 percent"."

So Brazil's growth this year could well be 3.6% and not the (evidently highly selective 2nd quarter y-o-y figure of 1.2%). If we wish to understand what may be going on here, the next paragraph should help clear up some doubts:

"Brazilians themselves seem not to care about growth. President Luiz Inácio Lula da Silva of the left-leaning PT party appears comfortably assured of winning another four years in office at elections next month."

And get this:

"The reasons for the president’s popularity are many but chief among them is global demand for Brazilian exports – led by China, India and other faster-growing markets. Brazil is recording trade surpluses of more than $40bn a year and, consequently, its currency has appreciated by 65 per cent against the US dollar since the end of 2002.

Inflation is at its lowest level in decades. As the spending power of the poor has increased, the prices of many foods have actually fallen.

The rich are doing nicely, too. Brazil’s central bank uses high interest rates to fight inflation and although its benchmark rate has fallen by 5.5 percentage points in the past year, it remains among the world’s highest, at 14.25 per cent a year. This creates a bonanza for anyone with capital to invest."

The impression I get from all of this is that things in Brazil are now much better than they used to be, and long may they continue that way. Obviously there is always much more to do in terms of reform, but Lula has a delicate line to walk. And in the meantime Jonathan Wheatley's article is not only a diservice to the paper whch published it, it is also a diservice to the cause of economic literacy.

Welcome To Brazil Economy Watch

2006-09-14T06:16:00.000-07:00

Hi, I'm Edward, and this is my new blog. Welcome.