Liquidity, Fund Inflows and Consumption

This in Bloomberg this morning:


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

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

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

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

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

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

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

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

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

Unemployment in Brazil

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

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

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

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

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

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

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

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

Biotech and Dollar Purchases

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

Brazil to Invest 10 Billion Reais in Biotechnology

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

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

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

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


Brazil Real Falls as Central Bank Steps Up Dollar Purchases


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

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

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

Brazil Selling Reais-Denominated Bonds

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

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

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

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

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

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

Government Deficit Increases

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.