Petrobas Stock on the Way Up

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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?