tag:blogger.com,1999:blog-343996662024-03-12T22:36:45.922-07:00Brazil Economy WatchUnknownnoreply@blogger.comBlogger77125tag:blogger.com,1999:blog-34399666.post-59691883147929148882009-06-20T03:29:00.000-07:002009-06-20T03:33:03.143-07:00Facebook LinksQuietly clicking my way through Bloomberg last Sunday afternoon, <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aC4zbsgMD6x8">I came across this</a>:<br /><br /><br /><blockquote><strong>Facebook Members Register Names at 550 a Second</strong><br /><br />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.<br /><br />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. </blockquote><br /><br />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:<br /><br /><blockquote>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.</blockquote>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.<br /><br />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.<br /><br />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.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-34399666.post-11692815466706052852009-05-24T03:00:00.000-07:002009-05-25T14:41:47.290-07:00Don't Get Carried Away Now!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 <strong>another planet</strong> 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. <a name="4422913586"></a><br /><br />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?<br /><br /><br />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?<br /><br />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 <a href="http://www.economist.com/opinion/displaystory.cfm?story_id=13697292">Decoupling 2.0, as the Economist calls it</a>). 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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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”.<br /><br />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".<br /><br /><br /><strong>Carry On Trading</strong><br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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.”<br /><br />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.<br /><br /><br /><strong>India on The Up and Up.</strong><br /><br /><br />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".<br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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.”<br /><br />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.<br /><br />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.<br /><br /><strong>Carry Me Home</strong><br /><br />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).<br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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 <strong>and</strong> 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.<br /><br />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.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-34399666.post-67780042711868302172008-10-04T12:53:00.000-07:002008-10-07T08:30:41.565-07:00Brazil's Economy Enters The Eye Of The Stormby Edward Hugh: Barcelona<br /><br />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.<br /><br /><strong>Response to the Crisis<br /></strong><br />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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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. <br /><br />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. <br /><br />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.<br /><br /><br /><strong>Emerging Market Bonds</strong><br /><br /><br />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. <br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh9yiKvnOg2U8H6dfg2-y_i9bZTdVbD6kf_KuXL2aBQMmn9Q727-q1UMzQomxbhz9_ZKT1uotCvMi7NG35MGHUIbMAvYLtkVlat0B5ovudQMyaO7uqa63gz67aE3KVnouFUYG0l_g/s1600-h/jp+morgan2.png"><img id="BLOGGER_PHOTO_ID_5253314806112406930" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh9yiKvnOg2U8H6dfg2-y_i9bZTdVbD6kf_KuXL2aBQMmn9Q727-q1UMzQomxbhz9_ZKT1uotCvMi7NG35MGHUIbMAvYLtkVlat0B5ovudQMyaO7uqa63gz67aE3KVnouFUYG0l_g/s320/jp+morgan2.png" border="0" /></a><br /><br /><br />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.<br /><br /><br /><strong>Emerging Market Stocks</strong><br /><br />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.<br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAu4paBdg_mTPG4wvEsAU-TKH6r_Cvky9M2dxLVVzQ_O1r21iJQJyur4le5lCkFLMjGDlm5apNFkNjXNaHB0gjXW2Y7NbeRDvNA_0CxdQvzkJKBINnSVyOp8Vk5Hn2HcT2iOFOqg/s1600-h/MSCI2.png"><img id="BLOGGER_PHOTO_ID_5253318336976839474" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAu4paBdg_mTPG4wvEsAU-TKH6r_Cvky9M2dxLVVzQ_O1r21iJQJyur4le5lCkFLMjGDlm5apNFkNjXNaHB0gjXW2Y7NbeRDvNA_0CxdQvzkJKBINnSVyOp8Vk5Hn2HcT2iOFOqg/s320/MSCI2.png" border="0" /></a><br /><br /><br /><br /><strong>Brazil's Stocks</strong><br /><br /><br />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. </p><p><br />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.<br /><br /><br /><strong>Central Bank Eases Reserves</strong><br /><br /><br />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.<br /><br />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.<br /><br />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.<br /><br /><br /><strong>September Global Manufacturing PMI Shows Sharp Contraction</strong><br /><br />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 <a href="http://www.ism.ws/ISMReport/content.cfm?ItemNumber=18594">JP Morgan Global Manufacturing PMI</a>, 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).<br /><br /><br />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.<br /></p><p>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.<br /></p><p>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.<br /><br />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.<br /><br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhT7I3RIjvDa8hfGJqN3WwkGRQFRbS97TOStwTckXfWaXMtOxBk39fJXoTDm2TTupFGn4vwJtMVCcGJfUX8hgm_g2xkwZnu74ZDTW0IWHG2eRfPiiZbc228h4hV9RLOAFGysTuLoQ/s1600-h/russia+manufacturing.png"><img id="BLOGGER_PHOTO_ID_5252447652166100194" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhT7I3RIjvDa8hfGJqN3WwkGRQFRbS97TOStwTckXfWaXMtOxBk39fJXoTDm2TTupFGn4vwJtMVCcGJfUX8hgm_g2xkwZnu74ZDTW0IWHG2eRfPiiZbc228h4hV9RLOAFGysTuLoQ/s320/russia+manufacturing.png" border="0" /></a><br /><br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgaiLsZWaQkE6DPtUzz3DknavnzwQiAhIevvsrTOK8lbU2DHVbyBaE4UjRn0rQreGnbmXO9n1BGkpFA_VbzTXEhoktz3IzfcWjDUWkTlill7P4Zugmf3XeXtD01YyWsx9KdFEbQvA/s1600-h/china+PMI.png"><img id="BLOGGER_PHOTO_ID_5253771502688649490" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgaiLsZWaQkE6DPtUzz3DknavnzwQiAhIevvsrTOK8lbU2DHVbyBaE4UjRn0rQreGnbmXO9n1BGkpFA_VbzTXEhoktz3IzfcWjDUWkTlill7P4Zugmf3XeXtD01YyWsx9KdFEbQvA/s320/china+PMI.png" border="0" /></a><br /><br />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.<br /><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvIEAkNfi1fkSjkif7Ldd5mTNwo_8NfgRRHtgS3hy44tW2cjkKmiTOgUS6467HKKywKzG90mwzTjxGOYkmd8PfXe_hsZqGeLuyUpnvllLBDYlSzjbnQ6p-6Grrx-aVR-wHHXHC2A/s1600-h/india+ip.jpg"><img id="BLOGGER_PHOTO_ID_5245122831764215570" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvIEAkNfi1fkSjkif7Ldd5mTNwo_8NfgRRHtgS3hy44tW2cjkKmiTOgUS6467HKKywKzG90mwzTjxGOYkmd8PfXe_hsZqGeLuyUpnvllLBDYlSzjbnQ6p-6Grrx-aVR-wHHXHC2A/s320/india+ip.jpg" border="0" /></a><br /><br />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.<br /><br /><br />So basically this is where we get to learn what a global credit crunch means in terms of output and economic growth.<br /><br /><strong>Brazil's's Industrial Output Weakens Too</strong><br /><br />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.<br /><br /><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_RRbJ7cUqZVs7LvwJPPPEiEDrds_j4mruskb2WaLLH_ZdpsZY24jY4WNUbdCf7LaIYP5l3DXxSRVcVXN7awzg78lBptJ-QlN3Yx9g4J2sZqQFfoVJOQjnSGvW8SiydoQgNIZPpw/s1600-h/brazil+industrial+output.png"><img id="BLOGGER_PHOTO_ID_5253774401186326210" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_RRbJ7cUqZVs7LvwJPPPEiEDrds_j4mruskb2WaLLH_ZdpsZY24jY4WNUbdCf7LaIYP5l3DXxSRVcVXN7awzg78lBptJ-QlN3Yx9g4J2sZqQFfoVJOQjnSGvW8SiydoQgNIZPpw/s320/brazil+industrial+output.png" border="0" /></a></p><p>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.<br /><br /><br /><br /><strong>GM And Fiat Cut Vehicle Output</strong><br /><br /><br />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.<br /><br />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.<br /><br /><br /><br /><strong>JP Morgan Global Manufacturing PMI Methodology</strong><br /><br /><br />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.<br /><br />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).<br /><br />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.</p>Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-34399666.post-510758385796600802008-09-24T23:11:00.000-07:002008-09-26T03:35:01.698-07:00Brazil's Mid-month Inflation Lowest Since MarchBrazil'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.<br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8yW5yqTCpQEvDNpheS_DvBZNPi85Nm0KvILthW3uWMBhV_K8Iifh5nYfVj_fII420acNPji1MCcD4haYmqPHv_1Vov22XgM_S17NnGt20niq5sjzdsdlBkoOTferi50orbNzedw/s1600-h/brazil+inflation.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8yW5yqTCpQEvDNpheS_DvBZNPi85Nm0KvILthW3uWMBhV_K8Iifh5nYfVj_fII420acNPji1MCcD4haYmqPHv_1Vov22XgM_S17NnGt20niq5sjzdsdlBkoOTferi50orbNzedw/s320/brazil+inflation.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5249838601401383170" /></a><br /><br /><br />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. <br /><br /><br /><strong>Central Bank Reduces Reserve Requirements</strong><br /><br />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. <br /><br />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. <br /><br />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. <br /><br />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.<br /><br /><br /><strong>Bank Lending Slows</strong><br /><br />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.<br /><br />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. <br /><br />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.<br /><br />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. <br /><br /><br /><strong>The Real Continues To Wobble In The Wake Of Uncertainty</strong><br /><br />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. <br /><br />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.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-34399666.post-84646584615064749892008-09-17T03:00:00.000-07:002008-09-17T04:32:54.749-07:00Brazil Retail Sales Accelerated in JulyThe 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. <br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzyqu7SU2OkXX7llX1lfqtI9zeLvihkdzDsNgeTIln5WF7rNplhZP-z0R5b1gCZJwk0NzhpKVzxsbFz25VFPzlxVhL24NLI3uYk9TZwI-uRLMtnMmXzgugbY5wCGLdNnIR4icXFQ/s1600-h/brazil+retail+sales.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzyqu7SU2OkXX7llX1lfqtI9zeLvihkdzDsNgeTIln5WF7rNplhZP-z0R5b1gCZJwk0NzhpKVzxsbFz25VFPzlxVhL24NLI3uYk9TZwI-uRLMtnMmXzgugbY5wCGLdNnIR4icXFQ/s320/brazil+retail+sales.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5246928755178440722" /></a><br /><br />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). <br /><br />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.<br /><br />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.<br /><br /><br /><br />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.<br /><br /><br />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.<br /><br />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.Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-34399666.post-39149504568895083722008-09-11T01:47:00.000-07:002008-09-11T12:40:58.196-07:00Brazil Central Bank Raises Interest Rates Another 0.75%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.<br /><br /><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhle9oxA_G5AEthX813qu0WCjrfxlj1cQ6FPhU_9YUvBiiSOa0Y9BKwv6_UB6y3whxntDxvGFSuF3SuArbFu-rTbJfiCfJAG6MCqqtzAgQF6JIG_xc7h7t5JkpqI13aPrOJZATlQ/s1600-h/brazil+interest+rates.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhle9oxA_G5AEthX813qu0WCjrfxlj1cQ6FPhU_9YUvBiiSOa0Y9BKwv6_UB6y3whxntDxvGFSuF3SuArbFu-rTbJfiCfJAG6MCqqtzAgQF6JIG_xc7h7t5JkpqI13aPrOJZATlQ/s320/brazil+interest+rates.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5244683206428589970" /></a><br /><br /><br /><span class="Apple-style-span" style="font-weight: bold;">Real Decline</span><br /><br />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.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-h1eP01tXvkrgvISMEBnwtMNuyRoUdEQrQACFT0HwCWhy8Y9GRvMnnKfP_-tu2TExhbitu3fhsHl7PMSq3HOTU9hX18B1di0xWTwPhdVW2csDqs9Z38R97ZNLlb8-NRh_QZsICA/s1600-h/brazil+USD+One+Year.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-h1eP01tXvkrgvISMEBnwtMNuyRoUdEQrQACFT0HwCWhy8Y9GRvMnnKfP_-tu2TExhbitu3fhsHl7PMSq3HOTU9hX18B1di0xWTwPhdVW2csDqs9Z38R97ZNLlb8-NRh_QZsICA/s320/brazil+USD+One+Year.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5244827277552530434" /></a><br /><div>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.<br /><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYnxY13vjrNZNaTNTGG4WYaLCAPlNQsFrjedmNFW_FjPc44LvHsvSRlX9PcPHox-27sUgInlbHeIb1hPAoDwpEzIwnfcQhkVW46ux5wq4wp5lyGDxBpeNxo36Po9kEvmXLi0bMwQ/s1600-h/brazil+usd+3+months.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYnxY13vjrNZNaTNTGG4WYaLCAPlNQsFrjedmNFW_FjPc44LvHsvSRlX9PcPHox-27sUgInlbHeIb1hPAoDwpEzIwnfcQhkVW46ux5wq4wp5lyGDxBpeNxo36Po9kEvmXLi0bMwQ/s320/brazil+usd+3+months.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5244827964409885890" /></a><br /><br />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.</div><div><br /><br />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.<br /><br /><br /><span style="font-weight:bold;">And Is Inflation Already On The Wane?</span><br /><br /><br />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.<br /><br />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.<br /><br /><span style="font-weight:bold;">The Impact Of Energy Price</span>s<br /><br />Energy prices also seem to be easing, and rapidly.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTe11_Fzs2VR2LC-1c-r72-HO-WGH-m29PPffXZnNS-x4SICdhYnaL_CMZUVuKyN-mS4pLdZMoUPLbKpKvbcoV6asTx1m2MX6ImvUYlanBTSNUqDK1OS5emUJ79J23Vbh_0e-kYg/s1600-h/oil+futures.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTe11_Fzs2VR2LC-1c-r72-HO-WGH-m29PPffXZnNS-x4SICdhYnaL_CMZUVuKyN-mS4pLdZMoUPLbKpKvbcoV6asTx1m2MX6ImvUYlanBTSNUqDK1OS5emUJ79J23Vbh_0e-kYg/s320/oil+futures.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5243216148345659474" /></a><br />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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTe11_Fzs2VR2LC-1c-r72-HO-WGH-m29PPffXZnNS-x4SICdhYnaL_CMZUVuKyN-mS4pLdZMoUPLbKpKvbcoV6asTx1m2MX6ImvUYlanBTSNUqDK1OS5emUJ79J23Vbh_0e-kYg/s1600-h/oil+futures.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTe11_Fzs2VR2LC-1c-r72-HO-WGH-m29PPffXZnNS-x4SICdhYnaL_CMZUVuKyN-mS4pLdZMoUPLbKpKvbcoV6asTx1m2MX6ImvUYlanBTSNUqDK1OS5emUJ79J23Vbh_0e-kYg/s320/oil+futures.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5243216148345659474" /></a><br /><br /><br /><span class="Apple-style-span" style="font-weight: bold;">GDP Growth Remains Strong</span><br /><br />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.</div><div><br /></div><div>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.<br /><br />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.<br /><br />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.<br /><br /><span style="font-weight:bold;">The Iara Field</span><br /><br />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.<br /><br />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. </div><div><br /></div><div>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.</div><div><br /></div><div><span class="Apple-style-span" style="font-weight: bold;">The Outlook Is Soli</span>d</div><div><br />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. <br /><br /><br /><br /></div>Unknownnoreply@blogger.com8tag:blogger.com,1999:blog-34399666.post-1579514512428641422008-08-27T08:51:00.000-07:002008-08-27T08:57:18.137-07:00Brazil Consumer Prices Fall In August According To The IGP-M IndexBrazil'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. <br /><br />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. <br /><br />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. <br /><br />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.<br /><br />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.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-34399666.post-27588903510290603032008-08-22T07:15:00.000-07:002008-08-22T07:17:25.454-07:00Mid August Brazil Inflation SlowsBrazil'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. <br /><br />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.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-34399666.post-4408903547499657352008-08-21T05:27:00.000-07:002008-08-22T02:56:44.124-07:00Brazil Unemployment Rises In JulyBrazil'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.<br /><br />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. <br /><br />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.<br /><br /><br /><br />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.<br /><br />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%.<br /><br /><strong>Current Account Deficit Increase</strong><br /><br /><br />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. <br /><br />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.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-34399666.post-82793794934154348102008-08-18T02:37:00.001-07:002008-08-18T06:45:53.999-07:00Where Now for Brazil?<p>By Claus Vistesen Copenhagen<br /></p><p>In case you did not notice, the <a href="http://www.economist.com/world/europe/displaystory.cfm?story_id=11921252">Eurozone recently slipped into a near recession</a> and <a href="http://japanjapan.blogspot.com/2008/08/japans-economy-contracts-in-q2-2008.html">so did Japan</a>. 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. <a href="http://www.rgemonitor.com/roubini-monitor/">Nouriel Roubini</a>, who recently got some fine words in <a href="http://stefanmikarlsson.blogspot.com/2008/08/recommended-reading.html">the NYT by Stephen Mihm</a> (hat tip: <a href="http://stefanmikarlsson.blogspot.com/2008/08/recommended-reading.html">Stefan Karlsson</a>), massages the probability of a global recession in <a href="http://www.rgemonitor.com/roubini-monitor/253308/the-perfect-storm-of-a-global-recession/">a recent piece</a>. This is a topic also <a href="http://www.morganstanley.com/views/gef/archive/2008/20080814-Thu.html#anchor6792">taken up, in a US context, by Joachim Fels</a> in his recent installment over at Morgan Stanley's Global Economic Forum. </p><p>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.<br /></p><p>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 <a href="http://www.policyproject.com/pubs/generalreport/Demo_Div.pdf">demographic dividend</a>. In this small piece, we shall be looking at Brazil.</p><p>Recently, in <a href="http://brazileconomy.blogspot.com/2008/07/brazil-country-outlook-august-2008.html">an economic outlook on Brazil</a> 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, <a href="http://clausvistesen.squarespace.com/alphasources-blog/2008/5/20/brazils-economy-not-emerging-anymore.html">I have also detailed</a> in a more general context how I really did not feel that Brazil could be branded as an "emerging" economy any more. </p><p>But is all that optimism really warranted?<br /></p><p>In <a href="http://www.morganstanley.com/views/gef/archive/2008/20080812-Tue.html#anchor6768">an analysis</a> 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.<br /></p><p>Yet, retorts Carvalho. This is really a question of <em>choosing your poison</em>, 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.<br /></p><p>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 <a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=ab8A4jP_.3PU&refer=home">running a bit out of steam</a> 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.<br /></p><p>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.<br /></p><p>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 <a href="http://www.rgemonitor.com/latam-monitor/252581/the_output_gap_in_brazil">Antonio Carlos Lemgruber</a> 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.<br /></p><p>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 <em>high</em> 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.<br /></p><p> 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.<br /></p><p>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 <em>risk</em> 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.<br /></p><p>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, <a href="http://brazileconomy.blogspot.com/2008/08/brazil-annual-inflation-rises-to-637-in.html">inflation rose another notch to 6.4%</a> 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.<br /></p><p>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.<br /></p><p>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.<br /></p><ul><li>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.<br /></li></ul><ul><li>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?<br /></li></ul>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.<br /><br /><strong>Notes</strong><br /><br />[1] - Although not so booming as of late.CVhttp://www.blogger.com/profile/16843402165210120665noreply@blogger.com3tag:blogger.com,1999:blog-34399666.post-91350899140183190102008-08-14T13:12:00.000-07:002008-08-14T13:18:04.020-07:00Brazil Retail Sales Slow In JuneBrazil'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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpaitNVuUidwq_S9w9LCZtRV7Z-dZfkE7MpFrrz8fxRfnXWGu1vLssiMIYRBphtvlECDAUH5wOVl7xtEPg5DbjKBYMxVMXoSGVcSF_Awjl4FyMv81YyWodfKcuThyd58uhsDnE8w/s1600-h/brazil+retail+sales.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpaitNVuUidwq_S9w9LCZtRV7Z-dZfkE7MpFrrz8fxRfnXWGu1vLssiMIYRBphtvlECDAUH5wOVl7xtEPg5DbjKBYMxVMXoSGVcSF_Awjl4FyMv81YyWodfKcuThyd58uhsDnE8w/s320/brazil+retail+sales.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5234469667723666370" /></a><br /><br />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. <br /><br /><br />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.Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-34399666.post-76426467237546384152008-08-08T14:43:00.000-07:002008-08-08T14:53:16.820-07:00Brazil Annual Inflation Rises To 6.37% In JuneBrazil'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. <br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiw8ByBtoAZ28yrR6LMp9wIV9INgaI2dJZXwhFbcVV9OC54HyocCP_-SLHwmQAFUOCRNfloDqjKaV3HMgp0QGHtXdIqvDnA4D3g-hzhSkTsALGgrjM2DPsvZI7C4ua1FKkNf1r4kQ/s1600-h/brazil+inflation.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiw8ByBtoAZ28yrR6LMp9wIV9INgaI2dJZXwhFbcVV9OC54HyocCP_-SLHwmQAFUOCRNfloDqjKaV3HMgp0QGHtXdIqvDnA4D3g-hzhSkTsALGgrjM2DPsvZI7C4ua1FKkNf1r4kQ/s320/brazil+inflation.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5232267009436417794" /></a><br /><br />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.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-34399666.post-13827823586027027022008-07-31T02:08:00.000-07:002008-08-02T03:28:40.768-07:00Brazil Country Outlook August 2008Claus Vistesen: Copenhagen<br /><br />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.<br /><br />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.<br /><br />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).<br /><br />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.<br /><br /><br />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.<br /><br /><strong>Recent Economic Indicators</strong><br /><br /><br />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.<br />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.<br /><br /><br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKUEG6f2ygtQ5GRxzWQKtB2aJCDlOH6O1fHcHW0wT-TcW5DoaahMk5h9qM83mgtQ7GLCaJWDNWaUsyfAKfRwWHXEHXzVhJCTdRtqTt52w4uIYRIAESQKMFdtNByTSYSn02NWv9iw/s1600-h/brazil+one.jpg"><img id="BLOGGER_PHOTO_ID_5229103812984181362" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKUEG6f2ygtQ5GRxzWQKtB2aJCDlOH6O1fHcHW0wT-TcW5DoaahMk5h9qM83mgtQ7GLCaJWDNWaUsyfAKfRwWHXEHXzVhJCTdRtqTt52w4uIYRIAESQKMFdtNByTSYSn02NWv9iw/s320/brazil+one.jpg" border="0" /></a><br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYPMWOCYFmB5qERmkpf4xSISJ62XQvREH3lcXljXdY3_lIU4toGcuo9WVufbeP_WR5zgL8Dgx39tytzIb5n7k7ANYFVTnIKr7whwUTaC9Y1NV1_6GBjeagJlSvkhAHallZYyOmwA/s1600-h/brazil+two.jpg"><img id="BLOGGER_PHOTO_ID_5229103965757373298" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYPMWOCYFmB5qERmkpf4xSISJ62XQvREH3lcXljXdY3_lIU4toGcuo9WVufbeP_WR5zgL8Dgx39tytzIb5n7k7ANYFVTnIKr7whwUTaC9Y1NV1_6GBjeagJlSvkhAHallZYyOmwA/s320/brazil+two.jpg" border="0" /></a><br /><br />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. </p><p><br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlkd_czgAcUuFSOj4szfWEomzPfXo1FxQoov79-WYW67cNzV0ksiWyqwUe3b0WhvblfjL-qLlkKDNv24P8cSGfPQ5BFVPZa4lFHHwuvX7ZM28ObYtRlfoj4o7DawPub6jqPhN7ng/s1600-h/brazil+three.jpg"><img id="BLOGGER_PHOTO_ID_5229104171767797970" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlkd_czgAcUuFSOj4szfWEomzPfXo1FxQoov79-WYW67cNzV0ksiWyqwUe3b0WhvblfjL-qLlkKDNv24P8cSGfPQ5BFVPZa4lFHHwuvX7ZM28ObYtRlfoj4o7DawPub6jqPhN7ng/s320/brazil+three.jpg" border="0" /></a><br /><br />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.<br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg2HAKWe8Bo6eb30hO9Dg0615QpuWLQ2DI4-rF5uOIfnD6UW40L6riRptelGcKDilQxlQL4Zi847pdAH8E9D0Dk3N-KBdoKw2SGZ8hU9gBeof-jMwLGe1Bi8FcqmcKSnV74uVGTaQ/s1600-h/brazil+four.jpg"><img id="BLOGGER_PHOTO_ID_5229104376668025698" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg2HAKWe8Bo6eb30hO9Dg0615QpuWLQ2DI4-rF5uOIfnD6UW40L6riRptelGcKDilQxlQL4Zi847pdAH8E9D0Dk3N-KBdoKw2SGZ8hU9gBeof-jMwLGe1Bi8FcqmcKSnV74uVGTaQ/s320/brazil+four.jpg" border="0" /></a><br /><br />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. </p><p><br />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.<br /><br /><strong>Outlook on Key indicators</strong></p><strong></strong><ul><li><br />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.</li><li><br />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.</li><li><br />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. </li></ul><p><br /><strong>2007 Data<br /></strong><br />GDP (2007) - 5.4%<br />Inflation (2007) - 3.6%<br />Current Account Deficit -0.27% of GDP<br />Fiscal Deficit - 2.27% GDP<br />Debt to GDP ratio - 42.8%<br /><br /><br /><strong>Debt Ratings</strong> (local currency, long term)<br /></p><p>Fitch - BBB-<br />S&P - BBB+<br />Moody- Ba1<br /><br /><br />2008 Central Bank Inflation Target - 4.5% (+ or – 2pp)<br /><br />Population Median Age -29 years<br />Total Fertility Rate (2007) -1.88 child per women<br />Male Life Expectancy - 68.57 years<br /><br /><strong>Development Indicators Rank</strong> (131 economies in total)<br /><br />Global Competitiveness (World Economic Forum)<br />72/131 (2007-08)<br />Business Competitiveness (World Economic Forum)<br />59/131 (2007-08)<br /><br /><br /><strong>Selected Sub-components</strong><br /></p><p>Institutions - 104/131<br />Infrastructure - 78/131<br />Macroeconomic Stability - 126/131<br />Health and Primary Education -84/131 </p><p></p><p><strong>Short Term Data</strong><br /><br />Retail Sales Growth (May, y-o-y, volume index) - 10.5%<br />Industrial Output (May, y-o-y) - 2.4%<br />Inflation (July 2008) - 6.3%<br />Central Bank Interest Rate (SELIC Rate) - 13.0%</p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-34399666.post-3777019864837111642008-07-24T13:39:00.000-07:002008-07-26T05:58:22.778-07:00Brazil Central Bank Raises Interest Rates Again In JulyBrazil'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. <br /><br />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".<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPqQqC1qIqY24ZvOBH9h6l_4o3bFhEVjKQG1rXxdyZxs7p8Gn8iVExh1-0ihYvJAHX0RGCL5CF82gBMZ-gioPTYBk_WOpUuHdwHqDETE23FsFAYvOwjk7S8B2J3VyqHdk_358g1Q/s1600-h/brazil+interest+r.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPqQqC1qIqY24ZvOBH9h6l_4o3bFhEVjKQG1rXxdyZxs7p8Gn8iVExh1-0ihYvJAHX0RGCL5CF82gBMZ-gioPTYBk_WOpUuHdwHqDETE23FsFAYvOwjk7S8B2J3VyqHdk_358g1Q/s320/brazil+interest+r.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5226683769700464450" /></a><br /><br />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. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4n6J3XO_Udj4Ijo9UA1pj7Uv422UOe0KsltYhRJkazRX_kFnMTethclU8vj5cElMJfzfXbANNcNIcEGCz0ydzu9IPR70LlqOQz5Pg83RBeA1Aulq68q6tMqKtjz5VeSFf5TwNRA/s1600-h/brazil+inflation.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4n6J3XO_Udj4Ijo9UA1pj7Uv422UOe0KsltYhRJkazRX_kFnMTethclU8vj5cElMJfzfXbANNcNIcEGCz0ydzu9IPR70LlqOQz5Pg83RBeA1Aulq68q6tMqKtjz5VeSFf5TwNRA/s320/brazil+inflation.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5226946719833708882" /></a><br /><br />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. <br /><br />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. <br /><br />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. <br /><br />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.<br /><br />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).<br /><br />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.<br /><br />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. <br /><br />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. <br /><br />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.<br /><br /><br />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.<br /><br /><br />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. <br /><br />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.Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-34399666.post-76046692370536755872008-07-16T03:41:00.000-07:002008-07-26T03:46:20.142-07:00Brazil Retail Sales May 2008Retail 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. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgL9zLplA7ZbGEoxamtPLqKxuUkDmoBY7Ho8BD2JsUy7Ic1QYtTjssM1FMM3SwDPfusbwTprfJhtrDdAjB81BLAAS-iTSlt0TjFGdjZyrxh-detn0VZWQolOrPfPCmrjfjSeV8qcQ/s1600-h/brazil+interest+r.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgL9zLplA7ZbGEoxamtPLqKxuUkDmoBY7Ho8BD2JsUy7Ic1QYtTjssM1FMM3SwDPfusbwTprfJhtrDdAjB81BLAAS-iTSlt0TjFGdjZyrxh-detn0VZWQolOrPfPCmrjfjSeV8qcQ/s320/brazil+interest+r.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5227271682724609266" /></a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-34399666.post-31564919218674841742008-07-12T04:53:00.000-07:002008-07-12T07:24:00.421-07:00Brazil Monthly Inflation Falls Back (Slightly) In JuneBrazil'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.<br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioCa-7ZPXUxdvHj-hKv8bp4u3L0qe2lxOnt_UCe3wXlX5GDjBxpVl5VL6BZyoeMy4u0y8lrRmPE2pjSjVaLfKSrVN6Rq8NbHsLtATIYw0Wct0DNlqAZW6khexAyZ0XRMnHYSdXUg/s1600-h/brazil+inflation.jpg"><img id="BLOGGER_PHOTO_ID_5222099912961756178" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioCa-7ZPXUxdvHj-hKv8bp4u3L0qe2lxOnt_UCe3wXlX5GDjBxpVl5VL6BZyoeMy4u0y8lrRmPE2pjSjVaLfKSrVN6Rq8NbHsLtATIYw0Wct0DNlqAZW6khexAyZ0XRMnHYSdXUg/s320/brazil+inflation.jpg" border="0" /></a><br /><br />Slowing inflation may give the the central bank - which <a href="http://www.economist.com/world/la/displaystory.cfm?story_id=11707341">the Economist wryly refers to as the new Bundesbank</a> - 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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHF6zbTGLnUbgzOznDTGcSPyScP6iqiboXZdQ22WOUu4nmUOBHqlWrJWTA0KkrLkjVqbKhi_JUyVD6Us9x9656zBXfNuHWjMcoliMXOH3oM4iTew4vmcNmZ9K-0s3O9vVI3YKhkA/s1600-h/brazil+interest+rates.jpg"><img id="BLOGGER_PHOTO_ID_5208273951958658706" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHF6zbTGLnUbgzOznDTGcSPyScP6iqiboXZdQ22WOUu4nmUOBHqlWrJWTA0KkrLkjVqbKhi_JUyVD6Us9x9656zBXfNuHWjMcoliMXOH3oM4iTew4vmcNmZ9K-0s3O9vVI3YKhkA/s320/brazil+interest+rates.jpg" border="0" /></a><br /><br />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.<br /><br /><br />Brazil's annual inflation rate has been running above the 4.5 percent midpoint of the central bank's annual target range throughout 2008.<br /><br />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.<br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXSvuXQ_ovtdZVpQRGhOI-eijVNGeiL3GD3VFFcZXXOTOk4MTabIYYFVY8yXD7J4x0jg118190qV-7ammlj-_OqYGcZmyxR58HW8oE-GsiHiOVvzpQQZdT85s9XZlR2zGY3IKjWg/s1600-h/brazil+retail+sales.jpg"><img id="BLOGGER_PHOTO_ID_5222107889396222706" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXSvuXQ_ovtdZVpQRGhOI-eijVNGeiL3GD3VFFcZXXOTOk4MTabIYYFVY8yXD7J4x0jg118190qV-7ammlj-_OqYGcZmyxR58HW8oE-GsiHiOVvzpQQZdT85s9XZlR2zGY3IKjWg/s320/brazil+retail+sales.jpg" border="0" /></a><br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEheP1yQCOZA-aeP7s1c4iNTPTSfCb10GY_ETdFi1oKGO9zmW2Rsdc2uiMWwTVbNEoTKNLCqv92C7Jg1_zdMfEGWaSnqQyM2l0dFKUjlBrZ_mgZirOrsD4aju43U2B-MtFg4-Cj55g/s1600-h/brazil+industrial+output.jpg"><img id="BLOGGER_PHOTO_ID_5218094093606249298" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEheP1yQCOZA-aeP7s1c4iNTPTSfCb10GY_ETdFi1oKGO9zmW2Rsdc2uiMWwTVbNEoTKNLCqv92C7Jg1_zdMfEGWaSnqQyM2l0dFKUjlBrZ_mgZirOrsD4aju43U2B-MtFg4-Cj55g/s320/brazil+industrial+output.jpg" border="0" /></a><br /><br />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.<br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs_m4eX0bwSnhgIkJWzAcjW4uiifJRL047yOlABOWf9X7q17DahmK0-BSpoosgoSCONXFvMz4p8UaCxbogDj3yNZJVOh1cpDACRYQ3hHf6SBpQqjsDIMipuju_ZsDzPB4mTkcSvA/s1600-h/brazil+fx2.jpg"><img id="BLOGGER_PHOTO_ID_5201307399639795730" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs_m4eX0bwSnhgIkJWzAcjW4uiifJRL047yOlABOWf9X7q17DahmK0-BSpoosgoSCONXFvMz4p8UaCxbogDj3yNZJVOh1cpDACRYQ3hHf6SBpQqjsDIMipuju_ZsDzPB4mTkcSvA/s320/brazil+fx2.jpg" border="0" /></a><br /><br />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.<br /><br />Interestingly Morgan Stanley's Marcello Carvalho <a href="http://www.morganstanley.com/views/gef/archive/2008/20080624-Tue.html#anchor6569">in a recent piece for the GEF</a> 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:<br /><br /><blockquote>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).</blockquote><br /><br />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.<br /><br /><blockquote>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.<br />Marcello Carvalho</blockquote><br /><br />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 - <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayVzB8QlyYng">was out there warning central bankers </a>that deflation may soon overtake surging prices as the biggest risk to the world economy.Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-34399666.post-10946761624422233052008-07-01T10:03:00.000-07:002008-07-01T10:21:05.533-07:00Brazil Trade Surplus, June 2008, Industrial Output and Retail SalesBrazil'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.<br /><br />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.<br /><br />The Brazilian real has risen 20 percent against the dollar in the last 12 months, the best performance among the 16 most- traded currencies.<br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEheP1yQCOZA-aeP7s1c4iNTPTSfCb10GY_ETdFi1oKGO9zmW2Rsdc2uiMWwTVbNEoTKNLCqv92C7Jg1_zdMfEGWaSnqQyM2l0dFKUjlBrZ_mgZirOrsD4aju43U2B-MtFg4-Cj55g/s1600-h/brazil+industrial+output.jpg"><img id="BLOGGER_PHOTO_ID_5218094093606249298" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEheP1yQCOZA-aeP7s1c4iNTPTSfCb10GY_ETdFi1oKGO9zmW2Rsdc2uiMWwTVbNEoTKNLCqv92C7Jg1_zdMfEGWaSnqQyM2l0dFKUjlBrZ_mgZirOrsD4aju43U2B-MtFg4-Cj55g/s320/brazil+industrial+output.jpg" border="0" /></a><br /><br />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.<br /><br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1tAjtFOp5rAj97h0f_XiboQfjxLZe5NPld68xZ343G56PxtA37BvxO21iULatqqmSXdTCVz1pfPuCl74IdKXRdlvMacIfnWWo2V5NS7FYM4OO-ItlGDUr8R0K1hn-DnzCYL3PPA/s1600-h/brazil+retail+sales.jpg"><img id="BLOGGER_PHOTO_ID_5218094630267914354" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1tAjtFOp5rAj97h0f_XiboQfjxLZe5NPld68xZ343G56PxtA37BvxO21iULatqqmSXdTCVz1pfPuCl74IdKXRdlvMacIfnWWo2V5NS7FYM4OO-ItlGDUr8R0K1hn-DnzCYL3PPA/s320/brazil+retail+sales.jpg" border="0" /></a><br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHF6zbTGLnUbgzOznDTGcSPyScP6iqiboXZdQ22WOUu4nmUOBHqlWrJWTA0KkrLkjVqbKhi_JUyVD6Us9x9656zBXfNuHWjMcoliMXOH3oM4iTew4vmcNmZ9K-0s3O9vVI3YKhkA/s1600-h/brazil+interest+rates.jpg"><img id="BLOGGER_PHOTO_ID_5208273951958658706" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHF6zbTGLnUbgzOznDTGcSPyScP6iqiboXZdQ22WOUu4nmUOBHqlWrJWTA0KkrLkjVqbKhi_JUyVD6Us9x9656zBXfNuHWjMcoliMXOH3oM4iTew4vmcNmZ9K-0s3O9vVI3YKhkA/s320/brazil+interest+rates.jpg" border="0" /></a>Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-34399666.post-43126561709474261422008-06-26T02:22:00.000-07:002008-06-26T02:26:13.715-07:00Brazil Inflation Mid-June 2008Brazil'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. <br /><br />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. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPRSBjDGKD4AGGPcPnAAkfAhqongnLEEC-TaMD-jd_H48AZ69qklRzjCeQMlw3KeREUzW4XwQOhOTJ02Hv4O1ey2JwuIMc5PohxeEHDXyppQEfOpKkSgM_6OePl1Bl6mR18KOtdA/s1600-h/brazil+inflation.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPRSBjDGKD4AGGPcPnAAkfAhqongnLEEC-TaMD-jd_H48AZ69qklRzjCeQMlw3KeREUzW4XwQOhOTJ02Hv4O1ey2JwuIMc5PohxeEHDXyppQEfOpKkSgM_6OePl1Bl6mR18KOtdA/s320/brazil+inflation.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5216118388228274706" /></a><br /><br />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. <br /><br />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.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-34399666.post-48766379162953290692008-06-17T06:41:00.000-07:002008-07-12T05:46:22.790-07:00Brazil Retail Sales April 2008Brazil'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. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXSvuXQ_ovtdZVpQRGhOI-eijVNGeiL3GD3VFFcZXXOTOk4MTabIYYFVY8yXD7J4x0jg118190qV-7ammlj-_OqYGcZmyxR58HW8oE-GsiHiOVvzpQQZdT85s9XZlR2zGY3IKjWg/s1600-h/brazil+retail+sales.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXSvuXQ_ovtdZVpQRGhOI-eijVNGeiL3GD3VFFcZXXOTOk4MTabIYYFVY8yXD7J4x0jg118190qV-7ammlj-_OqYGcZmyxR58HW8oE-GsiHiOVvzpQQZdT85s9XZlR2zGY3IKjWg/s320/brazil+retail+sales.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5222107889396222706" /></a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-34399666.post-76732118445687573372008-06-13T00:21:00.001-07:002008-06-13T00:33:58.217-07:00Brazil IPCA Consumer Inflation May 2008Brazilian 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. <br /><br />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. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiypJs8KuYd3qNR3MS4K1oAKVCweptLE-iSSCoo_cBbFTozkLMLAQ_jD52LTJ0wMuhKN5B5QYeYXL_YPcwjNGRh5Hv4UaiiN_G02tzbMKW9dQKc3eIjrSwUcX46hPhWmVNtArcWRQ/s1600-h/brazil+inflation.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiypJs8KuYd3qNR3MS4K1oAKVCweptLE-iSSCoo_cBbFTozkLMLAQ_jD52LTJ0wMuhKN5B5QYeYXL_YPcwjNGRh5Hv4UaiiN_G02tzbMKW9dQKc3eIjrSwUcX46hPhWmVNtArcWRQ/s320/brazil+inflation.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5211262980387520546" /></a><br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHF6zbTGLnUbgzOznDTGcSPyScP6iqiboXZdQ22WOUu4nmUOBHqlWrJWTA0KkrLkjVqbKhi_JUyVD6Us9x9656zBXfNuHWjMcoliMXOH3oM4iTew4vmcNmZ9K-0s3O9vVI3YKhkA/s1600-h/brazil+interest+rates.jpg"><img id="BLOGGER_PHOTO_ID_5208273951958658706" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHF6zbTGLnUbgzOznDTGcSPyScP6iqiboXZdQ22WOUu4nmUOBHqlWrJWTA0KkrLkjVqbKhi_JUyVD6Us9x9656zBXfNuHWjMcoliMXOH3oM4iTew4vmcNmZ9K-0s3O9vVI3YKhkA/s320/brazil+interest+rates.jpg" border="0" /></a><br /><br /><br />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. <br /><br /><blockquote>"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." </blockquote><br /><br />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.Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-34399666.post-78106830273698074652008-06-04T23:02:00.001-07:002008-06-05T00:46:23.461-07:00Brazil Central Bank Raises Interest Rates to 12.25%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.<br /><br /><blockquote>"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.</blockquote><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHF6zbTGLnUbgzOznDTGcSPyScP6iqiboXZdQ22WOUu4nmUOBHqlWrJWTA0KkrLkjVqbKhi_JUyVD6Us9x9656zBXfNuHWjMcoliMXOH3oM4iTew4vmcNmZ9K-0s3O9vVI3YKhkA/s1600-h/brazil+interest+rates.jpg"><img id="BLOGGER_PHOTO_ID_5208273951958658706" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHF6zbTGLnUbgzOznDTGcSPyScP6iqiboXZdQ22WOUu4nmUOBHqlWrJWTA0KkrLkjVqbKhi_JUyVD6Us9x9656zBXfNuHWjMcoliMXOH3oM4iTew4vmcNmZ9K-0s3O9vVI3YKhkA/s320/brazil+interest+rates.jpg" border="0" /></a><br /><br />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.<br /><br />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.<br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0CrnR12QtPyK_im5YF5ItuI3_W95_TjCn2ODrBobACopleOuXNPS7j6ctjOKwiMfeEJ6S767_RNYHUBkwQlpE2gGkK1xuYleOWztmr0GeGamuPVuGqwMGqRjtebzR68gMdHXDsg/s1600-h/brazil+CPI.jpg"><img id="BLOGGER_PHOTO_ID_5200718250385868626" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0CrnR12QtPyK_im5YF5ItuI3_W95_TjCn2ODrBobACopleOuXNPS7j6ctjOKwiMfeEJ6S767_RNYHUBkwQlpE2gGkK1xuYleOWztmr0GeGamuPVuGqwMGqRjtebzR68gMdHXDsg/s320/brazil+CPI.jpg" border="0" /></a><br /><br />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.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiiMgaGAE7SvPB14jTB4WPWd0clZjphJFS9IsdzfLpE7NgSKlSq61IvFgVeStScK7zIikmRiCKntqpGlnRW6Ee7cUwqtkI_M4VB95MwMoxojYynmV7bWmTrHGV1R4Gxj97mOOxGQ/s1600-h/brazil+retail+sales.jpg"><img id="BLOGGER_PHOTO_ID_5200717554601166658" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiiMgaGAE7SvPB14jTB4WPWd0clZjphJFS9IsdzfLpE7NgSKlSq61IvFgVeStScK7zIikmRiCKntqpGlnRW6Ee7cUwqtkI_M4VB95MwMoxojYynmV7bWmTrHGV1R4Gxj97mOOxGQ/s320/brazil+retail+sales.jpg" border="0" /></a><br /><br />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.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs_m4eX0bwSnhgIkJWzAcjW4uiifJRL047yOlABOWf9X7q17DahmK0-BSpoosgoSCONXFvMz4p8UaCxbogDj3yNZJVOh1cpDACRYQ3hHf6SBpQqjsDIMipuju_ZsDzPB4mTkcSvA/s1600-h/brazil+fx2.jpg"><img id="BLOGGER_PHOTO_ID_5201307399639795730" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs_m4eX0bwSnhgIkJWzAcjW4uiifJRL047yOlABOWf9X7q17DahmK0-BSpoosgoSCONXFvMz4p8UaCxbogDj3yNZJVOh1cpDACRYQ3hHf6SBpQqjsDIMipuju_ZsDzPB4mTkcSvA/s320/brazil+fx2.jpg" border="0" /></a><br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br /><br />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 - <a href="http://brazileconomy.blogspot.com/2008/05/brazils-economy-not-emerging-anymore.html">as my colleague Claus Vistesen keeps emphasising</a> (and <a href="http://globaleconomydoesmatter.blogspot.com/2008/06/japans-savings-going-for-yield.html">see here for the Japanese case</a>) - 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.<br /><br /><br />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.Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-34399666.post-67773443781824065002008-06-03T14:30:00.000-07:002008-06-04T00:46:16.331-07:00Brazil Industrial Output April 2008Brazil'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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjajzqOheE96RgcsJO4S8iL3qjgclLvbP4oo9HkSmuTuJJjEv0wkjlmY5qMZYfSENj-yZKw-KMo0Fzd0uXrd6tIjX8oLAD5dKvx0qRPp7EapCV331oV_88lWn62SeQyut-DuSW1Q/s1600-h/brazil+IP.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjajzqOheE96RgcsJO4S8iL3qjgclLvbP4oo9HkSmuTuJJjEv0wkjlmY5qMZYfSENj-yZKw-KMo0Fzd0uXrd6tIjX8oLAD5dKvx0qRPp7EapCV331oV_88lWn62SeQyut-DuSW1Q/s320/brazil+IP.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5207925350938078642" /></a><br /><br /><br />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.<br /><br /><blockquote>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%).</blockquote><br /><br /><br />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.<br /><br />Production of pharmaceuticals rose 8.1 percent in April, automobile output increased 2.3 percent and production of foodstuffs expanded 2 percent.<br /><br />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.<br /><br />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.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-34399666.post-31228000462694113582008-05-29T09:47:00.000-07:002008-06-13T00:20:58.817-07:00Brazil Wholesale Inflation May 2008Brazil'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.<br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4VNR-g9gaXBA2gzhmuteYVanRPfT01-aM7h7Nv6wCUh_X9KRsiYfMcbdqf3MF0S-y4g1siT5ZfT6JV48UAeBTusSIdMmvFq3wGXFk3zaRJy37hsFOZYTftmkAu00AiW43h0nb1Q/s1600-h/brazil+inflation.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4VNR-g9gaXBA2gzhmuteYVanRPfT01-aM7h7Nv6wCUh_X9KRsiYfMcbdqf3MF0S-y4g1siT5ZfT6JV48UAeBTusSIdMmvFq3wGXFk3zaRJy37hsFOZYTftmkAu00AiW43h0nb1Q/s320/brazil+inflation.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5205843465444115730" /></a><br /><br />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. . <br /><br />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.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhE6joyD695LWXzHZnRiAlO4rkaW-0HsfiD7T0P444HSE3pkztBWZ_A0D-RKgEY_MTLkf0pRMJnjmvlDeo7GJ8OWH6GMuWfTudfRNyxclM9vS-CJO-a2lg-Nj0Wm543dUTvfhT-CQ/s1600-h/brazil+interest+rate.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhE6joyD695LWXzHZnRiAlO4rkaW-0HsfiD7T0P444HSE3pkztBWZ_A0D-RKgEY_MTLkf0pRMJnjmvlDeo7GJ8OWH6GMuWfTudfRNyxclM9vS-CJO-a2lg-Nj0Wm543dUTvfhT-CQ/s320/brazil+interest+rate.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5205846596475274530" /></a>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-34399666.post-12149078436929129692008-05-26T14:02:00.000-07:002008-06-04T01:11:07.357-07:00Brazil Current Account Deficit April 2008Brazil 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. <br /><br /><br />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.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiY2ifIMy-h3SyGAaM9uBZi7qtWNJqxJwwnOF20w5t-BqXM7TlHgw8LPKZlhg1rPD_FKRIspPuHqTpSkqygWPgj4gJL1hZ8bJBGEbQlpm4PnQnsbF9LNqITpwFX-2J2ZI5U3M83AA/s1600-h/brazil+CA.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiY2ifIMy-h3SyGAaM9uBZi7qtWNJqxJwwnOF20w5t-BqXM7TlHgw8LPKZlhg1rPD_FKRIspPuHqTpSkqygWPgj4gJL1hZ8bJBGEbQlpm4PnQnsbF9LNqITpwFX-2J2ZI5U3M83AA/s320/brazil+CA.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5207935611614948802" /></a><br /><br />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.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs_m4eX0bwSnhgIkJWzAcjW4uiifJRL047yOlABOWf9X7q17DahmK0-BSpoosgoSCONXFvMz4p8UaCxbogDj3yNZJVOh1cpDACRYQ3hHf6SBpQqjsDIMipuju_ZsDzPB4mTkcSvA/s1600-h/brazil+fx2.jpg"><img id="BLOGGER_PHOTO_ID_5201307399639795730" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs_m4eX0bwSnhgIkJWzAcjW4uiifJRL047yOlABOWf9X7q17DahmK0-BSpoosgoSCONXFvMz4p8UaCxbogDj3yNZJVOh1cpDACRYQ3hHf6SBpQqjsDIMipuju_ZsDzPB4mTkcSvA/s320/brazil+fx2.jpg" border="0" /></a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-34399666.post-63624822221431439212008-05-20T13:04:00.000-07:002008-05-20T13:05:20.760-07:00Brazil's Economy - Not Emerging Anymore?<div class="body">By Claus Vistesen: Copenhagen </div><p class="body">Brazil is interesting; not only because of its <a href="http://en.wikipedia.org/wiki/Brazil#Geography">fabulous nature</a>, <a href="http://en.wikipedia.org/wiki/Bossa_nova">its rhythmic and musical heritage</a>, 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.<br /><br />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 <a href="http://www.rgemonitor.com/economonitor-monitor/252611/brazil-opec-bound/">suggest that Brazil enter OPEC</a>. </p><p class="body">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. <a href="http://bloomberg.com/apps/news?pid=20601109&sid=aV._LdPUcaNU&refer=exclusive">Extraordinary evidence of this</a> 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.<br /></p><p class="body">In many ways, as <a href="http://brazileconomy.blogspot.com/2008/05/barazli-petrobas-investment-grade-soya.html">Edward also hints</a> 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.<br /></p><p class="body">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?</p><p class="body" style="TEXT-ALIGN: center" align="center"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMPdYpc6hV928H5owr7Eiq0k1_U1-Tiz1ZUwJW4Ht7w9xx7UILg52E_2MDu4mCKI3_z_woaiYq3j9NhzsTqtLO9hwqq3cQLmEnRvPY3kkk4r4W4REOTFipe2PYt2vpfjBK6y5b9A/s1600-h/brazil.gdp.ppp.jpg"><img id="BLOGGER_PHOTO_ID_5202518686750474914" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMPdYpc6hV928H5owr7Eiq0k1_U1-Tiz1ZUwJW4Ht7w9xx7UILg52E_2MDu4mCKI3_z_woaiYq3j9NhzsTqtLO9hwqq3cQLmEnRvPY3kkk4r4W4REOTFipe2PYt2vpfjBK6y5b9A/s320/brazil.gdp.ppp.jpg" /></a> </p><p class="body" style="TEXT-ALIGN: center" align="center"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg46mKks1oaee0o6VYwxVEfqEJpDW4LPFPO3CEUF-2YSlCXsowoe6XCVyjeOlfQeRWZE_VBs73I5yIT6LDjSicO0sgg9nsgRxUpAv-dCJcLKdxVPQ_Ixdgnuo9XZiw9AQwCYr0z1Q/s1600-h/brazil.gdp.ppp2.jpg"><img id="BLOGGER_PHOTO_ID_5202518691045442226" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg46mKks1oaee0o6VYwxVEfqEJpDW4LPFPO3CEUF-2YSlCXsowoe6XCVyjeOlfQeRWZE_VBs73I5yIT6LDjSicO0sgg9nsgRxUpAv-dCJcLKdxVPQ_Ixdgnuo9XZiw9AQwCYr0z1Q/s320/brazil.gdp.ppp2.jpg" /></a> </p><p class="body" style="TEXT-ALIGN: center" align="center"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbMshpjI99c3L2ma5cqwsPoZQaRSskZ76UnLOMsL0IW79-ByjWyTMX5vn-l6fdmcMIlPXmjhaqX9a8PXKeIi47C28OhMdXGE-9tnp6lUwQ2vEX0huytJtWLX2kmCu5Y31Km8fLcg/s1600-h/inflation.jpg"><img id="BLOGGER_PHOTO_ID_5202518699635376834" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbMshpjI99c3L2ma5cqwsPoZQaRSskZ76UnLOMsL0IW79-ByjWyTMX5vn-l6fdmcMIlPXmjhaqX9a8PXKeIi47C28OhMdXGE-9tnp6lUwQ2vEX0huytJtWLX2kmCu5Y31Km8fLcg/s320/inflation.jpg" /></a></p><p class="body" style="TEXT-ALIGN: center" align="center"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_OA5v5iQcEZ-iEebeC6QHPgW2ddPQp41OyCeth8iPUmazcjw741s8foL7WmmFmB-Ja25IZsvFgyCmy0nLeeeka470aM2BaHD6mu9xG1A6h05XfnDJkJ2wkNKObuDjN9JNiYiI2A/s1600-h/usd.real.jpg"><img id="BLOGGER_PHOTO_ID_5202518708225311458" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_OA5v5iQcEZ-iEebeC6QHPgW2ddPQp41OyCeth8iPUmazcjw741s8foL7WmmFmB-Ja25IZsvFgyCmy0nLeeeka470aM2BaHD6mu9xG1A6h05XfnDJkJ2wkNKObuDjN9JNiYiI2A/s320/usd.real.jpg" /></a> <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjViagDzAeg6ZwJZYSDQ3k90uz5_NmE68WFlANvxOOPrcMgCeH7s3J2DjVWSVBFfdAupmZiV28SH-EgV-3RVU13mqeAh114nK7MFCTMGQX8fy1u-pCvjCgz46oddw3AbOsFuzHs2Q/s1600-h/bovespa.jpg"><img id="BLOGGER_PHOTO_ID_5202518703930344146" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjViagDzAeg6ZwJZYSDQ3k90uz5_NmE68WFlANvxOOPrcMgCeH7s3J2DjVWSVBFfdAupmZiV28SH-EgV-3RVU13mqeAh114nK7MFCTMGQX8fy1u-pCvjCgz46oddw3AbOsFuzHs2Q/s320/bovespa.jpg" /></a></p><p class="body" style="TEXT-ALIGN: left" align="left"></p><div class="body">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.<br /></div><p class="body"><br />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.<br /></p><p class="body"><strong>Too Much of a Good Thing?</strong><br /></p><p class="body">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. </p><p class="body"></p><p class="body">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, <a href="http://www.rgemonitor.com/latam-monitor/252581/the_output_gap_in_brazil">Antonio Carlos Lemgruber</a> voiced a similar critique in the context of <a href="http://www.rgemonitor.com/latam-monitor/">RGE's Latin America monitor</a>. 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 <a href="http://demographymatters.blogspot.com/2006/09/economics-of-demographics.html">demographic dividend</a>.<br /></p><p class="body">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.</p><p class="body"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjK4xK-wjyEeWpFIjOCXr0TGp2IaTTaP2jfOm6ssY9FrOWR2kPMbdynGIH4g8469JpXhGIkPSWxXDI2U-zVUR59pXVD2KXLcglY9WhWBsTKBLgyst5gaSPxrUgKNlkyh8JMpTne2w/s1600-h/tfr.jpg"><img id="BLOGGER_PHOTO_ID_5202519202146550514" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjK4xK-wjyEeWpFIjOCXr0TGp2IaTTaP2jfOm6ssY9FrOWR2kPMbdynGIH4g8469JpXhGIkPSWxXDI2U-zVUR59pXVD2KXLcglY9WhWBsTKBLgyst5gaSPxrUgKNlkyh8JMpTne2w/s320/tfr.jpg" /></a></p><p class="body"></p><div class="body">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. </div><div class="body"></div><div class="body">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 (<a href="http://macro-man.blogspot.com/2007/04/brazilian-real-fair-value.html">see Macro Man for a semi-empirical account of this</a>). 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.</div><div class="body"></div><div class="body">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 <a href="http://www.morganstanley.com/views/gef/archive/2008/20080519-Mon.html#anchor6364">Stephen Jen wrote a neat piece</a> 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?<br /></div><p class="body"><br />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. </p><p class="body"><br /><strong>Letting the Capital Flow?</strong></p><p class="body">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.</p><p class="body"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgN7ntc1k40VJMjMugqStuytKHGn2P2ZJHbJfcTZUEFOoKm6MqsA3xmqUADeu1MYIVm0a7kQ5q19T1Ytxit9VnBsuK4wqnTRBex973umXpSM8WHhYRH7i9RQ33zmZksel9Qo0ttLw/s1600-h/brazil+ca.jpg"><img id="BLOGGER_PHOTO_ID_5202519210736485122" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgN7ntc1k40VJMjMugqStuytKHGn2P2ZJHbJfcTZUEFOoKm6MqsA3xmqUADeu1MYIVm0a7kQ5q19T1Ytxit9VnBsuK4wqnTRBex973umXpSM8WHhYRH7i9RQ33zmZksel9Qo0ttLw/s320/brazil+ca.jpg" /></a></p><p class="body"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2FH7Rn1BV1dvH4UBahxACWbuNBdEvYiAUckpwmLlVtTA_Tcugj5cl2V5-uyEhUQm-I8qOIKxG7o30EB348rDGRNhIUOxiOGO8mPChSH1yexCXCpbqq3VXqbiVwfROWqj6wyuTng/s1600-h/ca2.jpg"><img id="BLOGGER_PHOTO_ID_5202519215031452434" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2FH7Rn1BV1dvH4UBahxACWbuNBdEvYiAUckpwmLlVtTA_Tcugj5cl2V5-uyEhUQm-I8qOIKxG7o30EB348rDGRNhIUOxiOGO8mPChSH1yexCXCpbqq3VXqbiVwfROWqj6wyuTng/s320/ca2.jpg" /></a></p><p class="body"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitH75PeLc_ArSXCtaj7NDE0bPdPD1R5xWvIOzSUtj4FEurBgx-kYF0pgCN_cbndoP7VaeotDXumSBTc28GhEhC4c3Tox7LjkWRCh6oQWrcv7JKFgYiLcL7S7toQJXd42IRb7NysQ/s1600-h/cap1.jpg"><img id="BLOGGER_PHOTO_ID_5202519219326419746" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitH75PeLc_ArSXCtaj7NDE0bPdPD1R5xWvIOzSUtj4FEurBgx-kYF0pgCN_cbndoP7VaeotDXumSBTc28GhEhC4c3Tox7LjkWRCh6oQWrcv7JKFgYiLcL7S7toQJXd42IRb7NysQ/s320/cap1.jpg" /></a></p><p class="body"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqf1bSwn2iLzQ9YD06J6gCpcQcGOEoQNqLbWjM6jM3hK7ntHaxt_QvkV9Bq4go_I6q-oNmdAwOhTS6n3NyJ2rIpfBlhPnMOhUnjysIQUw-qRUh97c1X7lEAhn5lmyXQKrDTKHrvA/s1600-h/cap2.jpg"><img id="BLOGGER_PHOTO_ID_5202526993217225586" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqf1bSwn2iLzQ9YD06J6gCpcQcGOEoQNqLbWjM6jM3hK7ntHaxt_QvkV9Bq4go_I6q-oNmdAwOhTS6n3NyJ2rIpfBlhPnMOhUnjysIQUw-qRUh97c1X7lEAhn5lmyXQKrDTKHrvA/s320/cap2.jpg" /></a></p><p class="body"></p><div class="body">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. </div><p class="body"><br />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. </p><p class="body">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? </p><p class="body">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. </p><p class="body">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. <a href="http://www.rgemonitor.com/latam-monitor/252563/brazils_investment_grade_rating">Thomas Trebat</a> 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 <em>investment grade</em> 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. </p><p class="body">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.</p><p class="body"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjr7uKsyipN1bJLer23gpqqciAvMa_uqQ91zRk3lUrT56gy2n8szqjBGk9TCQr48EgbmNpU38zyibIX09SyrkKSHSpeJsIS0KalzDPxbfLJ1GWLDTJWdoDoJY5PhM27QrBja5A_Lw/s1600-h/reserves.jpg"><img id="BLOGGER_PHOTO_ID_5202520409032360770" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjr7uKsyipN1bJLer23gpqqciAvMa_uqQ91zRk3lUrT56gy2n8szqjBGk9TCQr48EgbmNpU38zyibIX09SyrkKSHSpeJsIS0KalzDPxbfLJ1GWLDTJWdoDoJY5PhM27QrBja5A_Lw/s320/reserves.jpg" /></a></p><p class="body"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhgT71JVlN_MDo3jn4QQFLRKwJ-KrATD2Tp0heHyA1R8NYp5qHRSZgSSjaHWLzlijmweKFW6tBpLaYLqdOmr1fhJ3Z7X9Hmh39Nn3BIzf4yNpFS3d656GzS3cY2F9NY5uKXLN2Ryg/s1600-h/reserves2.jpg"><img id="BLOGGER_PHOTO_ID_5202520413327328082" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhgT71JVlN_MDo3jn4QQFLRKwJ-KrATD2Tp0heHyA1R8NYp5qHRSZgSSjaHWLzlijmweKFW6tBpLaYLqdOmr1fhJ3Z7X9Hmh39Nn3BIzf4yNpFS3d656GzS3cY2F9NY5uKXLN2Ryg/s320/reserves2.jpg" /></a></p><p class="body">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. <a href="http://www.forexblog.org/2007/05/brazil_aims_to_.html">We know in this context</a> 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 <a href="http://blogs.cfr.org/setser/2007/04/25/five-observations-all-loosely-tied-to-yen-and-dollar-weakness/">Brad Setser</a> put words on Brazil’s possibilities as he asked …</p><blockquote class="body"><p><em>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.</em></p></blockquote><p class="body">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. </p><p class="body">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. </p><p class="body">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. </p><p class="body"><strong>Keep Drilling; when an Ugly Duckling turns into a Swan?</strong></p><p class="body">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. </p><p class="body">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 href="http://brazileconomy.blogspot.com/2007/11/future-is-no-longer-what-it-used-to-be.html">a slew</a> <a href="http://www.morganstanley.com/views/gef/archive/2008/20080129-Tue.html">of notes</a> 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.</p><p class="body">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. </p><div class="body"><br /><strong>Appendix – So what the hell is a carry trade?</strong> </div><p class="body"><br />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: </p><p class="body"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgUJ7KQYJFIOQtdZzsdZ412nfRplIG2ThQ7E87V86thNy4Ijm6UozN61VMZviouEoGQlYIDgnuVT9m32h9ndvXOFE-CZxAiRmZ4VUtlKExJcIlSqwqZ5ZjcI0DN37JPfwlwYvHZg/s1600-h/uip.jpg"><img id="BLOGGER_PHOTO_ID_5202520421917262690" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: pointer; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgUJ7KQYJFIOQtdZzsdZ412nfRplIG2ThQ7E87V86thNy4Ijm6UozN61VMZviouEoGQlYIDgnuVT9m32h9ndvXOFE-CZxAiRmZ4VUtlKExJcIlSqwqZ5ZjcI0DN37JPfwlwYvHZg/s320/uip.jpg" /></a></p><p class="body">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) <strong><em>lose</em></strong> money as the funding currency (the Yen) appreciates. </p><p class="body"><em>Assume: </em></p><p class="body">USD/JPY: 120 (indirect quote)</p><p class="body">USD/JPY: 115 (indirect quote) - after one month</p><p class="body">Monthly USD rate: 0,6%</p><p class="body">Monthly JPY rate: 0,012%</p><p class="body">We progress in the following steps (amount invested 100 USD)</p><p class="body">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)</p><p class="body">2. After one month you will have earned 100USD*(1+0,06) which equals 100,6 USD. </p><p class="body">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. </p><p class="body">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. </p><p class="body">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</p><p class="body">i.e. [(11596-12014,4)/11596]*100 = -3,61%. </p><p class="body"><strong><em>Note here</em></strong> that the main risk is for an <strong><em>appreciation in the funding currency/low rate currency</em></strong>. 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. </p><p class="body">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. </p><p class="body">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.</p>Unknownnoreply@blogger.com4