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Home > Blogs > Ian Fraser > Samba set to continue despite Brazil's necessary slowdown

Samba set to continue despite Brazil's necessary slowdown

Finance Blogger: Ian Fraser Ian Fraser

Brazil's turbocharged economic growth—its GDP grew at 9% in the first quarter of 2010—may be showing signs of slowing but the authorities are welcoming this. They believe the pause for breath should enable them to ward off the spectre of inflation.

In minutes of its July 20–21 meeting the Brazilian Central Bank said:

“The economy may have settled into a pace that is more in line with growth levels considered sustainable in the long term, as opposed to what was seen in the first quarter. Available information confirms there was a worsening in the inflation dynamic at the start of 2010 but, on the other hand, a sharp improvement on the margin since June."

Speaking on July 28, Brazil's Treasury Secretary Arno Augustin added that the government would be careful not to impose measures that might "tie down [the Brazilian economy]" any further.

At the same July 20–21 meeting, the central bank increased the country's Selic interest rate by 50 basis points—less than the 75 basis point economists were expecting—leaving the country's base rate at 10.75%. The changes prompted economists to trim their estimates for Brazil’s 2010 economic growth.

However the public accounts of Latin America’s largest economy are in remarkably good shape compared to those of most "developed" economies. The IMF has praised the country for achieving years of strong growth combined with low inflation and sound macroeconomic policies. The government’s achievements in lowering the public net debt-to-GDP ratios and moving significant amounts of public debt to longer maturity notes have been singled out for special praise.

At its July 28 press conference, the Treasury confirmed that Brazil's current account entered surplus in June, reflecting lower public expenditure from May 2010. The surplus was R$631.5 million (Brazilian reals; $359 million). That compared to a deficit of R$618.2 million in June 2009. The primary surplus for the year to June was R$24.8 billion, or 1.46% of GDP.

Writing in the Financial Times's Beyond Brics blog, Jonathan Wheatley predicted that the slowdown in economic growth will be temporary ("driven, for example, by the removal of tax breaks on cars and household electrical goods"—i.e. the removal of the post-crisis stimuli). Wheatley wrote:

Some economists worry the bank’s monetary policy committee is [too obsessed with] short-term data and may ease off further at its next meeting on September 19 and 20, the last before October’s general elections.

And according to QFINANCE Viewpoint author Bruce Stout, the Brazilian economy remains highly impressive. He predicts that from here on in, it will increasingly decouple from more demographically and fiscally challenged developed economies. Already, Brazil is far less dependent on US consumption. China replaced the US as the Latin American powerhouse's biggest export market in 2009, and in the first half of 2010 China bought 15% of Brazil's $89 billion of total exports.

Stout, who manages the Murray International Investment Trust and is a major investor in emerging Brazilian multinationals such as Petrobras and Souza Cruz, said:

Brazil has a fiscal surplus and huge foreign exchange reserves. But more importantly it has a young population and has a pension system into which people are paying, but from which little is currently being taken out.

They are using more of their savings to invest domestically and can stretch out their bond market duration to 30 years, enabling them to wean themselves off dependence on foreign capital. So what happens in the developed economies no longer really matters to them ... The macroeconomics are so strong they can maintain their own domestic policy initiatives irrespective of what’s happening in the developed world.

Further reading on Brazil's economic outlook

Tags: Brazil , exports , inflation , international differences , Latin America
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