Girish Gupta



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Brazilian Carnival: Made in China
Mar. 11, 2011

Published by Minyanville
Investors in Brazil had four days of carnival to celebrate a quarter-century high in economic growth, with GDP up 7.5% in 2010 over the previous year. The Financial Times got right down to business however, highlighting the growth of imports into the South American economic giant, as opposed to the Brazilian-made products of just over a decade ago.

Some 80% of costumes on show at the festival were imported from China, the London newspaper reported, along with the odd piece from South Korea. According to the Association of Textile Importers, this was very different just 15 years ago when everything was manufactured in Brazil.

“When the real got strong or, rather, the dollar weakened, the carnival industry reacted like any other. Of course we imported more,” explained the owner of Carnaval Store in São Paulo. When Carnaval Store was set up in 2005, one US dollar was worth around 2.5 real; the owner imported 30% of fabrics. Now it sits at 1.6 to the US dollar and the store’s owner imports 60%.

The real has gained 40% against the US dollar since 2009, amid huge economic growth and a rise in foreign investment. The government is thought to be discussing additional foreign exchange measures and analysts are expecting an announcement imminently.

The country’s economy, however, is in a strong state. Economic growth hit a 25-year high in 2010 with GDP reaching $2.21 trillion, the highest figure since 1986. This was a 7.5% rise on 2009, making Brazil the world’s seventh largest economy.

“The 2010 growth rates demonstrate that the Brazilian economy is growing at a significant and sustainable pace, which supports the country's plans for long-term investment projects,” finance minister Guido Mantega said. “We expect GDP to grow around 4.5 to 5.0% in 2011, a rate that would be sustainable and generate no inflationary pressures,” he added.
Growth was led by industry which saw an expansion of 10.1%, agriculture growing 6.5%, and the services sector, which saw growth of 5.4%. Brazil's GDP outstripped Mexico's.

Brazil is booming. It’s a real success story,” US Secretary of State Hillary Clinton told the Senate Appropriations Committee in Washington last week, backing up Mantega’s comments. “They have the highest tax to GDP ratio in the hemisphere, and they use that money to invest in social inclusion, improve their education and health systems.”

With Barack Obama visiting the country later this month, Brazil’s ambassador in Washington, Mauro Vieira, was keen to tout the countries’ “robust” trade relations. Vieira however, was also keen to address Brazil’s trade deficit, which is currently at an $11 billion gap with the US.

All is not rosy. Brazil has one of the world’s highest interest rates, currently at 11.75%, rising twice in the past three months. President Dilma Rousseff’s government is doing its best to curb high inflation, which was at 6.08% for the year through February. Analysts are not convinced that the recent interest rate hike will be enough and are suggesting further hikes before May. The central bank hinted on Thursday that other measures were in store over the coming months in order to combat inflation.

Oil Boom: According to analysts, state oil company Petrobras is on track to eclipse Exxon as the largest publicly traded oil company in terms of reserves and production. Vast deep water reserves discovered in the Santos Basin some 200 miles off the coast of Rio de Janeiro over the last five years are buoying up the company to become one of the fastest growing in the world.

Petrobras is leading foreign firms including Schlumberger (SLB), Haliburton (HAL) and General Electric (GE) in setting up the infrastructure required. Petrobras plans to invest $224 billion over the next four years, much of it on platforms and rigs in order to get into the Santos Basin’s deep reserves. It plans to sell up to $40 billion in bonds during that time in order to build up capital.

In the immediate term, energy minister Edison Lobao was forced to deny reports of a fuel price hike last week. Domestic fuel has been frozen since 2009 when gas prices were cut after the global financial crisis drove skyrocketing crude prices back to earth. With crude now hitting $107 a barrel, a local newspaper reported that Petrobras was preparing price hikes.

But Lobao denied this, saying “The price of oil is going to stabilize and could even fall... We don't want to raise prices at the pump.”

Markets Catch Cold: With Moody’s downgrading its sovereign credit rating for Spain to Aa2 from Aa1 and a negative outlook, Greece tarnished with a similar brush earlier this week, and China’s surprising February trade deficit, investors were worried. The foreign equity declines spilled into Brazil’s benchmark IBOVESPA index, forcing it down 1.0% on Thursday to 66,595 points.


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© Girish Gupta