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Obama's Brazilian Job
Mar. 18, 2011

Published by Minyanville

The two biggest economies in the Western hemisphere meet this weekend as President Obama today flies into Brasilia for his first state visit to Latin America. With Brazilian growth hitting 7.5% last year the country is in a good position to soak up US exports, which Obama has said he wants to double by 2015.

“This trip fundamentally is about the US recovery, US exports and the critical relationship that Latin America plays in our economic future and jobs here in the United States,” said Michael Froman, National Security Adviser for International Economic Affairs. The trip, says Ari Shapiro of NPR, sticks to an “overarching theme of [Obama’s] presidency. He spends more of his time abroad in emerging democracies than in well-established world powers.”

The president is expected to give a major speech on US-Brazil economic relations. He is likely to concentrate on the energy and infrastructure / construction sectors, with Brazil estimated to invest $200 billion as it prepares for the 2014 World Cup, the Copa America in 2015, and the Olympics in 2016. Former Brazilian central bank chief Henrique Meirelles will be spearheading preparation for the Olympics.

All is not entirely rosy however, as Brazilians have expressed strong disappointment over US tariffs on Brazilian sugar and ethanol. And Brazil’s repeated defense of Iran’s nuclear program is not popular with the Obama administration, to put it mildly. Brazil and Turkey were the only countries in 2010 to reject US-proposed sanctions on the Middle Eastern pariah for continuing violations of nuclear guidelines. (Brazil also has friendly relationships with US foes such as Cuba, Venezuela and Iran).

But it is American recognition of and support for Brazil’s bid for a permanent seat on the five member UN Security Coucil that will be top of many Brazilians’ checklist for the meeting.

After his visit to the region last month, Treasury Secretary Timothy Geithner told Bloomberg: “It really is unbelievable how much progress Brazil has made. It's very impressive, very promising, and we'll have a big economic stake in being a bigger part of that.”

Secretary of State Hillary Clinton was singing from the same songsheet when talking to the Senate Appropriations Committee in Washington this month. “Brazil is booming. It’s a real success story,” she said. “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.”

The coming years are looking strong for Brazil, with GDP expected to grow 5% after last year’s quarter-century high of 7.5%. A finance ministry report released this week says private sector investment will be fundamental in achieving 5% growth each year to 2014. The report says that by the end of 2011, investments will account for 20% of GDP, rising to 24% by 2014.

There is a battle against inflation however, and the government last month ordered $30 billion in spending cuts. In her first interview as president, Rousseff this week told Valor that she will “not permit that inflation comes back to Brazil.” She added that her government will continue to target an inflation rate of 4.5-5% in 2011 and that the spending cuts would not “knock down growth.”

Tony Volpon, Head of EM Research Americas at Nomura, said:

“The refusal to admit any kind of trade-off between inflation and growth may be in part a strategy to maintain high ‘animal spirits’ and the political need not to admit the necessity of making adjustments after last year’s policy-induced overheating of the economy… Nonetheless, even as adjustments are being made, there is a clear choice to “ring fence” investments that will add to future output capacity from any effort to control inflation.”
With shockwaves from Japan’s earthquake spreading across the world’s markets, Brazil saw stocks fall with the IBOVESPA down 1.5% earlier this week. Petrobras contributed to this, falling 1% as did Vale (VALE) which dropped 2.5% on Wednesday. Steelmaker Usiminas dropped 5.5%. Debt linked to Brazil’s real is also likely to be hit as Japanese investors -- the largest holders of Brazilian bonds -- return funds to Japan to pay for reconstruction




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© Girish Gupta