Girish Gupta



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Brazil's Inflation Targets Postponed Until 2012
Apr. 1, 2011

Published by Minyanville

Brazil’s central bank this week published its quarterly inflation report. In it, authorities have said they are looking to bring inflation down to 4.5% in 2012. They fear that meeting the goal this year would have too high an economic cost.

“In the current circumstances, good practice recommends that one seeks a smoother convergence of inflation to its target,” the report says. Monetary policy is to be used to “ensure the convergence of inflation to target in 2012.”

Brazil has one of the world’s highest interest rates, having risen for the second time in three months in March to 11.75%. (See Brazil Sees World's Highest Interest Rates Climb Even Further.) The rise is designed to slow rapidly accelerating inflation which hit 6.13% for the year to mid-March.

According to central bank forecasts, inflation will slow to 4.4% in 2012, down from 5.5% in 2011 if the interest rate is raised to 12.5%. Policy makers do expect inflation to rise again, possibly up to 6.5%, before it slows late in 2012.

Brazil’s real fell to 1.635 to the US dollar as investors feel the report could lead to even higher interest rates as inflation increases over the coming year.

Tony Volpon, an analyst at Nomura in New York feels that the report was “unusually clear," however, adds that President Dilma Rousseff as well as other government elements may be having second thoughts as well as suffering from infighting. Volpon cites newspaper articles which suggest a “tug of war” between Minister of Finance Mantega and Chief of Staff Antonio Palocci, with Palocci arguing for a less gradualist stance.

Brazil’s economy is slowing. Following a decade of gains, growth is expected to settle at 4-5% a year, according to analysts. This, according to Reuters, offers investors the country’s terrible infrastructure as well as the expansion of consumer markets as millions of Brazilians have access to funds and join the middle classes.

“Brazil's 2010 expansion of 7.5 percent, its fastest pace in 24 years, will likely be as good as it gets for some time as higher interest rates and tighter public spending cool economic growth to around 4.5 percent,” says Brian Ellsworth of Reuters.

Rumors have flown around this week that Brazil is to buy Portuguese debt in the form of bonds. Portugal is suffering huge debt problems. Financial Times associate editor Edward Hadas suggested that Portugal leave the European Union and allow itself to be annexed by its former colony.

“Here is an out-of-the-box way to deal with the situation,” says Hadas, “annexation by Portuguese-speaking Brazil. Portugal would be a big province, but far from dominant: 5 per cent of the population and 10 per cent of GDP.

“Sure, the old colonist would resent the loss of status. But the former colony has something to offer, even beyond narrower credit spreads and proportionally much lower government and current account deficits. Brazil is one of the BRICs, the emerging center of world power. That sounds like a better home than the tired old EU.”

The tongue-in-cheek suggestion riled Portuguese readers. Rousseff said in a newspaper interview earlier this week: "We're studying the best way to participate in the process of Portugal's economic recovery... One of the possibilities is to buy part of the Portuguese sovereign debt. We're also considering other alternatives, such as the early buyback of Brazilian instruments in the hands of the Portuguese government."

However, when asked by reporters if Brazil was looking to purchase Portuguese bonds on Thursday, finance minister Guido Mantega said: “I don’t believe so.”

One major investment opportunity, the 2014 World Cup, has been hit with problems and criticized by FIFA President Sepp Blatter as well as Pele. Rio de Janeiro’s Maracana stadium, which is to host the final, will not be ready until 2013 as it needs a new roof. Blatter said this week: “The World Cup is tomorrow and the Brazilians are thinking it’s the day after tomorrow,” while soccer legend Pele said that Brazil runs a huge risk of embarrassing itself.

Blatter blamed political squabbles for the delays leading Brazilian authorities to hit back claiming there would be no delays to stadiums.

Vale (VALE) Chief Executive Roger Agnelli is finally to be replaced after years of embattlement as the government campaigned to tighten its grip on the iron ore exporter, the largest in the world.

Formerly state-owned, Vale has been under government scrutiny as it works to align national interests with those of the company. The company is thought to owe the government $3 billion in royalties, though disputes this claim. More and more iron ore is being exported to China and many ships are built in Asia rather than Brazil, which the government claims is damaging industrial growth.

The news is part of a bigger picture struggle between Rousseff’s supporters who claim that companies should forego some profitability in order to speed up Brazil’s development while critics suggests that it was state intervention which led to past inefficiency and corruption.


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© Girish Gupta