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Underlying Inflation in Brazil's Thriving Economy Scaring Investors
May. 6, 2011

Published by Minyanville

Yet again, it is inflation that is scaring investors away from Brazil, one of the world’s biggest economies which saw 7.5% growth in 2010. Its currency, however, has risen 40% against the US dollar in just two years along with 6.4% inflation.

Among other things, this has led to movies selling at $15, caipirinha cocktails for over $16 a go, and a room at the Marriott Renaissance hotel in Sâo Paulo costing 50% more than in New York, says the Wall Street Journal.

The currency is currently sitting close to a three-year high, with Goldman Sachs claiming that it is arguably the world’s most overvalued currency. This is worrying for those exporting out of Brazil as buyers (paying in dollars) are scared off by higher prices.

“Inflation is still being driven by higher commodity prices in local currency terms. In our view the fruits of a decision to prevent BRL from appreciating alongside commodity prices during the second half of last year,” says Tony Volpon, a strategist at Nomura.

“The hitch,” adds the Journal’s John Lyons, “is that Brazil is becoming as expensive as rich countries before it can truly compete with them. Converted into dollars, Brazilian workers are starting to earn developed-world salaries, even though productivity is lower.”

Foreign investors have pulled money out of Brazil for the last three consecutive months. Around $2.3 billion has been pulled out of the local stock market in 2011, underpinning the exchange’s poor performance, down 7% so far this year.

Brazil’s trade balance widened for the third consecutive month in April, reaching a record for the year, according to figures released this week. The April surplus was $1.68 billion, up from 1.55 billion in March. The problem, according to the Financial Times, is that commodity prices have shot up. These are the main exports that are keeping foreign importers at bay thanks to the real’s strength against the US dollar.

The amount of dollars entering Brazil dropped 88% last month thanks to tax increases on foreign loans and debt sales. The country took in $1.54 billion from trade and investments, down from $12.7 billion in March. Still, the real was up 3.6% against the US dollar in April.

"Foreign investors' interest in coming here is diminishing," Roberto Padovani, Latin American chief strategist at WestLB, told the Wall Street Journal. "That's happening for a combination of factors: firstly, the restrictions imposed by the government to reduce short-term capital flows, but aside from that, there's a lot of uncertainty with relation to monetary policy around the world, and depending on the position of some countries, Brazil could become less attractive for investments."

Not All Foreign Investors Afraid of Brazil


Not all foreign investment is looking elsewhere, however. Supermarket giant Walmart (WMT) will invest $755m in Brazil in 2011, with 80 new stores on top of the 483 that exist there already. The company is already the country’s third-largest retailer.

Mining giant Vale (VALE), which has seen changes at its upper echelons as president Dilma Rousseff attempts to bring the company in line with state interests, fell 1.5% on Tuesday. The company has agreed to buy a stake in a Brazilian hydro-electric project in the Amazon, investing roughly $1.5 billion.

It will buy up to 9% of Norte Energia which is looking to build and operate the Belo Monte dam. Vale will reimburse previous owners Gaia for expenditure made and will take over future investment commitments.

The company came under government criticism when Chief Executive Officer Roger Agnelli was at the helm for not doing enough to generate jobs. He was also criticized for buying ships in China when Brazil was setting up its own shipyards. The company fired 1,300 employees and put another 5,00 more on paid leave during the global financial crisis. Agnelli was forced out and replaced by Murilo Ferreira last month.

Petrobras to Import More Gas

State oil company Petrobras is looking to import more gasoline to feed the ever-growing domestic market. The company is set to import 1m barrels of gasoline in May, on top of the 1.5m imported in April. The company is expecting crude prices to be volatile in the short-term, according to Chief Executive Jose Sergio Gabrielli.

Brazil’s population hit 190.8m in 2010, according to the country’s first-ever full digitized census. This indicates 12.3% relative growth in the last decade, and a 20-fold increase in population since the country’s first census in 1872, with most people concentrated in urban areas.




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© Girish Gupta