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Brazilian Growth Isn't Immune to Global Crisis
Aug. 25, 2011

Published by Minyanville

Brazil’s President Dilma Rousseff has admitted that the global crisis is having an effect on her country’s economy. The president has had a tough few weeks with a stream of resignations from her cabinet and a much-criticized financial system.

“The main objective of my government is ... to guarantee that, at this time, we are able to contain the perverse effects of a crisis that we did not create, and that could hit Brazil," Rousseff told local radio. “It's obvious that the crisis has an effect.”

Murilo Ferreira, CEO of the Brazilian mining firm Vale (VALE), disagreed with Rousseff, saying that the world’s third-largest mining company was yet to change investment plans or suffer any modified or cancelled shipments thanks to the crisis. “Life goes on as usual at Vale and, as a result, things are going as planned,” Ferreira told a local newspaper.

The Brazilian economy has shown signs of cooling since June while many economists have slashed their forecasts for the Latin American giant. Last week, Morgan Stanley cut its 2011 growth outlook to 3.7% from 4%, while also pulling down its estimate for 2012 from 4.6% to 3.5%. The government is considering cutting its own GDP forecast for this year from 4.5% to 4%, according to Valor Economico. This follows Goldman Sachs’ forecast -- cut from 4.5% to 3.7% for this year.

“Despite all the optimism about consumer demand and rising middle classes, Brazilian growth is still very much indexed to global commodity prices,” writes Samantha Pearson in the Financial Times. “In fact, over the past two decades, Brazil’s exports have become increasingly geared towards raw materials such as soybeans and iron ore.”

Brazil’s reliance on China is also coming under scrutiny. “If China’s economy, for example, encountered a hiccup, let alone stalled, Brazil’s party would be over pretty quick,” continues Pearson.

Rousseff’s admission that the global crisis is hitting Brazil hard will worry investors, who have also been concerned about her government for many months. She is being seen as a “political novice,” unable to control the economy or her own cabinet.

However, Rousseff has high approval ratings. The 63-year-old took office in January this year and adopted $30 billion in budget cuts. Since January, interest rates have been hiked five times -- now at 12.5% -- in order to curb inflation. Criticism is coming in fast, especially in the wake of the charismatic and successful former president, Luiz Inácio Lula da Silva.

Inflation is the government’s biggest concern, though it does look to be cooling. Year-end forecasts for 2012 are falling and are now at 5.2%. For the year ahead, the figure is 5.43%, again down from last week’s prediction of 5.44%.

Authorities reduced the overnight rate to 26% from 26.5% last week for the first time in a year, a sign that the Central Bank believes inflation is slowing. While there will be no practical impact with the move, it seems a psychological first step, an indicator of what may come next.

Traders are also betting that inflation will soon be curbed thanks to the slowdown in global growth. This has, however, led to a fall in yields on Brazilian interest-rate futures, which for the January 2013 contract are down five basis points to 11.46%.

Reuters suggests that the oil, car, and agriculture industries are the ones to watch in Brazil. The oil industry has high global prices to thank, coupled with state oil firm Petrobras’ huge investment in offshore oil fields, which are thought to contain more than 50 million barrels of oil. Brazil’s sugar crop is expected to grow 17% in the coming years, according to analysts. The country is the world's largest exporter of beef, sugar, coffee, and orange juice.

Consumer spending by a growing middle class is one “problem area,” that Brazil must tackle, according to the news agency. Defaults on personal loans rose 22% in the first six months of 2011, the biggest jump in nearly a decade. Brazil’s middle class is poor by most people’s standards, according to the Financial Times. An entire family surviving on $20 a day is considered within the middle class bracket by the Brazilian government.

There was some good news for Rousseff this week, however, as Forbes named her the third most powerful woman in the world, behind German Chancellor Angela Merkel and US Secretary of State Hillary Clinton. She comes ahead of Michelle Obama at No. 8 and Lady Gaga at No. 11.




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© Girish Gupta