Girish Gupta



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Brazil Economy Continues to Struggle in Wake of Eurozone Crisis
Sept. 28, 2011

Published by Minyanville

Brazil’s economy is looking murkier than ever this week, as authorities return home “shell-shocked” after meetings in Washington to find their country wedged firmly in the wake of Europe’s debt crisis, a real severely weakened after August’s shock interest rate cut and a stock market down more than 20% this year. The interest rate cut looks to have had little impact on inflation, perhaps President Dilma Rousseff’s biggest woe.

Authorities in Brazil have lashed out against developed economies and their handling of the crisis. Just last week, Rousseff criticized the Security Council while speaking at the UN General Assembly, claiming that it failed to “reflect contemporary realities,” adding that the global crisis was “too serious” to be managed by such a small group of nations.

This week, Finance Minister Guido Mantega described to the International Monetary Fund (or IMF) the similarities between the current crisis and that in 2008. However, this time, “emerging market and developing countries are responsible for the larger share of world economy growth,” and therefore, said Mantega, have a bigger role to play. He blamed, “persistently loose monetary policies,” in developed regions such as the United States, Europe and Japan for causing nations like his “considerable headaches.”

While the general trend has been up, the real has suffered the effects of traders nervously itching back and forth in their confidence in European leaders and their ability to tame the region’s debt crisis. The currency sat at 1.8040 to the US dollar on Wednesday, falling slightly from a three-day rise -- the biggest since January 2009. US Treasury Secretary Timothy Geithner’s prediction that European government will use more force against the crisis as well as news that Mantega is not expecting a Greek default lent investors some confidence.

“Greece is fulfilling its obligations to the European Stabilization Fund and to the IMF,” the Finance Minister told reporters, denying that he was no more worried “today than we were before.”

However, the benchmark Bovespa Index has fallen 22% this year, as Brazil’s stocks “turn hostage to euro woes,” writes Joe Leahy in the Financial Times. “Brazilian stocks are the among worst-performing in the emerging world,” writes Leahy, pointing out that is not solely down to Europe but also thanks to Brazil’s unpredictable inflation figures, which hit 7.33% for the 12 months up to mid-September.

However, the market is still huge. The Bolsa de Valores de Colombia -- a conglomerate designed to combine stocks from Colombia, Chile and Peru -- has seen its first four months of transactions total just under $3m -- the equivalent of around 20 seconds of trading in Brazil.

The real hit a 12-year-high against the US dollar in July, though has weakened rapidly ever since thanks both to the surprise interest rate cut towards the end of August and the European crisis. Analysts are now asking whether Brazil will have to retreat in its so-called “currency war” -- its battle against foreign inflows which spurred on the real while trampling on its domestic industry, making it uncompetitive.

“The real fell because of problems with Europe, but if a solution is found, the currency will bounce back,” Mauricio Rosal, an economist with Raymond James Financial Inc. in São Paulo, told Bloomberg. “What’s happening in Europe isn’t going to solve Brazil’s structural problems.”

Domestic Auto Industry Reports Good News

The Economist is focusing on the rise in protectionism within Brazil’s government this week, noting Brazil’s tax on importers bringing in cars, thanks to their production being 60% more expensive there than in China, according to the National Carmakers’ Association. The new measure will increase the import price by a quarter. This is just one measure that aims to help the domestic market. Brazil cannot “allow our auto industry to be taken over by upstarts who are coming in from outside,” Mantega said at the time.

There is more good news for the domestic auto industry. Nissan is planning to invest $1.5 billion in a Brazilian factory that may even produce electric cars, according to a source speaking to Reuters. The Japanese company confirmed plans, though declined to add any further details except that it was likely to produce around 200,000 vehicles annually.

However, a tax of petrol imports has had to be cut as prices rise higher, fueling the country’s inflation. The CIDE tax, which applied to imports and sales of petrol to distributors, is to fall by 16%. This will also help cut losses at state oil firm Petrobras, which is being forced to import more petrol to meet demand from the country’s growing middle class. It must absorb the losses as it is banned from passing the higher cost onto consumers.

There is still interest in Brazil’s economy which is in a better state than many emerging markets’. The British government, “as it slips down the league table of world power,” writes The Economist, has become used to closing down diplomatic outposts. However, news that a new consulate is to open in the north-east Brazilian town of Recife will add confidence in the country. The region has been described as the “China of Brazil” (Private Equity Looks to Brazil). Its nine states are home to 53m people, many with new money. “Britain’s retreat from the region is over,” William Hague, British Foreign Secretary, declared.


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© Girish Gupta