Economy size: $1.3 trillion economy
Forecast 2009:
The $1.3 trillion economy shed a record 654,946 jobs last month as industry back output, consumer demand declined and commodity prices plunged.
Gross domestic product will grow 2 percent in 2009, according to the central bank’s Jan. 23 survey of economists published Jan. 26. That pace would be the slowest pace since 2003.
For more...see central bank survey of 100 institutions published Jan. 19, and http://www4.bcb.gov.br/pec/GCI/PORT/readout/R20090116.pdf
Table of Contents:
Budget Deficits:
Brazil’s budget deficit widened to a record in December after the government created a 14.2 billion reais sovereign wealth fund, the central bank said yesterday. Including federal and local governments and state companies, the budget gap widened to 33.6 billion reais in December from 8.9 billion reais in November and 24 billion reais in the same month a year ago.
Brazil’s budget deficit also is growing. The government should cut back its spending because slowing economic growth will curtail tax collection, Regina Nunes, head of S&P in Brazil, said today.
Leading indicator of economic activity:
Cardboard sales, a key measure of economic activity, fell 4.5 percent in December from a year earlier, the Brazilian Corrugated Paper Association said this week. For more leading indicators, see our discussion on economic indicators
currency value tied to commodities:
"Brazil’s real fell as prices of raw materials, which account for two-thirds of the country’s exports, declined" source: bloomberg.com
Brazil achieved "investment grade" status in 2008....but will it last?
Brazil’s government, with a much bigger public debt, needs to preserve its primary fiscal surplus (ie, before interest payments) to retain the confidence of bondholders.
see investment grade (nations)
Capital flows reverse directions in 2008
External capital flow to Brazil surpassed US$983mil the capital inflow in 2008 for the first time since 2002. From Jan - Sep the external capital flow was positive US$17.2bi, and over Oct - Dec net outflow was US$18.2bil. The trade balance did not make up for the capital flowing out. Brazilian hard currency reserves ended the year with US$193.7bil, after to have peaked US$208.7bil on Sep
Currency Swap lines with US help to halt crisis:
The swap lines will be in place through April 30.
even though they havent been used (yet)..."Meirelles wouldn’t comment on the factors that may influence monetary policy in the future. He said the central bank hasn’t used the $30 billion in swap lines the U.S. Federal Reserve agreed to provide Brazil on Oct. 30. “If there’s no use, there’s no interest payment paid,” Meirelles said. “It’s good to have the line but we didn’t think it was necessary to use it so far.”
Debt / GDP manageable (for now)
In November, the ration debt/GDP was of 34.9% declining by 1.4% in comparison to October. In great part it was not the dynamics of the fiscal results of the consolidated public sector which contributed to such reduction, but the changes observed in the foreign exchange rate, due to the international crisis. In this sense, it was not the additional fiscal effort, through a reduction of expenditures, which allowed for such result, but the financial gains of the devaluation of the currency . In other words, there is no structural change, but a change in the scenario. In this scenario, the ratio debt /GDP should reach 36.8% until the end of this year, and with the return of the foreign exchange to R$ 2/US$ at the end of 2009 the ratio of debt should be of 38.6%.
Unemployment rising:
The $1.3 trillion economy shed a record 654,946 jobs last month as industry back output, consumer demand declined and commodity prices plunged.
Brazil un-employment data : BZJCGTOT:IND http://www.bloomberg.com/apps/quote?ticker=BZJCGTOT%3AIND
Consumer demand:
BZRTRETM:IND
Brazil IBGE Retail Sales Re http://www.bloomberg.com/apps/quote?ticker=BZRTRETM%3AIND
Also see: Retail sales, including vehicles and construction materials: http://www.ibge.gov.br/home/presidencia/noticias/noticia_visualiza.php?id_noticia=1304&id_pagina=1
Commodities index
see commodity
Data:
Brazil interest rates :
see Banks in Brazil
Target Central Bank rates
forecast: Analysts estimate that the Selic rate by year-end will fall to the record low of 11.25 percent in place in September 2007, according to the median forecast in the most recent weekly central bank survey. http://www4.bcb.gov.br/pec/GCI/PORT/readout/R20090116.pdf
Commercial lending Rates
the average annual interest rate banks charge customers increased to 43.2 percent in December from 33.8 percent a year earlier.
Increased Lending in 2008:
- Total lending climbed 31.1 percent in 2008, the biggest increase since 1995, a year after the Brazilian real currency was introduced.
- Total loans represented 41.3 percent of the GDP country’s gross domestic product in December, compared with 40.4 percent in November and 34.2 percent in the same month last year.
Mortgage loans:
Total mortgages outstanding rose 2.4 percent last month to 63.3 billion reais, the central bank said. Housing loans grew 38 percent in December from the year-earlier period.
Increased Defaults expected
as rates rise in 2009, defaults are expected....
Individuals: The default rate on personal loans in Brazil increased to 8.1 percent in December from 7.8 percent in November, the central bank said.
Companies: Default rates of companies increased to 1.8 percent from 1.7 percent in November, the central bank said.
Brazilian companies have more than $24 billion of debt coming due this year, according to data compiled by Commerzbank AG....Brazil’s central bank President Henrique Meirelles unveiled plans Jan. 14 to provide more than $20 billion to help 4,000 or more companies meet international debt payments this year. Companies in Chile and Mexico are receiving financing help from state-owned banks because of similar pressures, Joydeep Mukherji, a sovereign risk analyst at S&P in New York, said the same day.
read more here: Company defaults to rise
Real Interest Rates:
.BZRAT:IND
REAL BRAZIL INTEREST RATE http://www.bloomberg.com/apps/cbuilder?ticker1=.BZRAT%3AIND
Brazil’s real interest rates, which take inflation into account, fell to 6.85 percent, still the highest among 54 countries tracked by Bloomberg.
Interest Rate Futures:
The yield on the interest-rate future contract for January 2010 delivery, the most actively traded on Sao Paulo’s BM&F commodities and futures exchange, closed at 11.15 percent yesterday, the lowest since August 2007.
How to invest if you think rates will fall?
Note: Brazil’s local-currency bond yields dropped to the lowest since October 2007 after the central bank unexpectedly cut its benchmark interest rate by the most in five years to boost economic growth.
see our forum discussion:
Yields on Brazil’s local-currency bonds and rate-futures contracts fell on increased bets the central bank may cut the benchmark rate by 75 basis points next week to boost economic growth.
Run from Banks: “Most large cap banks in Brazil have asset-sensitive balance sheets; thus, falling interest rates normally result in margin compression...Profit margins fall with interest rates because short- term investments tied to the benchmark Selic rate represent “the bulk” of their assets, according to Morgan Stanley. ”
Buy retailers with consumer credit: "Lojas Renner led gains for retailers, rising 4.4 percent to 16.23 reais, on the prospect that lower rates would spur consumer spending."
Where to find rates
BM&F - Brazil Mercantile & Futures Exchange, (Bolsa de Mercadorias & Futuros)
Copom:
Comitê de Política Monetária: Committee at Brazilian central bank dealing with monetary policy.
see: http://www.bcb.gov.br/?COPOM
Key Data
IMF data on Brazil: http://imf.org/external/np/sta/ir/bra/eng/curbra.htm#I
Interest Rates:
12/2008: recent increase in the basic interest rate which now is at 13.75% p.y. in comparison to 11.25% in the beginning of the year
Government Spending:
In 2008, we see high rates of growth in government spending in Brazil. Growth in consumption in federal, state and municipal spending grew at 5.3% in the second quarter of 2008...much higher than 2-3% common before. This increase can partly be explained by upcoming elections.
Pro-cyclical spending:
This trend emphasizes one cocern about Brazil: that the government is not engaged in contra-cyclical spending, but instead has increased spending along with increased revenues. So, instead of saving in the good times to spend in the bad times...Brazil has just increased spending in the good. Will there be money left when the good times turn to bad? Time will tell...
Effect of government spending on inflation:
Brazil's central bank would have a much easier time battling inflation if the government spending were to be more controlled.
Important Laws
Lei de Responsabilidade Fiscal (LRF) : This law was passed after the economic meltdown, and changed the system so that the Federal government no longer would be resonsible for the deficits of the states, or local governments. This ended an unsustainable system where local governments could spend, borrow, and not be responsible for their own deficits. This is one stark difference from Argentina, which did not pass a similar law after the meltdown in 2002.
Resistance to external shocks:
12/2008: Brazil is more resistant to external shocks than in previous times. Largely due to the reversal of the net external debt position. In recent years, Brazil has gone from a debtor nation (of foreign currency) to a creditor. "In this sense, external shocks that previously depreciated the currency and increased public debt, worsening risk perception and feeding the Brazilian Real devaluation, nowadays result in Public Debt reduction as a percentage of GDP, thus becoming a stabilizing factor for the Brazilian economy."
Recent boom years 2002-2008
increases in the credit availability, taken together with higher GDP growth have stimulated consumption, and driven the Brazilian economy
Inflation:
Inflation target central bank: central bank’s target http://www.bcb.gov.br/Pec/metas/TabelaMetaseResultados.pdf
latest chart: http://www.bloomberg.com/apps/quote?ticker=BZPIIPCY%3AIND
BZPIIPCY:IND
Brazil Inflation Indices IP
Add Security to your Watch List
Might be higher than the official numbers suggest. see article here: http://www1.folha.uol.com.br/folha/dinheiro/ult91u418109.shtml (portuguese)
How Brazil measures Inflation:
In Brazil there are many different measures of inflation that are often reported. For a summary (in Portuguese), see link here: http://www1.folha.uol.com.br/folha/dinheiro/ult91u102745.shtml
Briefly, the inflation indicies are:
- IGP Índice Geral de Preços
- IGP-DI; O Índice Geral de Preços - Disponibilidade Interna
- IGP-M; Índice Geral de Preços do Mercado
- IGP-10; Índice Geral de Preços 10
- IPC-RJ; Considera a variação dos preços na cidade do Rio de Janeiro
- IPC-Fipe; Índice de Preços ao Consumidor da Fundação Instituto de Pesquisas Econômicas
- ICV-Dieese; Índice do Custo de Vida do Departamento Intersindical de Estatística e Estudos Socioeconômicos
- INPC; Índice Nacional de Preços ao Consumidor
- IPCA; Índice de Preços ao Consumidor Amplo
- INCC; Índice Nacional do Custo da Construção
- CUB; Custo Unitário Básico
Central Banker running for President? Watch out for inflation!
I recently read an article in newspaper "Folha de S. Paulo" from 5/16/08 where the Central Bank of Brazil decided to increase its inflation target (IPCA) from 4.5% (as its been since 2005) up to 5%. The reasons given by the central banker, Meirelles, was due to a global inflationary situation that was out of Brazil's control. On the surface of it, this seems like a reasonable conclusion, and you nod your head "yes, thats right", and accept this reasoning.
But, I think there is something else to explain the change in policy. In a recent article from the magazine "Istoe e Dinheiro", there was the Central Banker on the cover, smiling, with a headline that told us that Meirelles is considering running for the Presidency of Brazil.
Put these two headlines together, and you may sense a feeling of inflation worry setting in. Remember...it is very important that the central Bank be independent from the politicians. Why is this important? Because to have an independent central bank is key to removing political pressures off of the central banker. Why? Because any time the Central Bank raises interest rates to fight off inflation, it is unpopular.
No politician (especially one facing re-election) will ever want interest rates raised (which would slow growth, kill off jobs, and put the economy into a recession). For this reason, most economists now agree that it is essential that the role of the Central Banker be 100% free from political pressure. Having an independent central bank is seen as reassurance that inflation will be fought with rigor, and there will be no compromise in order for politicians to get elected. This was true in Brazil. Until now.
You see...if the Central Banker is running for the presidency, then its clear that the independence of the Central Bank has been compromised. No longer can you assume that the bank will fight inflation 100% of the time (not as long as the Central Banker is trying to run for president in 2 years). Any effort to raise interest rates would make him extremely unpopular in the business community, and could make him a scape-goat if job losses were to follow.
For this reason, I am now suspect of the raising of the target from 4.5% to 5%. I believe that there may be political reasons mixed with economic ones, and that makes me uncomfortable Expect inflation to rise.
Current account deficits
current account deficit, which in 2008 should already equal 2% of GDP. Expectations for 2009 are for lower intake of foreign currency from exports, but with a depreciated currency, perhaps lower imports as well. What will be the impact on the current account? further deficits in 2009?
Forces to consider:
- Brazilian exports such as steel and soy will face both falling demand + falling prices
- But, Brazilian imports such as wheat, fertilizers, and chemicals will also fall in price, reducing the importing bill
- A fall in oil prices globally could help Brazil, but might make ethanol exports less attractive.
- Falling transport costs will help Brazil save money on trucking (a massive cost in Brazil)
- Weaker currency could mean more tourists to Brazil, but for the fact that all foreigners are suddenly poorer
Brazilian Exports:
The value of goods sold abroad in 2009 may tumble to $158 billion from $197.7 billion in 2008
see more from GloboTrends: Brazil import export
Foreign Direct Investments:
Foreign Direct Investment (FDI) was about US$ 40 billion in 2008 , and expected to drop to a figure of US$ 25 billion in 2009.
Portfolio Investment from abroad
US$ 16 billion that came in over the course of 2008. Expectations for 2009 are lower
Sovereign Wealth Fund:
Brazil’s budget deficit widened to a record in December after the government created a 14.2 billion reais sovereign wealth fund, the central bank said yesterday. Including federal and local governments and state companies, the budget gap widened to 33.6 billion reais in December from 8.9 billion reais in November and 24 billion reais in the same month a year ago.
read more: Brazil sovereign wealth fund
Currency appreciation (from agri-business) harms the industrial sector.
the phenomenon is called the "dutch disease", and is what happens when there is a boom in agriculture or natural resources which causes the currency to appreciate, which harms the countries industrial sector.
Mercosul - common import tariff
The Camex (Câmara de Comércio Exterior - Exterior Chamber of Commerce) inside announced the reduction of the tax of importation for 328 machines and equipment and of four good of computer science and telecommunications of the rule of former-tariff. The former-tariff one is a norm that allows the reduction of costs for purchase of some products that are not produced in Brazil. In the case of the machines, the average reduction of the TEC (Tarifa Externa Comum do MercosulCommon External Tariff of the Mercosul) is of 14% for 2%. For the other goods, it is of 20% for 2%.
Inflation & Interest rates
see our discussion on real interest rate
Other indicators
From the Economist Intelligence Unit
Source: Country ViewsWire
Key indicators |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
Real GDP growth (%) |
4.7 |
4.5 |
4.1 |
3.9 |
3.9 |
3.9 |
Consumer price inflation (av; %) |
3.7 |
4.1 |
4.0 |
3.8 |
3.7 |
3.7 |
Total public-sector budget balance |
-1.8 |
-2.4 |
-2.4 |
-2.4 |
-2.4 |
-2.4 |
Current-account balance (% of GDP) |
0.7 |
0.2 |
0.3 |
0.3 |
0.6 |
0.8 |
SELIC overnight rate (av; %) |
12.0 |
10.1 |
9.8 |
9.5(.) |
9.3 |
9.3 |
Exchange rate R:US$ (av) |
2.00 |
2.13 |
2.32 |
2.38 |
2.44 |
2.50 |
|
2003(a) |
2004(a) |
2005(a) |
2006(a) |
2007(a) |
GDP at market prices R bn |
1,699.9 |
1,941.5 |
2,147.9 |
2,322.8 |
2,516.8 |
GDP US$ bn |
552.2 |
663.6 |
882.0 |
1,067.4 |
1,261.5 |
Real GDP growth (%) |
1.2 |
5.7 |
2.9 |
3.7 |
4.7 |
Consumer price inflation (av; %) |
14.7 |
6.6 |
6.9 |
4.2 |
3.6 |
Population (m) |
179.0 |
181.6 |
184.2 |
186.8 |
189.3 |
Exports of goods fob (US$ m) |
73,084 |
96,475 |
118,309 |
137,808 |
161,164 |
Imports of goods fob (US$ m) |
-48,290 |
-62,835 |
-73,606 |
-91,349 |
-116,463 |
Current-account balance (US$ m) |
4,177 |
11,679 |
13,985 |
13,622 |
8,540 |
Foreign-exchange reserves excl gold (US$ m) |
49,111 |
52,740 |
53,574 |
85,561 |
173,296 |
Total external debt (US$ bn) |
236.6 |
220.4 |
188.0 |
191.2 |
207.9(b) |
Debt-service ratio, paid (%) |
65.9 |
46.2 |
55.5 |
26.0 |
19.8(b) |
Exchange rate (av) R:US$ |
3.08 |
2.93 |
2.44 |
2.18 |
2.00 |
More economic data
Origins of gross domestic product 2006 |
% of total |
Components of gross domestic product 2006 |
% of total |
Agriculture |
5.1 |
Final consumption |
80.3 |
Industry |
30.9 |
Fixed investment |
16.8 |
Services |
64.0 |
Trade balance (goods&services) |
2.9 |
|
|
|
|
Principal exports 2006 |
US$ m |
Principal imports 2006 |
US$ m |
Transport equipment&parts |
20,098 |
Machinery&electrical equipment |
23,560 |
Metallurgical products |
15,068 |
Oil&derivatives |
15,201 |
Soybeans, meal&oils |
10,481 |
Chemical products |
14,414 |
Chemical products |
3,936 |
Transport equipment&parts |
10,301 |
|
|
|
|
Main destinations of exports 2006 |
% of total |
Main origins of imports 2006 |
% of total |
US |
17.9 |
US |
16.3 |
Argentina |
8.5 |
Argentina |
8.8 |
China |
6.1 |
China |
8.7 |
Germany |
4.1 |
Netherlands |
0.9 |
|
More economic data
Brazil Macro Profile:
Background:
More than 20 years of military rule ended in 1985 and a new constitution was ratified in 1988. The government of Fernando Henrique Cardoso (1995-2002) ended hyperinflation and advanced reforms to liberalise the economy, but public-debt indicators deteriorated amid low economic growth. The current government, under the president, Luiz Inacio Lula da Silva, has been successful in consolidating macroeconomic stability, while stepping up social spending. However, the political environment is obstructing the implementation of deeper reforms needed to accelerate growth.
Political structure:
The president executes policy approved by the 513-seat Chamber of Deputies (the lower house) and the 81-seat Senate (the upper house). Constitutional review is by an independent judiciary. Although the president can resort to temporary decrees to push through legislation, the 1988 constitution gives Congress ample capacity to frustrate the executive. A total of 21 political parties are represented in the lower house and party discipline has traditionally been weak.
Policy issues:
The da Silva government has stuck to fiscal and monetary conservatism and improved the public-debt ratios, while stepping up poverty-alleviation programmes. But fiscal problems persist, preventing a steeper decline in interest rates. The public debt remains high at around 44% of GDP and social security expenditure is on an unsustainable path. The success of Mr da Silva’s plan to push annual average real GDP growth to 5% (mainly through higher infrastructure investment) will depend on progress in pending microeconomic reforms. These include streamlining the complex tax system, strengthening the regulatory framework, improving the quality of social spending and tackling labour informality.
Taxation:
Brazil has a poorly structured revenue system characterised by heavy tax burdens, a narrow taxable base, complicated levies and widespread tax evasion. Companies, both foreign and domestic, employ tax professionals and devote considerable resources to managing their tax affairs. The corporate and indirect taxation systems are particularly complex, porous and unwieldy; the income tax system is considered to be relatively efficient, with a top rate of 27.5%.
Foreign trade:
Compared to other countries, Brazil can be considered a relatively closed economy, with a trade to GDP ratio of around 22% in 2007
Strong external demand and a more active export policy have contributed to booming export earnings since 2003, leading the trade surplus to swell and transforming the current account from a deficit of 4.6% of GDP in 2001 to a surplus of 1.3% of GDP in 2006. Despite import value growth outpacing that of export earnings in 2007, the erosion of the trade surplus will be limited, owing to a favourable export/import ratio.
Crime Problem / Safety issue
The influx of cocaine and other narcotics is blamed for many of the 370,000 deaths by violence in Brazil over the past ten years. Washington argues that Brazil is now the second largest single-country market for cocaine in the world. Drugs have financed arms purchases and intensified turf wars between gangs in Rio do Janeiro and other cities.
International disputes
The country has a long-standing disagreement with Argentina over the use of waterways for power generation but keeps its objections muted because both countries are members of Mercosur.
Where to find Data:
1. IBGE (Instituto Brasileiro de Geografia e Estatística = Brazilian Institute of Geography and Statistics).
2. stock market: Bovespa (Bolsa de Valores de São Paulo)
3. Ministério do Desenvolvimento, Indústria e Comércio Exterior.
4. inflation: Dieese (Departamento Intersindical de Estatística e Estudos Socioeconômicos)
Historical Data & Charts:
* left scale = credit as % of GDP
* right scale = default rate...
So, clearly there has been an increase in credit up till Sept '08...but, what does that mean going forward? maybe default rates will jump, and available credit will fall !!
As a result of credit...retail sales jumped. But, what will happen going forward?
Increasing GDP + investment led to more jobs...
Plus, As people saw benefits of credit available...they chose to become "formal" employees...
FDI levels
This expectation for 2009 seems way out of line, and not based on the new reality
Purchasing managers confidence....
Consumers confidence...
Foreign Reserves....
External Links
Brazil stock exchanges:
Brazil bonds:
Exchange rates:
More Data:
government links:
more interesting external links:
- Brazil: Instituto Brasileiro de Geografia e Estatistica
- The Brazilian Statistics Agency provides a wealth of information and statistical data including an annual survey of trade and monthly reports on the Brazilian economy. Available in English, Portuguese and Spanish.
- Brazil: Brazilink
- A very complete source of information about different topics in Brazil. In addition to an online forum and newsletter, the web site has a number of sections including politics, finance, environment and education. Economic and social indicators are available as well.
More links:
Brazil: Lula Learns the Lesson of Not Planning Ahead
By John Fitzpatrick
January 15, 2008
Towards the end of 2007 one of President Luiz Inacio Lula da Silva´s senior advisers said the government had no Plan B to fall back on should Congress fail to prolong the CPMF tax on financial transactions. This was an understandable position to take since very few people at that time thought that would happen. However, it became gradually clearer as the deadline approached that the government was in danger but since it had no Plan B it was swept away by the vote. The result is that Lula now finds himself facing more problems than he could have imagined only a couple of months ago when life looked rosy thanks to a dynamic economy.
Now he has to contend with running the country with R$40 billion (around US$18 billion) less than he budgeted for. To do so, he said the government would have to cut expenditure to the bone by R$20 billion and raise taxes in other areas. Not surprisingly this message has not been well received by the politicians and employees in the public sector nor by individuals and companies in the private sector.
…click here to read the rest of the article>>
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