Unlike their counterparts in the industrialised world, policymakers here are both lucky and effective. Brazil’s latest stroke of economic luck has been the strengthening of the Real over the past couple of months. This even prompted the central bank (BCB) to reverse its stance of trying to prop up the dollar and instead, in September, it sold dollars for Reais.
The BCB intervened in size, offering US$5.6bn in swaps in the futures market, to defend the Real for the first time in two years on 22 September. The trigger seemed to be the R$1.91 level, and the central bank’s move immediately pulled the Real back to R$1.89 to the dollar. The bank appears to have put a floor under the Real. The following week it moved back up to about R$1.83/US$.
What is not clear is how the intervention will affect Brazilian monetary policy. Theoretically, a weaker Real should push up consumer prices and therefore prompt the central bank to push up interest rates. The problem with this scenario is that the bank has only just started to trim Brazil’s lofty real-interest rates. One possibility is that the intervention move is another step in Brazilian mercantilism: the overvalued Real encouraged consumers to try imported products, now these products are substantially (20%) more expensive in Reais terms, so the same consumers may try the locally-made alternatives. If this happens on a wide scale, the Brazilian economy will continue to grow and, more importantly, inflation will not jump as high as some economists expect.
Brazil is certainly starting to see itself as a global economic policymaker rather than a policy taker. Its economic priorities are very different from those of industrialised countries. Brazil has, for example, used a financial transactions tax (much to the IMF’s disgust) and the tax worked more or less as its advocates said it would. The tax did not, as its critics forecast, lead to an increase in cash transactions, but appeared to be progressive (hitting the rich harder than the poor) and difficult to avoid.
Jobs rather than corporate profits seem to drive Brazilian economic policymaking. Brazil’s labour minister, Carlos Lupi, argues that Brazil has been “a major protagonist” in job creation in the G-20 group which brings together the world’s biggest economies. According to Lupi, Brazil is on course to create between 2.7m and 2.9m formal jobs in 2011. This figure is a slight disappointment because the government set itself a target of creating 3m new jobs in 2011. It is nevertheless impressive given that in other economies, such as Mexico, unemployment has gone up this year as its economy (like Brazil’s) grew a little slower than policymakers originally expected. Unemployment in Brazil is falling and now stands at its lowest level for 10 years.
The official rate of unemployment in August was unchanged month-on-month at a record low of 6% in August. Monthly wages averaged R$1,629, up 0.5% month-on-month and 3.2% year-on-year, but down in dollar terms (at the current end September exchange rate).
What happens in the domestic market is far more important to Brazil than what happens to commodity prices. The two big commodity exports (soya and iron ore) are hugely capital-intensive businesses. Soya farmers buy new equipment and boys’ toys (just as many foreign made luxury cars are sold in the soya belt as in the “old money” centres of São Paulo and Rio de Janeiro).
Overall, Brazil’s domestic market is already doing pretty well. Credit growth in August was the strongest so far this year. Total outstanding bank lending rose 1.7% month-on-month and 19% year-on-year to reach R$1.86 trillion (US$1.05 trillion), according to the central bank. There is still plenty of room for further growth as credit is not yet equivalent to half of the country’s GDP.
The August figure is slightly ahead of the government’s target of 15%. The central bank does not seem bothered, however, and has simply raised its forecast for credit growth for the full year from 15% to 17%. As GDP is growing at less than a quarter of this rate, the bank is likely to become a little more cautious in 2012, unless GDP surges again.
The bulk of the growth in credit in August was in mortgage and corporate lending. Mortgage loans rose 49.3% year-on-year. Default rates are rising a bit, but there is no sign that Brazilian lenders have created anther subprime disaster.
The average consumer default rate in August was 6.7%, while the corporate rate was 3.9%. Given that the average interest rate on consumer loans was 46.2% a year, consumers, a lot of whom have never had credit before, are managing their money well. In its latest (September 2011) Financial Stability Report, the central bank estimates that Brazilian consumers must now set aside some 21% of their disposable incomes for their accumulated personal debt liabilities (i.e. non mortgage debt), up from 19% on average in 2009-2010. The bank is very confident in the strength of the Brazilian banking system. Its risk simulations demonstrate that even if the default rate hit 16%, over 99% of Brazilian banks could cope with the solvency issues created.
Inflation: The government is concerned about inflation and is prepared to forego tax revenues to keep prices from rising. At the end of September it cut the Cide fuel tax (paid by distributors) by 16%, in an effort to dissuade petrol and flex-fuel distributors from passing on higher prices to customers. The Fundação Getulio Vargas reported that its index of consumer confidence fell in September for the second straight month.
The minimum wage will rise some 7% in real terms in 2012. Brazil’s main IPCA index of consumer prices was running at 7.2% year-on-year in August, above the 6.5% target ceiling. The BCB insists that inflation has peaked and will fall in line with the cooling global economy (and the local harvest) between now and December.
Current account: The central bank cut its forecast for the 2011 current account deficit to US$54bn, or the equivalent of 2.19% of GDP, down from a previously forecasted US$60bn (2.49% of GDP). The accumulated deficit in the first eight months of 2011 was US$33.78bn, up from US$31.4bn in the same period of 2010. Higher deficits on the income and services accounts are the result of increased corporate profit remittances and more Brazilian travel abroad.
The trade surplus in the first nine months was US$21.9bn, on exports of US$184.6bn and imports of US$162.7bn. The bank now expects a full year trade surplus of US$29bn, up from its previous forecast of US$20bn.
It also expects another new record in foreign direct investment of US$60bn, sufficient to cover the current account deficit.
Savings: Guido Mantega, the finance minister, is now calling for Brazil to rein in public spending and boost its low national savings rate (a mere 16% of GDP), in order to facilitate a lower interest rate environment and reduce Brazil’s heavy dependence on foreign equity and debt to finance investment.
- In 2012, a municipal election year, the budget calls for fixed public spending to increase on the back of a 7% real rise in the minimum wage, to which pensions and other social security benefits are indexed. Notably, the Budget Guidelines Law allows for infrastructure investment spending under the Growth Acceleration Programme to be deducted from the final fiscal surplus, which as a result may come in closer to 2.7% of GDP (rather than the targeted 3%).
