The central bank’s monetary policy committee (Copom) cut the benchmark Selic interest rate by a full 75 basis points (bps) this week, taking it down to single digits (9.75%) for the first time since 2009. In a curt one-line statement, the Copom revealed that the larger-than-expected cut was not unanimous, with five votes in favour and two in favour of a smaller (50 bps) cut. The Copom took the opportunity to act more forcefully in support of domestic economic growth after the national statistics institute (Ibge) this week reported a weak real annual GDP growth rate of just 2.7% for 2011 and a steep fall in industrial production (IP). The IP index fell the most in three years in January 2012, declining 3.4% year-on-year, its biggest drop since December 2008. It also fell 2.1% month-on-month over December 2011.
The GDP result, though the weakest since 2003, was cushioned by the continued domestic consumption boom, with private consumption running much faster than overall GDP growth at 4.1% year-on-year. Government consumption rose 1.9% year-on-year in 2011, in line with the official efforts to rein in public spending. Gross fixed capital formation was up 4.7% year-on-year, which the government took as a reassuring sign. The combination of the domestic consumer boom and a strong Real stimulated strong import growth of 9.7% in 2011. In contrast, export growth was slower (though still respectable) at 4.5%, thanks largely to the Asian demand for commodities. In effect, Brazil is running a two-speed economy at the moment; domestic consumption continues to boom, but domestic industry is struggling to compete, both externally and against a flood of cheap imports at home.
The Rousseff administration, which is facing its first electoral test this October in municipal polls, is anxious to shore up growth. Finance Minister Guido Mantega – who began last year forecasting a GDP result of 4.5%, only to backpedal every quarter – insists that Brazil will rebound over the course of 2012, with the pace of growth accelerating back towards 4.0%-4.5% (in annualised terms) in the second half. Arguably, the central bank is frontloading its planned interest rate cuts now; it might not get the same opportunity again come the second half if Mantega’s rebound gathers pace.
Local producers and exporters are clamouring for the government to take urgent measures to re-balance the economy away from its current reliance on private sector consumption as the main engine of growth. This, they say, is leading Brazil into an uncomfortable reliance on a strong Real so as to fund imports, avoid higher inflation and also to attract external financing. Brazil needs to boost its domestic savings rate (17.2% in 2011) so as to be able to lift its investment rate from below 20% of GDP (19.3% in 2011) to the estimated 25% of GDP required to sustain targeted annual growth of 4.5%-5.0%.
In fact, this is only the second time ever since inflation targeting was first introduced in 1999 that the Selic has been in single digits. In mid 2009, the Copom reduced it to 9.25% (from 10.25%) and then again to an all-time low of 8.75%, where it remained until late April 2010. When the Copom first began its current easing cycle last August, the central bank president Alexandre Tombini signalled that the bank would seek to leverage the crisis in Europe to bring down Brazil’s structurally high interest rates. Tombini and President Dilma Rousseff strongly agree that permanently lower interest rates are key to ensuring more sustainable (read, domestic-led) investment growth in Brazil, reducing its historical over reliance on external financing.
In theory, lower interest rates should help temper the strong appreciatory pressure on the Real which, at R$1.74/US$ (8 March), has risen by almost 6% against the greenback to date this year, heaping the pressure on domestic manufacturers and exporters. To date this year, capital inflows have amounted to a whopping US$15bn, compared with outflows of US$3bn in the final quarter of 2011, as global investors pile back in. In Germany this week, President Rousseff warned that her government was prepared to take strong measures to protect local manufacturers from the “monetary tsunami” unleashed by the quantitative easing policies (i.e. money printing) being pursued in the US and Europe.
The obvious upside to a strong Real is that it protects Brazilian consumers from higher inflation. In January annual inflation was 6.22%, down from last year’s September peak of 7.3%. However, with virtually full employment, price pressures will remain to the fore. Local economists surveyed by the central bank expected year-end inflation of 5.24% on 2 March. Although Mantega is adamant that inflation will gradually return towards the targeted 4.5% this year, the truth is that the Rouseff government can live with a slightly higher figure in order to ensure economic growth.
Are exporters crying wolf?
Trade broke new records in February, according to latest figures from the ministry of development, industry and external trade (MDIC). Exports were valued at US$18bn, up 7.7% year-on-year. Imports amounted to US$16.3bn, up 5% year-on-year. Notably, all three export categories posted decent growth, with manufactured exports up 18% year-on-year; semi-manufactured exports up 25.5%, and basic exports up 6.6%. Likewise, imports of capital goods were up 18.6% year-on-year, with consumer goods up 14.2% and intermediary and primary imports up 7.3%. Total exports in the 12 months to February 2012 were worth US$258.26bn, up 23% year-on-year, while imports over the same period totalled US$229.64bn, up 21.6%. The trade surplus (US$28.6bn) was up 32%. This would appear to contradict the loud complaints by Brazilian exporters. The government is targeting an export figure of US$264bn in 2012, up 3.1% in annual terms. The US was the main destination for Brazilian goods in February.
Brazil and FIFA settle their differences over drinks
On 7 March the special congressional committee discussing the pending new legislative framework for the 2014 World Cup voted in favour of allowing the sale of alcoholic drinks inside football stadiums during the 2013 Confederations Cup and the 2014 World Cup. Brazil does not currently permit the sale of alcohol in stadiums but the International Federation of Football Associations (FIFA) asked Brazil to amend this regulation (among several others) under the contract to host the tournaments. The Brazilian government has had several run-ins with FIFA over these demands, which also, for example, sought to require Brazil to suspend temporarily its domestic regulations guaranteeing a quota of cheap tickets for students and pensioners at every game. FIFA has also made demands about the liability for security inside the stadiums and the protection of trademarks, asking Brazil to amend its domestic criminal penalties for those convicted of peddling counterfeit goods, for instance. The government led by President Dilma Rousseff has resisted such pressures, backed by its world famous football stars.
Earlier in the week FIFA’s president, Sepp Blatter, was forced to send the Rousseff administration a letter of apology after FIFA’s outspoken French chairman, Jerome Valcke, said Brazil needed “a kick up the backside” in order to get a move on with the World Cup preparations. The government responded that it would no longer deal with Valcke, who has previously made other comments deemed offensive locally. Valcke, who was actually due in Brazil this week, had wanted the new framework legislation (The General Law of the Cup) in place by end-March but that is unlikely – it must first go before the full lower house and then to the senate for debate before approval. The government repeatedly insists all preparations are on track, although FIFA does not seem reassured.
- Supreme breakthrough
On 6 March Judge Cármen Lúcia Antunes Rocha was elected president of the supreme electoral court (TSE), becoming the first woman to sit at the helm of the court in its 67-year history. Upon accepting the post, Antunes Rocha noted that Brazil enfranchised women 80 years ago. Now, she said, women make up 52% of the Brazilian electorate; however, they are still under-represented in official life. Judge Marco Aurélio Mello was elected the TSE vice-president.
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