BRAZIL: On the mend
Although industrial production fell by a record 13.4%, year-on-year, in the first half of 2009, the economy is clearly on the mend. The main reason of the recovery is the strength of consumer demand. On 28 July the central bank reported that bank credit stood at a new record. The figure, 43.7% of GDP, is flattered a bit by the lack of growth in the rest of the economy. What is important is that at R$1.28 trillion (US$645bn) bank credit is 19.7% higher than in June 2008.
Such strong growth suggests that borrowers (and lenders) are pretty confident about the future. Altamir Lopes, the head of the central bank's economics department said that the growth in bank lending was in line with central bank forecasts. One worry is that non-performing loans (ie more than 90 days behind on payments) are also rising. They stood at 5.7% of total loans at the end of June. This was the seventh consecutive month to show a rise in bad loans.
Another encouraging sign was the surprise fall in unemployment. The rate dropped unexpectedly to 8.1% in June, from 8.8% in May.
The president of the central bank, Henrique Meirelles, is clearly becoming concerned that people have become too optimistic. He is warning against “excessive market euphoria" and did so when he testified to congress. Meirelles has yet to say what action the bank may take.
Brazilian assets have staged a major recovery in recent weeks on hopes for a quick exit from recession. The Ibovespa stockmarket index is up 48% in 2009. Most of the rise has come since March. More worrying for the real economy is the jump in Real. It is up by 28% against the US dollar since the start of the year. At R$1.82, however, the currency is still some way from the R$1/64 level it reached before the global economic crisis.
Meirelles is sticking to his line that the authorities have no target exchange rate. He did say that the bank would continue to intervene in the foreign exchange market whenever necessary to counter excessive volatility. At the end of 2008 and the beginning of 2009 such interventions meant sales of US dollars to the market because of the global credit crunch. Since March, however, the central bank has been rebuilding foreign reserves by buying dollars from the market.
Meirelles said the central bank has purchased US$8.2bn from the market so far in 2009.
Although Meirelles wanted to damp down optimism he could not stop himself from declaring that “Brazil will recover faster than other countries." He said the financial system has “weathered the storm" caused by the global credit crunch, with credit availability now approaching pre-crisis levels. He said the trend is for credit availability to continue to expand.
Even the grim industrial production figures had a silver lining. There was a 0.2% rise in output between May and June. Indeed since December 2008, which now seems to be the nadir of the recession in Brazil, industrial output has risen by 7.9%. The problem is that in the three months from September to December 2008 industrial production dropped by 20%.
Despite the clear signs that the worst is over, the government is remaining cautious about growth this year. The official forecast, from the Instituto de Pesquisa Económica Aplicada (Ipea) has been cut from 2% growth and now stands at between 0.2% and 1.2% growth. The Ipea said that it cut its forecast because the first quarter figures were much weaker than it expected: this is odd because most other analysts were surprised by how much better the first quarter figure (a year-on-year contraction of 0.8%) was. They had feared a much bigger contraction. In final quarter of 2008 the economy contracted by 3.8%, year-on-year.
The Ipea's chief macro-economist, Joao Sicsú, said that he had expected a flat quarter or a slight contraction of around 0.1% so the 0.8% contraction was a nasty surprise. He added that since then he had been surprised by the big drop in investment. The Ipea is still forecasting that growth in the second, third and fourth quarters will be reasonable.
Ipea's downward revision looks right. We believe that the outlook for the key agricultural sector is deteriorating. This year the grains harvest is likely to be 9% lower than 2008's at 133.3m t. The weakness of the agricultural sector has led to a 5.4% drop in output from the food industry in the first half of 2009. Although this is lower than the overall 13.4% drop in industrial output, it is still the biggest fall since records began (in 2002).
The weakness of the agricultural sector means that the industries that feed it are having an even worse time. The agro-chemicals industry, for example, saw a 27% drop in its output in the first half of 2009.
The main reason for the fall in the size of the harvest is the drought. The only agricultural sector which is doing well is sugar which is being flattered by the increase in the international sugar price. This has increased sugar exports, in the first half of 2009 by 50% year-on-year.
Brazil's sugar crop has not been affected by the drought. Indeed, showers and thunderstorms at the end of July disrupted the cane harvest and the drying of the crop in São Paulo and Minas Gerais. Rain had also disrupted the harvest in Brazil's Centre-South, the world's biggest-producing region, at the end of June.
The big question for the sugar industry is whether Brazil will switch sugar which had been destined for ethanol to sugar for export. The recovery in international oil prices means that distillers can still make good money from ethanol.
The planning minister, Paulo Bernardo Silva, said that the economy was recovering and that second quarter growth should be 2%. In the first quarter of 2009, the economy contracted by 0.8%, following a 3.8% contraction in the final quarter of 2008. The government and private sector forecasts for 2009 are more optimistic than the IMF which is forecasting a 1.3% contraction this year.
International analysts, apart
from the IMF, are starting to upgrade their forecasts.
JP Morgan Chase
is now forecasting that the Real will strengthen significantly by the end of the
year against the dollar as more foreign direct investment flows into the
economy. JP Morgan is forecasting that US$26bn of FDI will arrive in 2009.
Previously it was forecasting US$20bn.
JP Morgan expects the economy to expand at an annualised pace of 4.2% in the second, third and fourth quarters this year.
The consensus amongst independent analysts polled by the central bank is for the economy to contract by 0.34% this year before rebounding to grow 3.5% in growth in 2010.
Trade: Exports may surpass the government's official estimate of US$160 bn this year as the global economy recovers, spurring demand for commodities and other Brazilian goods, the trade minister Welber Barral said on July 8. In 2008 exports came to U$198bn.
The middle class: The rise in credit means that the expansion of the middle class, which has powered the economy's growth in recent years, is back on track. Since President Lula took office in 2004 over 25m Brazilians have joined the consumer economy. This means that the economy can withstand a drop in investment and exports because consumer demand is continuing to expand. Foreign investment dropped by 20 % during the first five months of 2009, and imports fell by 29% in the first six months of 2009, compared with the first six months of 2008. Exports dropped by 22.2%.
From 2001 to 2007, the poorest 10% of the population enjoyed a 49% increase in their real income, according to the Fundação Getúlio Vargas (FGV). The FGV reckons that 27.8m Brazilians have joined the consumer economy between October 2003 and October 2008.
The government's priority this year has been to keep these people in the middle class. It offered tax breaks to vehicle manufacturers. This helped the motor industry to sell a record number of cars in June 2009. The industry sold 300,157 vehicles, beating the previous record, set in July 2008, by 12,047.
What no-one really knows is how the recession in the final quarter of 2008 and first quarter of 2009 affected this new middle class. The FGV reckons that perhaps as many as 2.8m people were tipped out of the consumer society back into a world in which they had little or no discretionary spending.
IMF: President Lula is relishing the success of the economy. On 4 August he declared that Brazil now told the IMF what to do, not the other way around as used to be the rule. Brazil is providing the IMF with US$10bn to boost the Fund's resources. What is not clear is how this loan will be accounted for. Some economists claim that it should still be included as part of the country's reserves. Lula said that other countries were still pondering about policies to deal with the crisis but Brazil was now moving on to the next phase.
China: Brazil's trade with China has held up. In the first six months of 2009 China overtook the US as the country's biggest single export market. In the first six months of 2009 China accounted for 15% of Brazil's total exports, up from 8% in the first six months of 2008.
Reserves: The country's international reserves stood at a new record of US$209.576bn on 17 July.
Oil: Oil production by state-owned Petrobras fell by 3.2%, month-on-month, in June to an average of 1.92m bpd.
Banking: One of Brazil's biggest foreign owned banks, Santander, is reported to be planning to launch a public offering for 20% of its Brazilian subsidiary. The deal could be worth US$4.3bn.
FDI: In the first six months of 2009 foreign direct investment came to US$12.68bn.
GDP growth:
The government is forecasting that GDP growth in 2010 will be 4.5%.