Brazil & Southern Cone - September 2007 (ISSN 1471-4431

Both GDP growth and foreign direct investment (FDI) are rising. This combination, coupled with an inflation rate that, although rising is still well inside the government's 4.5% target, suggests that the economy is well set. 

Foreign direct investment in August was nearly twice the rate of August 2006 at US$2.04bn. The central bank said that foreign direct investment in the first half of September was US$950m and should reach US$1.3bn by the end of the month. What is striking, however, is the surge in foreign direct investment: the gross figure for the first seven months of 2007 was US$31.8bn, almost twice the US$16.4bn recorded in the same period of 2006.

The central bank now prefers to look at the net figure for FDI, after withdrawals. What is significant is that withdrawals are steady at just over US$1bn a month even though fresh investments are surging. The central bank has raised its forecast for (net) foreign direct investment in 2007 to US$32bn, its previous estimate was US$25bn. The strength of FDI suggests that the economy is becoming more competitive and is well placed to withstand any slowdown in the world economy. In the second quarter, output was 0.8% up on the first. This means that in the 12 months to June, the economy grew by 4.8%, pretty close to the government targets of 5%. 

The resilience of exports, despite the strength of the Real against the dollar, underlines the competitiveness of Brazilian products. Exports are running 16% higher in the first eight months of the 2007, compared with 2006. Export revenues in the 12 months to August topped US$151bn and should hit US$160bn this year. Imports are rising faster, by almost 28% in the first eight months, and are now over US$107bn for the 12 months to August. 

Growth in the second quarter was led by the strength of domestic demand. This was up by 5.7%. This strength was reflected in the increase in imports. In the second quarter the import bill, at US$27.2bn, was significantly above the first quarter bill of US$24.1bn. The surge in domestic demand is not only pulling in imports: it is also increasing demand for domestic goods. Industrial output was up by 6.8% between April and June. The consensus in Brazil is now that the central bank will probably not cut interest rates at its next meeting in October, despite the aggressive action by the US Federal Reserve Board. 

• Selic Rate
  At the beginning of September Copom announced a 0.25% cut in the benchmark Selic rate which brought it down to 11.25%.