Brazil & Southern Cone - July 2011 (ISSN 1741-4431)

Economic statistics are still not flashing amber, despite international investors fretting about the overvaluation of the Real against the US dollar. In the first week of July, the Real/US$ rate touched R$1.558, the highest for 12 years. Any sign that such a rate would cramp the domestic economy was belied by employment data, published on 19 July which showed that the unemployment rate in June, according to the official statistics agency, Ibge, was only 6.2%. This was the lowest rate for any June since 2001.

In June 2010 the unemployment rate was 7% and in June 2002, the final year of the administration of President Fernando Henrique Cardoso, it was 11%. More importantly, the latest result was down on May’s 6.4%. All this suggests that by the end of the year, unemployment will be back at the 5.3% level it reached in December 2010.

The Ibge’s gloss on the figures is that over the past 12 months 172,000 people seeking work have found jobs. More important, given the number of new entrants into the job market, the economy has created 512,000 new jobs since June 2010. This is a stark comparison to the disappointing figure for non-farm employment in the US, which show that since March 2011 unemployment has risen by 545,000, according to the US Bureau of Labor Statistics.

Wages are still rising in Brazil: they reached R$1,578 (US$1,000) a month in June. Given that the economy is slowing down from its 7.5% GDP growth rate of 2010, its capacity to continue to generate jobs is impressive.

The buoyancy of the Brazilian economy was noted by Apple and by IBM, which both reported strong second quarter 2011 figures. Apple’s performance in Brazil, however, paled besides a trebling of its sales in the Asia-Pacific region. Strong sales of imported consumer goods are an inevitable consequence of a strong currency.

What is less predictable is that exports appear to be holding up as well. In the first five months of 2011, exports were 31% year-on-year at US$94.6bn. Imports were up 29% at US$86.1bn. What is staggering, however, is the central bank’s figures for the current account: in the first five months of 2011 financial account investments in the country came to US$62.7bn, up from US$36.9bn in the same period of 2010. Little foreign money is going into Brazilian financial assets: the stockmarket has been a dismal performer this year. Oddly, Brazilian companies, which spent US$26bn on foreign acquisitions in the first five months of 2010, have cut back this year, spending only US$6.6bn on foreign investments.

So far this year the Real has appreciated by 6.2% against the dollar. It is worth noting that since 1999, the Real has risen by 40% against the dollar. The strength of the currency is now helping policymakers keep on top of inflation, but the prospect of more Quantative Easing in the US, as indicated by Ben Bernanke, the chairman of the US Federal Reserve Board, will complicate life further for Brazilian policymakers.

The central bank president, Alexandre Tombini, has started to warn Brazilian companies to be prepared for a change in government policy. His comments are cryptic, but seem to point towards efforts to deter foreign companies pushing the exchange rate up further. Tombini recalled that in 2009, when the global financial crisis caused the Real to temporarily depreciate, many Brazilian firms experienced cash flow problems as they had previously taken advantage of the strong Real to borrow heavily in dollars.

The central bank is now long on dollars as it has spent over US$330bn in spot and futures market purchases to try to put a floor under the dollar against the Real. This policy clearly has had little effect. In July the central bank again raised selected reserve requirements (on banks’ short dollar positions). The bank is intervening heavily, buying up dollars in an effort to weaken the Real, and the finance ministry has hinted at an extension of the tax on financial transactions to foreigners’ purchases of local currency futures contracts. However, much of the problem is beyond its powers to correct because the dollar is weak everywhere and real (inflation adjusted) interest rates are low outside Brazil.

Inflation: After producer prices fell 0.55% in May, the national index of consumer price inflation rose 0.15% month-on-month in June, down from a rise of 0.47% in May. The figures come from the Ibge. The June result was better than most independent forecasters had expected. Falling food prices helped the result, with a food price sub-index of minus 0.26% in June, down from a rise of 0.63% in May. Accumulated inflation in the first half of 2011 was 3.87%. The annualised result in June was 6.71%, above the target ceiling of 6.5%. 

In the latest (1 July) ‘Focus’ consensus report compiled by the central bank, local economists lowered their annual inflation forecast for year-end 2011 to 6.15%, down from 6.22% a month ago.

The consensus forecast for 2012 was down a bit at 5.1%.  The real annual GDP forecast fell to 3.94% in 2011 and to 4.5% in 2012. The Real is projected at R$1.60/US$ in 2011 and R$1.69/US$ in 2012.

Embraer: Embraer, the country’s main aircraft maker, shipped 48 aircraft in the second quarter of 2011, bringing the total for the first six months to 76. The company said that at the end of June 2011 it had firm orders worth US$15.8bn. The company shipped 45 airliners in the first half of 2011 and 31 executive jets.  The company said that it agreed the ale of 62 new aircraft in the fist half: in addition it subsequently took an order for 10 aircraft from Hebei Airlines in China, while Srikwijaya Air from Indonesia has agreed to buy 20 Embraer-190s

Bullet train: The government’s tender of a concession for a private company to build a bullet train from Rio de Janeiro to São Paulo drew no bidders on 11 July, forcing the government to revise the terms. The project had been budgeted to cost R$33.1bn (US$21bn). The government’s plan had been to choose the technology and operating system first and then select a bidder to deliver the project.

The government wanted the first stage to be completed this year; the second stage to be finalised e next year and the building work to start in 2013, for completion by the start of the Olympic Games in 2016. Rio is 513km from São Paulo. Congress has already approved of R$20bn in support from state banks for the project. Projections claimed that the bullet train would handle 22m passengers in its first year, rising to100m a year by 2033, when the concession would end.

Anti-trust: On 11 July Brazil’s anti-trust agency, Cade, agreed to allow the merger between the big meat companies, Perdigão and Sadia, to form Brasil Foods. As part of the terms for approving the deal, Cade ordered Perdigão to stop selling various products in the local market for between three and five years. The agreement covers 80% of Perdigão’s output.