Tag Archives: Brazil

Can the global growth help jump start Brazil?

The government of Brazil is expecting the growth in the global economy next year to spur growth in Brazil in 2015.  While I believe it is possible for global economic growth to spur growth in other countries, the back drop behind global growth this time is different.  The growth in 2015 is still based on a recovery from the Great Recession.  This means that US interest rates are still going to strengthen as more people bring capital back to the US with the expectation that interest rates are going to raise.  As we saw in December and January, countries like Brazil faced massive capital outflows and weakening currency rates, causing many of these countries to raise interest rates.  The central bank of Brazil has said that the growth in the world economy will help spur Brazil’s growth but there doesn’t seem to be any evidence to this statement.  The central bank says that the recovery and growth in the world economy has already started this year but analysts keep lowering their expectations of Brazil’s growth.  The bank of Brazil expects a growth of around 3% while economists are less optimistic and expect around 1.65% growth.  If the recovery is greater in 2015 then expected, Brazil could see a bump due to raising exports from Brazil if their currency keeps depreciating.  This is a big if though and I don’t think it will lead to the primary surplus that Brazil is hoping for.

As other posts in this blog have talked about, one key event that could help Brazil’s GDP growth is the World Cup this year.  There has become such backlash against Brazil’s development over the past 3 years that Brazil’s finance minister had to speak about it recently.  Many proponents of Brazil don’t believe that Brazil will meet the required infrastructure necessary for the World Cup or that the infrastructure will be hastily constructed and not up to par.  The finance minister points to outside forces as the key detractors of the World Cup preparations but FIFA has even issued warnings to Brazil about its preparations.  The World Cup usually leads to a large increase in outside investment and while Brazil’s currency has strengthened relative to the dollar, Standard and Poor just reduced Brazil’s bond rating to one step above junk.  This is going to make it even more difficult as many investors are still pessimistic about investing in Brazil.  One benefit that Brazil might have is inflation will most likely go down next year as food prices go down.  The recent drought this year caused food prices to sky rocket and support the high inflation rate of 6%.  A lack of a drought next year would help bring the inflation rate down.  While I do agree with Brazil that a large portion of their problems have been supported by the global slowdown, Brazil lacks strong infrastructure and political corruption is still a huge problem in Brazil.  Brazil needs a strong, fundamental base which it lacks.

Brazil’s Dilemma- High Inflation, Low Growth.

When Brazil was selected to be a host country for World Cup 2014, many foreign investors invested in Brazil, expecting a high return. Brazil, one of emerging economies of BRICS, had a rapid economic growth of 6.1% in 2007, when Brazil was elected as host country for World Cup 2014. As World Cup 2014 is quickly approaching, many economists are forecasting Brazil’s economy. But, it is not as optimistic as Brazil’s soccer team winning the World Cup 2014 trophy.

According to the article from Bloomberg Businessweek Brazil Economists See Faster Inflation and Slower Growth in 2014, Brazilian economists forecasted that Brazil’s inflation rate will continue to rise while its economic growth is getting slower and slower. The economists forecasted that Brazil’s inflation rate will rise to 6.35% from 6.30% while growth rate will decrease from 1.69% to 1.63%. The main reason for inflation is Brazil’s drought which drove the food price up.

The two graphs below is obtained from Federal Reserve Economic Data website. After reading the article above, I thought it would be interesting to see how Brazil’s Consumer Price Index and GDP changed over the course of years. From the Consumer Price Index graph, it can be seen that price level has been rising constantly, with a higher rate beginning from July 2013.  The economic growth rate graph from FRED shows a similar trend that was mentioned in the article above. In 2007, Brazil’s growth rate was 6%, when it was selected to host World Cup 2014. From then, the economic growth rate decreased drastically, as low as -0.3% in 2009. In 2010, Brazil’s economic growth recorded a 7.5% high, due to larger spending from the middle class. However, from then Brazil’s economy has been suffering  since then, as growth rate has been in the 1~2% range.

brazil cpi BRAZIL Growth rate

 

Brazil’s central bank has been trying its best to control its high inflation rate. According to the Wall Street Journal article Brazil Central Bank Hints at End to Rate Increases, Brazil’s central bank raised its interest rate for ninth consecutive times, from 10.75% to 11%. This increase in interest rate is to deal with the inflation from supply shock of food crops due to draught.

However, I am worried that Brazilian Central Bank’s decision to increase its interest rate even more will deteriorate Brazil’s economic growth rate. Brazil’s interest rate of 11% sounds really high, and it cannot be a permanent solution for Brazil’s inflation as Brazil’s inflation is mainly based on the supply-shock of food crops. Brazil’s atmosphere is getting hotter and hotter for world’s expectation of its World Cup, yet Brazil’s economy will need more time to recover.

World Cup 2014 in Brazil – Positive or Negative?

March Madness was pretty exciting. Last night, we had a disappointing loss against Kentucky but we are all proud of being part of Michigan! Now March Madness is over for us, what should we wait for? I am personally waiting for 2014 Brazilian World Cup. I did mention about Brazilian World Cup in my previous blog post What Is Common Among BRICS?, pointing out that large, fast-growing economies (Brazil, Russia, India, China and South Africa) are being host countries for large sport events such as Olympics and World Cup. I also pointed out being a host of prestigious sport event not only signifies country’s economic accomplishments but also it will bring many economic benefits to the country.

However, according to the Wall Street Journal article World Cup Won’t Be a Game Changer for Brazil  this might not be true. This article lists both positives and negatives on Brazil’s economy due to World Cup. The main positives are economic benefits due to increased number of tourists; Brazil’s airline company “Gol Linhas Aereas Inteligentes” can be happy by increased number of passengers, car rental company “Localiza Rent a Car” will serve more tourists. Of course, beer cannot be missed when watching soccer. So Brazilian beer companies such as Anheuser-Busch InBev will benefit from World Cup.

There are also some negative impacts that Moody’s Investors Service worry about. First, negative externalities such as crowding and traffic can possibly result in more difficulty for transportation and thus decrease consumption. Furthermore, reduced workdays and reduction of business activity during World Cup period is a minus for the economy. And, it is worrisome that World Cup might not have a “long term” positive effect on Brazil’s economy as World Cup lasts only for a month. Moody’s also predicted that economic stimulus from World Cup is around $11.1 billion, which is insignificant compared to Brazil’s magnitude of economy, which is $2.2 trillion.

The article from Telegraph World Cup 2014: the boos from Brazil are also concerned about World Cup in Brazil. The article points out that preparation for Brazilian World Cup have fallen so far behind the schedule, where two of the World Cup stadiums are unlikely to be finished until mid-May and many transportation projects have been delayed or cancelled. Thus, if Brazil is unable to host 2014 World Cup successfully, it can hurt Brazil’s national image to other countries as well.

When Brazil was selected as host country for 2014 World Cup in 2007, Brazil’s economy expanded by 6.1%, thanks to capital flowing into the country from many foreign investors. Surely, hosting World Cup can bring positive effect in its economy. If Brazil can manage to host World Cup successfully, I think there will be more positives compared to negatives in economy. Therefore, instead of thinking long-term effect of World Cup, Brazil should focus on preparation for World Cup as there is only limited time left.

Bargains for Brazilian Bonds

Many investors in the US are now looking toward the Brazilian bond market, a market which was one of the hardest hit by the turmoil in emerging-markets. Brazilian government bonds have returned to 3% this year, the third-best performance behind Indonesia and Thailand (cited by J.P. Morgan). The share of Brazil’s local-currency bonds held by foreigners jumped to a high of 16.5% (see graph). “‘The notion of this crisis in Brazil has abated,’ said Gorky Urquieta, co-head of emerging-market debt at Neuberger Berman, ‘It’s a healthier environment'”.

Screen Shot 2014-03-26 at 11.19.49 AM

Investors are attracted to Brazilian government and corporate bonds because of their high yields and relatively low risk when compared to issuances of debt from other developing nations. Brazil’s benchmark interest rate is 10.75%, compared to 3.5% in Mexico and 12% in Nigeria. The flow of investors pouring into Brazilian bonds is due to investors’ desire for income-generating investments (riskier bonds) at a time when our own safer assets are offering returns that are nothing special. Brazil’s five-year bonds yielded 12.8% as of Monday, whereas treasury bonds in the US are only yielded around 1.7%.

The recent traffic in Brazil’s bond market has also allowed troubled borrowers to raise new debt. This contrasts to the emerging-markets crisis, when bond markets shut themselves off from the developing world. Recently, the Brazilian real has depreciated 15% against the dollar. This is the effect that has driven up their yields, coupled with the fact that they are maintaining a 6% inflation rate- which has pushed bond prices down.

However, some investors think that these high yields overstate the threat to bond prices from inflation and rising interest rates. Brazil’s central bank recently began a currency-intervention program to stabilize the real. As a result, their central bank has raised interest rates at the past eight consecutive central bank meetings and is expected to keep raising them in the future. Other related problems in Brazil can have an effect on their future economic performance as well. For example, parts of Brazil are experiencing droughts, leading to water shortages which implies higher prices. Therefore it would be reasonable to expect a high level of short run inflation. Although the Brazilian bond market has been doing well, I think it would also be smart to look to the Brazilian stock market in the short-run. Brazilian wages are rising which will bring more domestic consumption. Consumers will also be more apt to spend this summer as Brazil is expecting to host the FIFA World Cup in June.

Brazilian Interest Rate Policy

With the Fed beginning to taper its Quantitative Easing program, the focus has begun to shift to what this means for emerging market economies that had become havens for return seeking investors.  Fed tapering means that the Fed sees the US economy as relatively stable now which would mean higher interest rates in the future.  This is causing a huge drain of investment and capital from emerging markets as it returns to the relatively safer returns of the US.  One of the biggest opponents of US Feds policy has been Brazil.  When the Fed announced that it would be cutting its bond buying program by $10 billion, the Brazilian Real fell to its lowest levels in five years.  The Brazilian central bank has responded by increasing interest rates to 10.5% in hopes of retaining foreign capital and investments.  Brazil has seen an increase in interest rates of 3.25% over the last 10 weeks.  The Finance Minister of Brazil defended the Real three weeks ago, stating that Brazil’s solid fiscal situation, floating exchange rate, record high international reserves and stable financial situation would protect them.  Unfortunately, this has not been the case.

Inflation is still above the target rate of 2.5% and barely below the upper limit target of 6.5%.  While inflation has come down since its 2 year high in June, the Real has dropped 15.3%, causing Brazilian imports to become more expensive.  The growth target for Brazil has now been cut to 1.67%, down from 3.8%.  The cause is due to mismanagement of Brazil’s interest rate by its central bank.

In the lexicon of the late Nobel Prize-winning economist Milton Friedman, Brazil is mimicking the “fool in the shower.” Friedman drew an analogy between the policy maker who aggressively changes rates to someone who finds the water in the shower too cold and impatiently overcompensates by making it scalding hot. Tombini has been carrying out one of the world’s most aggressive increases since April to curb inflation after he cut rates to a record low 7.25 percent in a bid to stoke growth.

According to a recent Wall Street Journal article though, Brazil isn’t in a position to continue to increase its interest rates.  The higher interest rates are inhibiting growth and Brazil’s economy is not strong enough to maintain the growth rate.  The fact that inflation is still high is another problem that the central bank is going to have trouble combating if it lowers interest rates.  Analysts believe that Brazil’s central bank has given up on its 4.5% target rate and are just focused on keeping inflation below the upper threshold of 6.5%.  Brazil’s response to this has been for the government to cut spending by a proposed $18 billion in order to help the central bank’s monetary policy be more effective and to fight inflation.  It will be interesting to see what the effect of Brazil’s interest rate policy in the future since most interest rate adjustments take about 6 months to realize the effects on the economy.

Central Banks Around the World

On the 28th of January, the Federal Operations Market Committee announced that they will taper additional $10 billion from its original quantitative easing program. The general concession is that as a response to FOMC central banks around the world will also adjust their strategies. Here are some expectations and outlooks according to Bloomberg news.

Bank of England

The Bank of England’s nine-member monetary policy committee will leave its key rate at a record-low 0.5 percent and its bond-purchase program target at 375 billion pounds ($617 billion), according to Bloomberg surveys before the decision on Feb. 6.

European Central Bank

The European Central Bank on Feb. 6 will keep its benchmark interest rate unchanged at a record-low 0.25 percent, according to the median forecast in a Bloomberg survey.

Australian Central Bank

Australia’s central bank will probably keep its benchmark interest rate at a record-low 2.5 percent at its first policy meeting for the year on Feb. 4, according to all 34 economists surveyed by Bloomberg. Economists will be focusing on the Reserve Bank of Australia’s comments on the currency and indications it may have dropped an easing bias.

Brazilian Inflation

A report from Brazil’s statistics agency on Feb. 7 may show inflation moderated to 5.66 percent in the first month of 2014. That would be the slowest since November 2012 after policy makers raised benchmark interest rates for seven straight meetings to ease consumer-price increases that still exceed the 4.5 percent target.

Although these are merely expectations and not set in stone, there are some patterns. Many central banks will maintain if not further lower interest rates in order to keep liquidity relatively high in the market. However, other countries have decided to raise their interest rate in control the inflation rates. It may be an overstatement to say that this was all caused by the Fed’s announcement, but with the recent emerging market being hit–at least temporarily, as I have discussed in my previous post–these measures seem pretty natural.

Eurozone, after disregarding many intertwined stories it had in the past few years, is experiencing very low level of inflation. Last year, it had an annual inflation rate was 0.7%, which is fourth consecutive years with inflation rate below 1% mark. Although economists’ consensus is that it is doubtful Euro will experience outright deflation, but ECB will need to ease monetary policy to control inflation at its target just below 2%.

As for Bank of England, it is quite clear that they are not going to tighten their monetary policy since the threshold for unemployment rate (7%)  is still not met. And the Reserve Bank of Australia is under pressure after its currency tumbled after emerging market down-trough. For these two countries, they do not have too much reasons to diverge from original planning to set lower interest rate.

Brazil is a little bit different. Brazil has experienced inflation level that is way above its target rate. Many of it is not due to monetary policy, but Brazil has missed its fiscal target by the most in 2013 with largest deficit since 2002. Ever since Brazil’s effort to slow down their inflation rate since November 2012, this is the slowest it has been at 5.66.

Most of these countries meeting will be held in mid-February. FOMC had its move and now it will be other countries to adjust accordingly. After all, US’s economy is still biggest in the world. With tapering in place, the money supply is shrinking gradually. Foreign exchange rates having been affected shortly after the FOMC announcements and foreign investments shrinking, I would like to see how much of these expectations will be met.