Brazil surges ahead of forecast
Published: 23 August 2010
Stimulus and confidence generate solid growth
It is gratifying when a forecast you have created turns out to be “very accurate in terms of results, even better than expected”.
The forecast was for the Brazilian economy’s first quarter of 2010, when Brazil emerged from the worldwide financial crisis and recession well ahead of many more-developed economies. The forecaster, in 2009, was HSBC’s Chief Economist for Brazil, André Loes.
Brazil is a vast country, only slightly smaller than the United States, and its economy is the eighth largest in the world measured by GDP (2009 data). After six months of recession in late 2008 and early 2009, Brazil’s Bovespa stock index climbed 83 per cent last year and the currency strengthened by 34 per cent.
The first quarter of 2010 continued the recovery process set in motion by the government, bringing about a turnaround in the public’s mood. Mr Loes said: “We had a very important amount of monetary and fiscal policy stimulus, and this was coupled with confidence.”
We had a very important amount of financial stimulus, and this was coupled with confidence.
Next, he expects to see some moderation of the high growth that recovery has brought, something that will be very welcome because of capacity limitations, he says. Inflation would be the natural result of industrial bottlenecks but he predicts that a slowdown will bring about a balanced result: continued growth with moderate inflation.
Having pushed money into the system to stimulate the economy, last year, the government moved to apply the brakes to prevent overly rapid growth and excessive FX appreciation, the natural result of Brazil being an excellent target of opportunity for foreign investors.
A two per cent tax was imposed on capital inflows into local stocks and bonds to slow the Brazilian real’s appreciation – enough to make it more expensive to invest in Brazil, but still allowing a good relative return.
“In a way, I think the government achieved its intentions,” Mr Loes said. This was not just a revenue grab; it pushed investors into taking longer-term views of the market.
With money flowing again, there is time to adjust the tax structure – but there are two complications: first, fiscal charges are already high, and second, a national election is due in October. Mr Loes thought that taxes were therefore unlikely to rise and rebates set in place last year on items, such as building materials, were likely to remain untouched.
Whenever Brazil goes beyond five per cent GDP growth, we get bottlenecks.
However, he felt that there was room for some structural changes to simplify what is a very complex taxation system, without damaging the continuing economic rebound. Fiscal deficit is running at 2.3 per cent of the GDP, which is one percentage point better than a year ago.
The country’s industrial capacity limitations are carryovers from years of economic volatility that naturally engendered a short-term investment view. A more long-term view has developed over the past seven or eight years, but more investment is needed – and applied cautiously. The current investment to GDP ratio is 20 per cent, and Mr Loes said this needed to rise to 25 per cent, but warned: “Whenever Brazil goes beyond five per cent GDP growth, we get bottlenecks.”
As a result of the rebound and of capacity limits being reached, inflation is rising again, hitting 4.9 per cent in May this year (slightly down from 5.0 per cent earlier in the year, but up from less than four per cent late last year), and the Central Bank responded by tightening interest rates.
As a result of the recovery, Mr Loes said: “The mood is great. People are upbeat, confident. The country weathered the storm very well.”
The mood is great. People are upbeat, confident. The country weathered the storm very well.
Several factors have helped in this: for instance, exports account for only about 13 per cent of GDP, so to that extent Brazil’s is a closed economy, insulated from the rest of the world’s problems. Thus the government has a large reservoir of goodwill.
“People want to see continuity of things that have been happening for the past seven or eight years,” Mr Loes said.
So far, he said, there seemed to be no bubbles developing. This is partly because price rises have been due to inflation, not asset-price rises in themselves, as Brazil’s economy is not leveraged.
One major change to Brazil’s economy has been the rise of China’s importance – last year it overtook the United States to become Brazil’s top trading partner. China accounted for 15 per cent and the US 10 per cent of Brazil’s exports from January to May 2010. This is to some extent inevitable, with China seeking vast quantities of commodities all over the world.
World Cup, Olympic Games
Brazil’s major exports to China are iron (38 per cent of exports to China), soya (33 per cent), oil and oil products such as petrochemicals, while imports from China comprise mainly of industrial machinery. The relationship was mostly complementary, Mr Loes said, and developing from simple trading into foreign direct investment.
Looking further ahead, Brazil has won the rights to host the 2014 World Cup soccer championships and the 2016 Olympic Games, which might seem big economic lumps to digest. But Mr Loes saw these events as important positive catalysts for the economy. “The deadlines are obvious,” he said.
The investment needed in sports facilities and in transport elements such as airports and roads would continue trends already in place to build for the nation’s future.
André Loes
André Loes joined HSBC in August 2008 as chief economist for Brazil. Previously, he was a partner at an asset management concern and chief economist, head of equity research and head of equity at a major Spanish bank based in Brazil.
Earlier, he served as aide to Brazil's foreign trade secretary in the Ministry of Industry and Foreign Trade and he led the economic department of the Brazilian National Association of Investment Banks (ANBID).
Mr Loes holds a bachelor's degree and a master's degree in economics, both from the Federal University of Rio de Janeiro, and a doctorate in economics from Université de Paris, France.
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