Brazil May Overheat on Investments, Coutinho Says (Update2)

March 4 (Bloomberg) -- Brazil’s economy may overheat as too much foreign investment flows into the country, said Luciano Coutinho, president of state development bank BNDES.

“We are worried about excessive inflow or excessive growth this year,” Coutinho said during an interview at Bloomberg’s London office yesterday. He added that the government is seeking economic growth of 5 percent to 5.5 percent in 2010.

Foreign investors are piling money into Latin America’s largest economy as the country builds houses, roads and stadiums for the 2014 World Cup soccer tournament and 2016 Olympic Games in Rio de Janeiro. Gross domestic product has tripled since President Luiz Inacio Lula da Silva came to power in 2003.

The benchmark inflation rate rose for the fourth straight month in January to 4.59 percent, above the government’s target of 4.5 percent, as economic growth quickened. Analysts raised their forecasts for 2010 inflation to 4.91 percent in a weekly central bank survey published March 1, adding to speculation that the central bank may raise interest rates for the first time since 2008 as soon as this month.

Foreign direct investment will jump 47 percent this year to $38 billion, according to the median forecast of about 100 economists in a central bank survey published this week. International investors added 20.5 billion reais ($11.4 billion) to their stock holdings last year, the most since records began in 1994, as the benchmark Bovespa Index gained 83 percent.

‘Somewhat Volatile’ Currency

Policy makers are next scheduled to decide on the overnight interest rate March 17. Banco Central do Brasil will raise the so-called Selic rate to 11.25 percent by year-end from 8.75 percent currently, according to the median forecast of about 100 economists surveyed by the central bank.

The Brazilian real will be “somewhat volatile” against the dollar in the coming months as the U.S. economy starts to recover, Coutinho said. The return to growth in the U.S. will lead to a stronger dollar and a weaker real, he said.

The real may also decline against the euro, he said.

The Brazilian currency rose 0.2 percent to 1.7875 per dollar at 11:19 a.m. New York time. The real has fallen 2.4 percent this year against the U.S. dollar, after rising 33 percent last year.

“I do not see a trend for consistent appreciation of the real,” Coutinho said in the Bloomberg television interview in the U.K. capital, where BNDES opened an office last year. “I would advise investors not to bet on an excessive appreciation of the real.”

No Capital Controls

The central bank will intervene in the case of “excessive” inflows or further appreciation of the currency, the bank’s president said. The government doesn’t intend to adopt capital controls and would use “conventional” market instruments to contain appreciation, he said.

Brazil’s economy may have grown a “small” amount last year as it recovered from its first recession since 2003, Planning Minister Paulo Bernardo told reporters in Brasilia yesterday, when asked about his expectations for the gross domestic product figures that will be released March 11.

The economy will grow 5.5 percent in 2010, according to the median estimate of analysts in Feb. 26 central bank survey published March 1. The central bank estimates economic growth of 5.8 percent this year and foreign direct investment of $45 billion.

BNDES, which was founded in 1952 and provides financing in Brazil and overseas, lent a record $72 billion last year, Coutinho said yesterday.

The bank wants to lend “somewhat less” this year as it seeks to “share the burden” with private banks, Coutinho said.

BNDES Ltd., the London-based unit, will “soon” be able to support companies with lending operations as it takes on banking services such as asset management, he said. The bank will eventually be able to raise funds in the U.K. and operate in capital markets, he said.

BNDES set up the unit last year to buy equity stakes in joint ventures and subsidiaries that Brazilian companies are setting up overseas.

To contact the reporter on this story: Laura Price in London at lprice3@bloomberg.net; Juan Pablo Spinetto in London at jspinetto@bloomberg.net

To contact the editor responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net