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Lula’s Record Lending Overwhelms Push to Weaken Real

Brazil President Luiz Inacio Lula da Silva
Brazil President Luiz Inacio Lula da Silva speaks during a conference in Sao Paulo. Photographer: Paulo Fridman/Bloomberg

A five-week rally in the Brazilian real is limiting President Luiz Inacio Lula da Silva’s efforts to make the country’s exports more competitive in international markets. Lula himself is partly to blame, according to Harvard University Professor Ricardo Hausmann.

Record lending by the state development bank, known as BNDES, is contributing to the fastest economic growth in 15 years, prompting the central bank to raise the benchmark overnight rate 1.5 percentage points this year to 10.25 percent, Hausmann said. The higher rates are luring capital to Brazil’s fixed-income assets and fueling gains in the real that Lula, 64, sought to curb by implementing a 2 percent tax on foreigners’ investments in stocks and bonds in October.

“BNDES should be ordered to slow credit growth,” Hausmann, the director of Harvard’s Center for International Development in Cambridge, Massachusetts, said in a June 23 telephone interview. “While the central bank is trying to responsibly control inflation, BNDES is expanding lending. That means the central bank will have to raise rates that much more.”

The real is the second-biggest gainer in emerging markets since May 20, climbing 3.9 percent to 1.8134 per dollar. Fitch Ratings said yesterday that the growth in BNDES lending is also slowing Brazil’s reduction of debt as a percent of gross domestic product, creating a concern as it considers raising the government’s rating from BBB-, the lowest investment-grade ranking.

Fitch shifted the rating outlook to positive from stable, citing the country’s “growth dynamics” and “resilience” during last year’s global recession.

‘Additional Burden’

“These are the positives that we noted, however we do believe that Brazil needs to exercise some fiscal restraint,” Shelly Shetty, a Fitch analyst in New York, said in a telephone interview. “BNDES activities are placing additional burden on monetary policy to curb excessive domestic demand.”

BNDES, the country’s fourth-largest bank by assets, said in a June 1 statement that it bolstered lending 34 percent in the first four months of the year to 35.7 billion reais. Rio de Janeiro-based BNDES lent a record $72 billion last year, bank President Luciano Coutinho said in a March 4 interview in London.

A spokesman at BNDES didn’t return a telephone call seeking comment yesterday. A Finance Ministry spokeswoman declined to comment.

95% Rally

Deputy Treasury Secretary Paulo Valle said in a June 21 interview in New York that state-sponsored lending will “stabilize” as private banks “increase market share” amid the economic expansion. Outstanding bank loans increased 2.1 percent, the fastest pace in 10 months, to 1.5 trillion reais in May, according to the central bank.

The real’s rally snapped a three-week, 7.6 percent slide through May 20 that was sparked in part by concern Europe’s debt crisis would erode demand for Brazilian commodity exports. The real is down 3.8 percent this year after posting a 33 percent gain in 2009 that made it the world’s best-performing major currency. Its 95 percent advance since Lula took office in 2003 is the biggest among all currencies tracked by Bloomberg except for the Afghanistan afghani.

Lula imposed the 2 percent tax on foreigners in October after daily central bank dollar purchases in the foreign- exchange market failed to reverse the real’s surge. The central bank’s foreign reserves have climbed to a record $254 billion from $207 billion a year ago. Finance Minister Guido Mantega warned investors as recently as April 26 that the government may take “further measures” to rein in the currency and bolster non-commodity exports.

Above-Target Inflation

Brazilian exports climbed to $72 billion in the first five months of the year from $55 billion in the year-earlier period while imports jumped to $66 billion from $46 billion, according to the Trade Ministry. It exported $10.6 billion of goods to China, making the Asian nation its biggest overseas market, and $7.3 billion to the U.S.

The real will slip to 1.8 by year-end before gaining to 1.73 by mid-2011, according to a Bloomberg survey of 20 economists. Traders expect the central bank will raise the benchmark overnight rate to 12 percent by December to cool the economy and rein in an inflation rate that has topped the government’s 4.5 percent annual target for the past five months, future contracts show.

Latin America’s largest economy will expand 7.1 percent this year, the fastest pace since 1994, according to a central bank survey of about 100 financial institutions released yesterday.

Overheating Economy

The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. Treasuries rose 10 basis points, or 0.10 percentage point, to 248 by 5:18 p.m. New York time, according to JPMorgan.

The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps rose 11 basis points today to 139, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Brazil’s debt-to-GDP ratio of about 60 percent is almost double the 35 percent median for countries rated BBB, Fitch said. Mantega said at the G-20 summit in Toronto on June 26 that Brazil is seeking to reduce its debt-to-GDP ratio to 30 percent.

Brazil has “a policy that is excessively expansionary and is causing the economy to overheat,” said Hausmann, a former Venezuelan planning minister who has been at Harvard since 2000. “I would like to see President Lula cool off the economy using a contraction of lending,” he said.

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