Deadly Rainfall, Floods in Brazil Pressure Inflation

Brazil's Central Bank President Alexandre Tombini
Brazil's Central Bank President Alexandre Tombini. Photographer: Evaristo SA/AFP/Getty Images

The heaviest rainfall in Brazil since 1967, already a disaster that has killed 741 people, is adding to the fastest inflation in two years.

Storms that dropped at least 17.6 inches of rain this month in the hardest-hit areas triggered mudslides that washed away highways and damaged crops, igniting concern food prices may rise as much as 17 percent in the first quarter, according to Fabio Romao, an economist with LCA Consultoria in Sao Paulo.

“The shock in food prices caused by rains is hitting an already heated economy,” Ures Folchini, the head of fixed income investments at Banco WestLB do Brasil SA in Sao Paulo, said in a phone interview yesterday. “The central bank will certainly take this into account because inflation expectations are worsening.”

A spike in vegetable and fruit prices could make it harder for new central bank President Alexandre Tombini to fight inflation being pushed by robust domestic demand and higher commodity prices, Folchini said. The deadliest natural disaster in Brazil’s history will test the resolve of President Dilma Rousseff, who took office Jan. 1 vowing to restrain spending.

Policymakers raised the benchmark interest rate yesterday by 50 basis points to contain inflation economists predict will exceed their 4.5 percent target in 2011.

Economists surveyed by the central bank last week raised to 5.42 percent their forecast for 2011 inflation, up from 5.34 percent a week earlier. Yields on interest-rate futures due in July have increased 25 basis points to 11.91 percent, since the rains that hit Brazil every year during the Southern Hemisphere’s summer intensified two weeks ago.

Food Shortages

Brazil’s Bovespa stock index has dropped 1.45 percent to 70,058.08 since Jan. 5, while the government’s real-denominated bonds have lost 0.4 percent, according to JPMorgan Chase & Co. The real has gained 0.2 percent to 1.6708 per U.S. dollar.

In Rio, supermarkets and restaurants reported food shortages after mudslides crushed entire neighborhoods in the cities of Petropolis, Teresopolis and Nova Friburgo last week. The area, which supplies 40 percent to 60 percent of the city’s vegetables and dairy products, needs 2 billion reais ($1.2 billion) to rebuild, mayors from the three cities said Jan. 17. The Rio de Janeiro Industrial Federation estimates damages will cost companies 153.4 million reais.

While less deadly, flooding in Sao Paulo, the country’s biggest agricultural-producing state, has been just as severe.

Lost Watermelons

Production of lettuce, broccoli, watercress, cauliflower and other items fell around 20 percent in the state after the rains destroyed or reduced the quality of crops, said Flavio Godas, an economist at Companhia de Entrepostos e Armazens Gerais de Sao Paulo, the world’s third-biggest wholesale food distribution center, known as Ceagesp.

Vegetable prices jumped 60 percent this month and will continue to rise until rains subside in March, said Godas. A flood in one of Ceagesp’s food terminal on Jan. 11 led to the loss of 40 tons of watermelons, he said.

Export crops -- soybean, sugar and coffee -- are unlikely to be affected, either because harvests haven’t started or rain in growing areas is less severe, according to farm groups including Cooxupe, the nation’s largest coffee cooperative. Brazil is the world’s largest producer of coffee and sugar, and the second-largest producer of soybeans after the U.S.

‘Serious Problems’

“We are going to have serious problems with vegetables and fresh foods,” Andre Perfeito, chief economist at Gradual Investimentos in Sao Paulo, said in a Jan. 17 phone interview. “We don’t know how big the impact is going to be.”

Consumer prices jumped 5.91 percent last year, the biggest yearly gain since 2004 and the fastest annual pace in 25 months. The cost of food and beverages in Brazil rose 10.39 percent last year, the fastest of nine components tracked by the benchmark IPCA index.

The impact of the flooding may be magnified in the central bank’s monitoring of inflation because Rio and Sao Paulo have a combined 46.7 percent weighting in the index. Food and beverages is the biggest component of the IPCA, accounting for more than 22 percent of the monthly price survey.

The floods are testing Rousseff’s commitment to contain the budget and make a clean break from her predecessor Luiz Inacio Lula da Silva’s spending increases, said Michael Roche, an emerging-market strategist with MF Global in New York.

Fiscal ‘Slippage’

“Markets are looking for clues over whether she adheres to the Lula game plan,” said Roche. A policy response to the disaster that increases government spending “would be a warning sign that there’s a fiscal policy slippage,” he said.

The government plans to invest $6.7 billion in a program to help prevent floods, the Budget Ministry said today in an e-mailed statement. The program to boost spending on slope stabilization and improve drainage systems will be part of the Growth Acceleration Program, a $570 billion investment drive that will be carried out through 2014.

Brazil will also create an early warning system to alert and evacuate people in high-risk areas ahead of floods, Science and Technology Minister Aloizio Mercadante said today in a radio program broadcast nationwide.

Finance Minister Guido Mantega said Jan. 4 the government will make “considerable” budget cuts to open room for lower interest rates. Mantega said the government likely failed to meet its budget target last year even as the economy expanded an estimated 7.3 percent, the fastest pace in two decades.

La Nina

Brazil isn’t the only country hurt by La Nina weather pattern this year, which is caused by cooling equatorial waters in the Pacific Ocean.

In Argentina, droughts are expected to reduce this year’s soybean harvest by 17 percent, Buenos Aires-based research company Economia y Regiones said in a Dec. 28 report. Soybeans are the country’s biggest export and main source of foreign currency.

In Colombia, President Juan Manuel Santos raised taxes on high-income wage earners and accelerated plans to sell a stake in state-owned oil company Ecopetrol SA to pay for 10 trillion pesos ($5.4 billion) in damage from flooding that killed more than 300 people and flooded more than 1 million hectares of farmland.

In Australia, the worst flooding since 1974 may cost as much as A$20 billion ($20 billion), about 1.5 percent of gross domestic product, economists from Australia & New Zealand Banking Group Ltd. wrote in a research reported dated Jan. 18.

The flooding, which killed at least 28 people in the past six weeks, is the biggest natural disaster in economic terms to hit Australia, Prime Minister Julia Gillard said Dec. 17.

‘Very Small’

The cost to Brazil’s $1.6 trillion economy has so far been contained. Rousseff’s pledge of 780 million reais in aid to Rio de Janeiro amounts to around 1 percent of average monthly federal tax collection last year. The World Bank has agreed to lend Rio $485 million to rebuild homes and relocate families.

“The government may have to cut from other areas, but the fiscal cost is not a concern,” said Elson Teles, chief economist at Maxima Asset Management SA in Rio de Janeiro. “These emergency expenditures are very small.”

More than a budget breaker, the natural disaster is a psychological blow to the country’s ambitions to reach developed-world status, said Leonardo Barreto, a political science professor at the University of Brasilia.

The lack of disaster response planning and prevention -- even after warnings were sounded in the wake of two other weather-related tragedies in Rio last year -- should serve as a wake-up call as the country prepares to host the 2014 World Cup and 2016 Olympics, he said.

“After a moment of national enthusiasm spurred by the elections and a bombardment of positive economic news, this tragedy reminds us that we’re a clay-footed giant,” said Barreto. “It awakens our inferiority complex.”

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