No Celebrating Rousseff’s Fastest Growth as Brazilian Real MeltsDavid Biller
Brazil’s economy probably expanded at the fastest pace in President Dilma Rousseff’s tenure in the second quarter, a clip analysts forecast is unsustainable as the central bank raises interest rates and the currency plunges.
Gross domestic product probably expanded 0.9 percent from April to June, an annualized rate of 3.6 percent and the most since 2010, according to the median estimate of 42 analysts surveyed by Bloomberg. Yet above-target inflation and falling consumer confidence helped prompt economists to cut their 2013 growth forecast to 2.2 percent, down from 3.3 percent in January, according to a weekly central bank survey.
The national statistics institute will publish its second-quarter GDP report at 9 a.m. tomorrow in Rio de Janeiro.
“Toward the end of the year they will be in real dire straights, because the economy is slowing,” Paulo Vieira da Cunha, a former central bank director, said by phone from New York. “There’s no easy fix.”
Seeking to prevent an economic slowdown and a resurgence of inflation ahead of the 2014 elections, Rousseff’s government has subsidized lending for everything from capital goods to televisions, given tax breaks to industry and defended the currency after the biggest decline among major emerging markets. Borrowing costs, which were at a record low in April, are rising at the fastest pace among major economies as the central bank labors to stem inflation.
The government’s efforts won’t be enough, according to Ilan Goldfajn, chief economist of Itau Unibanco Holding SA, Latin America’s largest bank by market value. He forecasts zero economic growth in the third quarter, no more than 0.5 percent in the fourth quarter and a 2.1 percent expansion for 2013.
“There was a recovery, but unfortunately it doesn’t look like it’s going to continue,” he said in an interview in Rio.
Bucking a trend toward holding or cutting benchmark rates in emerging markets from Hungary to Thailand, Brazil’s central bank yesterday increased the Selic rate by half a percentage point for a third straight meeting to 9 percent.
Annual inflation has remained above the midpoint of the 2.5 percent to 6.5 percent target range since central bank President Alexandre Tombini took office in January 2011, reaching a 20-month high of 6.7 percent in June.
Seasonally-adjusted retail sales rose 0.5 percent in the second quarter after falling 0.1 percent in the first quarter. Industrial production rose 1.1 percent from 0.9 percent over the same period.
With the real falling about 15 percent against the dollar since April, Rousseff’s government said industry will get a boost from the weaker real while simultaneously announcing a $60 billion intervention to support the currency.
“It’s wonderful that the dollar is reaching the point that it needs to,” Fernando Pimentel, minister of development, industry and trade, said Aug. 20. “Brazil is becoming competitive again, our industry is becoming competitive again.”
Every 10 percent fall in the exchange rate equates to a 0.75 percent point acceleration in inflation, Goldfajn said.
A weaker currency “will end up helping industry, but it’s not going to be immediate,” he said. “Business confidence is actually going to drop more.”
Tony Volpon, head of emerging market research for the Americas at Nomura Holdings Inc., said the benefits of a cheaper currency won’t be seen until 2014 or 2015 since it takes industry time to substitute costlier imports with domestic production and to regain export markets. He forecasts the economy will shrink as much as 1.1 percent in the fourth quarter, with growth of 1.6 percent for the year.
The MSCI index of Brazilian industrial stocks, which include airplane maker Embraer SA, highway manager CCR SA, and industrial machinery manufacturer WEG SA, fell 12.3 percent in the second quarter after rising 8 percent in the first quarter.
The real weakened 0.35 percent 2.3534 at 11:46 a.m. in Sao Paulo. The country’s dollar bonds have lost 13.3 percent this year, more than the 10 percent average for emerging markets, according to JPMorgan Chase & Co.’s EMBIG index.
A key factor both for Brazil’s economy and the exchange rate is commodity prices, which are largely determined by Chinese demand, according to former central bank President Carlos Langoni, who said he expects the currency to stabilize at between 2-2.2 per dollar. Chinese trade rebounded more than expected by economists last month while manufacturing, fueled by domestic demand, resumed its expansion this month after shrinking the most in almost a year in July.
‘Better the Mood’
“I think pessimism with regard to Brazil is exaggerated, primarily if there’s no disaster in China,” Langoni said.
Pending infrastructure concessions are one tool that could help “better the mood” in Latin America’s biggest economy, Volpon said.
With private banks restricting credit in the first half of 2013, public banks stepped up their efforts, disbursing at six times the rate of their private counterparts. Brazil’s development bank BNDES lent a record 88 billion reais ($38 billion) over that period, with about two-thirds going to infrastructure and industry. That will continue as lending balloons to as much as 190 billion reais this year, BNDES president Luciano Coutinho said Aug. 14.
The government plans three electricity auctions this year to draw 100 billion reais in investments and will also auction rights to the Libra offshore oilfield in October. With Brazil hosting the 2014 World Cup soccer tournament and 2016 Olympic Games, the government will also seek bids on infrastructure concessions worth $46 billion for railways, $27 billion for ports, $26 billion for highways, $18 billion for a bullet train and $4 billion for airports starting next month.
Standard & Poor’s put Brazil’s BBB credit rating on negative outlook in June, citing weakening fiscal fundamentals, and Barclays Plc. said on Aug. 16 that its base-case scenario is a downgrade in the first quarter of 2014. Finance Minister Guido Mantega announced spending cuts of 10 billion reais on July 22 in order to meet a primary surplus target of 2.3 percent of GDP.
Rousseff, 65, will hold fast to her economic model through the elections in October next year before being forced to make adjustments in 2015, former central bank director Vieira da Cunha said. Armando Castelar, coordinator of applied economic research at the Getulio Vargas Foundation’s IBRE institute, expects the current account deficit to climb to 4 percent of GDP next year from about 3.4 percent in July.
“There’s no lack of concerns for this administration at this point,” Italo Lombardi, an economist at Standard Chartered Plc, said by phone from New York. “Everybody is so much more skeptical. Everything is a concern.”