MercoPress. South Atlantic News Agency

Brazil's economic success turns on alarm warnings

The success of Brazil's orthodox economic policies is backfiring among exports who are increasingly concerned with the ever stronger local currency which makes imports cheaper and locally produced goods dearer in US dollars terms.

The strong appreciation of the Real which now stands at 2,22 to the US dollar, the same level as in May 2001, and with no prospects of short term recovery could hurt exports of coffee, beef, shoes, oil seeds and other produce argue exporters who have been acting as the main thrust and engine for the export oriented Brazilian model.

So far this year the Brazilian currency, Real, has appreciated 15,8% against the US dollar with some market analysts forecasting a two Reales to the US dollar sometime in the coming weeks. In the eve of the presidential election October 2002 which landed President Lula da Silva in office, the US dollar was selling at almost 4 Reales. Exporters fear that a stronger local currency will make Brazilian goods less competitive globally.

However high interest rates in Brazil (the basic benchmark is 19%) combined with low rates abroad, abundant international liquidity, record trade surplus, strong earnings of Brazilian companies abroad and a sound fiscal policy keep flooding the local market with US dollars thus forcing the appreciation of the Real.

In an another encouraging announcement the Brazilian Central Bank this week lowered the 2005 inflation forecast from 5,8% to 5%, below the original target, and similarly with the 2006 forecast which is now 3,5%. But in spite of exporters' complaints Brazilian trade is booming: overseas sales in the first half of 2005 reached 107 billion US dollars and even with a significant increase in imports, surplus is expected to reach 38 billion by the end of the year. The current account surplus in the first eight months of 2005 is also positive equivalent to the whole 2004 surplus and 1,78% of GDP.

The Central Bank forecasts the economy will expand 3,4% with agriculture growing 3,6%, industry 4,4%, services 2,4% and a slight 1,1%contraction in communications.. High commercial surpluses, a reduction in foreign debt, strong foreign investments and the high level of international reserves "are favourable for the current Brazilian situation" which means Brazil will have "no difficulties in addressing financial needs in 2005 and 2006 since it will sustain the favourable balance of payments performance".

International gross reserves increased 2 billion US dollars in the firsts seven months of 2005 and now stand at 55,1 billion US dollars. But, "let's not get over excited with the deceptive export scenario", warned Roberto Giannetti da Fonseca, chief of Foreign Trade and Relations from the Sao Paulo Industries Federation, the country's strongest industry lobby.

In a paper published by the Brazilian Foreign Trade Association, Mr. Giannetti da Fonseca shows that some industries such a footwear and textiles, which are in direct competition with Argentina and China, among other nations, are already feeling the impact of the strong Real with a drop in foreign sales, prompting layoffs and the failure of some small companies.

"Ironically, the industries most vulnerable in this situation are labour-intensive and dependent on domestic raw materials" added Giannetti da Fonseca.