MercoPress. South Atlantic News Agency

The Brazilian economy and the dividends of stability

Brazil's Central Bank president Henrique Meirelles was the guest this week of the Brazilian-American Chamber of Commerce in New York, where he talked about the Brazilian economy, prospects followed by a period of questions and answers.

Brazil is the largest economy of Latinamerica, the senior member of Mercosur, has a respected voice in world affairs and since the turn of the millennium has become one of the most promising emerging economies belonging to the so called BRIC group, Brazil, Russia, India and China.

Follows a summary of this conference written by Denise Karin Johnsson

Brazil is enjoying "the dividends of stability," said Henrique de Campos Meirelles, president of the Central Bank of Brazil, this morning at the Brazilian-American Chamber of Commerce. The president of the Central Bank delivered a 40 minute presentation in midtown Manhattan, followed by another 15 minutes of Q&A posed by a few of the approximately 160 attendees. Based on eight-data sources, namely, the Central Bank of Brazil (BCB), the Brazilian Institute of Geography and Statistics (IBGE), the Brazilian Bureau of Labour Statistics (MTE), the National Industry Confederation (CNI), the Brazilian Futures Exchange (BM&F), the Getulio Vargas Foundation for Economic Research (FGV), JPMorgan and Merrill Lynch; and with data ranging from one to thirteen-years, the presentation named "Recent Macroeconomic Developments" was divided into 27 data-trends. "In June 2008, the Brazilian economy created almost 1.9 million new formal jobs per year," said Mr. Meirelles, "the basis of the kind of growth pattern that Brazil has embarked into in the last few years. The unemployment rate is also coming down," added the Brazilian Central Bank president. "In terms of real payrolls measured by the three-month moving average, June 2008 has seen a growth of 6.4% in real terms when compared to the previous period," said Henrique Meirelles. Retail sales income-sensitive parts, such as supermarket and clothing-related purchases, have grown less than credit-sensitive retail sales, such as home-appliances and vehicle-related purchases. However, the correlation between payroll and retail is strong as consumption is driven by a real increase in average income. This said credit-based purchase is growing primarily as a result of two factors: an overall increase in average income together with market stability. As a result, a correlation between stable inflation expectations and expansion in credit is visible. The three-year seasonally-adjusted industrial moving-average has enjoyed an upward trend since January of 2003. The average industrial-output of the first quarter of 2008 (1Q08) is 6.3% higher when compared to the previous period. Capital goods drive the average industrial-output growth at 17.1% in 1Q08. "The business community in Brazil is betting that domestic demand will stay during the next years, with ups, downs and cycles, yet without the kinds of stops-and-goes that Brazil has seen in the past," said Mr. Meirelles. When comparing retail sales, industrial output and imports, the three-month seasonally-adjusted moving-average of sales enjoys a higher percentage-growth over industrial output. Concomitantly, absorption of capital goods is higher than industrial output. Lastly, capacity utilization has seen a steady upward-growth since January of 2007. There is also an investment-driven growth vibrant in Brazil, visible when contrasting the 1Q08 15% growth of investments to a meager 5.8% of GDP-growth in the same period. Although business confidence is at historical high-levels, the latest 3Q08 business confidence gauge has seen a drop at the margin due to inflationary pressures. Core inflation (IPCA) at a 5.7% in July 2008, which excludes foods, energy, utilities and transportation, is presently believed to mirror more accurately the vibrant Brazilian economy. Despite the upward trends in wholesale price-inflation of agricultural and manufacturing products, agricultural products have seen a recent marginal price-inflation drop in July of 2008. From October 2007 on, nominal interest-rates have reacted to higher inflation expectations by tracking an upwards trend. The nominal interest-rates of the 360-days swap and the 180-days swap are an optimum measure of future expectation. They are currently yielding higher rates of return than the commonly used SELIC nominal interest-rate. Yet, a longer view at the behavior of the average real interest-rate (calculated by averaging the nominal one-year future discounted by a one-year treasury inflation security), from January 1996 to-date, points at a decrease in the average real interest-rate and its historically high volatility. Inflation expectations measured by the IPCA-index or the IGP-DI index have already peaked and are currently in a downward trend. 2009 projections point at a smoother and more stable outlook. The targeted inflation-rate zone of Brazil ranges from 2.5% to 6.5%, being 4.5% the target-center. A look at the IPCA-index (twelve-month trailing basis) attests to an inflation drop into the target inflation-rate range zone in January 2004. The five-year behavior of the IPCA-index shows how it circumvents the target-center from the upper to the lower-zone surrounding it. Today, the 2008 market consensus for inflation expectations in Brazil is at 6.44% and zooming into the center-target. "Some cultures believe that inflation targeting should ideally be only in the upper-zone of the range, others believe it should move around the target-center," said Mr. Meirelles. The central bank sees medium-term inflation expectation projections dipping to 5% in 2009 and further to 4.5% in 2010: a result of the central bank's track-record of credibility and Brazil's commitment to macroeconomic stability. By comparing a six-year trend of the Brazil-risk to the general Risk-aversion index compiled by Merrill Lynch and JPMorgan, a correlation between the two is visible even if only up to 2005, when both grow further apart in a decoupling process. The central bank's steady acquisition of external debt initiated in 2004, reached its apex in January 2007. The internal reserves of the country have swelled from $15.9 billion in January of 2003 to US$203.6 billion in July of 2008. Net external debt has seen a dramatic plunge from US$166.7 billion in the 1Q02 to US$ (19.9) in the 1Q08. As a result, Brazil's external vulnerabilities, as measured by external the ratio of debt service/GDP and the ratio of net external debt/GDP, have from 2002 to-date enjoyed a steep descending flight. "Concluding, Brazil has addressed the main-sources of its vulnerabilities. Its fiscal vulnerability in reserves was tackled by shrinking the country's sovereign debt. Brazil's maintenance of inflation expectations has been kept on-target throughout the years, as well as the maintenance of a free-floating foreign-exchange regime. Today, substantial currency reserves and a much healthier balance of trade encompassing an import surge enable the country to continue investing" concluded Mr. Meirelles.