MercoPress. South Atlantic News Agency

Euro fiscal crisis and local inflation tarnish Brazilian glitter

Former Central bank president Arminio Fraga: Brazil not prepared to grow at 7% (Photo by LIFE)

Brazil's Bovespa stocks index and the Real lost ground for a sixth straight session Thursday as investors continued to sell local assets given the depressed global economic outlook following on fears about the Euro fiscal crisis and disappointing data on the health of the US economy.

Bovespa was down 2.5% at 58,192 points after ending at 59,689 points Wednesday. With Thursday decline, the index has reached its lowest level since Sept. 9 and is down by 15.2% so far this year.

The Brazilian currency Real also slipped 1% ending at 1.861 to the US dollar.

A sustained weakening of the Euro brought continued negative impact for Brazilian materials sector shares, as prices of key commodities continued recent declines threatening the country’s export. Making matters worse the US Labor Department on Thursday reported jobless claims rose 25,000 in the week ending May 15 to 471,000.

Locally, the market pondered a continued acceleration in inflation. Brazil's IBGE statistics institute reported IPCA consumer price inflation advanced by 0.63% in early May from 0.48% in April. The figure brought 12-month inflation to 5.26%.

The surging inflation has helped stoke concerns Brazil's central bank will be forced to take a hard line in a recently begun monetary-policy tightening cycle. Brazil's Central bank raised the country's reference Selic rate 75 basis points last month to 9.5% annually. The hike was the Central bank first in nearly 20 months.

According to market estimates, the Selic rate is seen rising about 225 basis points by the end of this year to 11.75% annually.

However next October Brazil goes to the polls to elect a new president and policy makers could be reluctant to press on the brakes too hard or suddenly.

While Brazilian economic growth prospects appear to remain good this year, with forecasts above 7%, analysts note local markets still are a ripe target for capital withdrawals by international players seeking to send funds to safe-haven investments elsewhere.

To that effect former president of the Central Bank Arminio Fraga warned Brazil isn’t prepared for economic growth of 6% or 7% a year because of inflationary pressures and infrastructure “bottlenecks”.

In an interview with O Estado de Sao Paulo Arminio Fraga said all the “mature” global economies are in a “very worrying fiscal situation” and the financial crisis “may worsen”.
Fraga said the situation won’t lead to the end of the Euro unless there is a “gigantic collective error in economic policy”.

Earlier this week the Central Bank index of economic activity said the Brazilian economy was up 2.38% in the first quarter compared to the fourth quarter of 2009 and 9.84% over the first quarter a year ago.

Finance Minister Guido Mantega said Wednesday that the Brazilian economy would generate two million formal jobs in 2010 after having created almost one million in the first four months, almost the same as in the whole of 2009.