Rousseff bets future growth on lower interests rates, trade surplus falls, Army invades Amazon

Rousseff bets future growth on lower interests rates

Rouseff’s goverment plans to lower interests rates to cheapen borrowing cost.  The new rates will peg returns on savings accounts to the central bank’s benchmark lending overnight rate or Selic-report

Trade Surplus Falls in April

Brazil’s trade surplus fell from $2 billion in March to $881 million in April.  This is the least amount of surplus reported in a decade.  The trade surplus continues to decline even though the real has lost 11% of its value against the dollar since the end of February.  Economists expect a trade surplus of $19.2 billion in 2012 and of $14.5 billion in 2013, according to an April 27 central bank survey.

Military Deploys 8,500 Troops to Patrol Amazon’s Northern Boarder

8,500 troops from Brazil’s armed forces have been deployed in the Amazon to fight drug trafficking, illegal logging, and mining.  Operation Agata 4 began yesterday with the troops patrolling an area that stretches some 5,000km (3,100 miles) along Brazil’s northern border

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Brazil’s economic growth rate contracts, first since the financial crisis of 2008.

The Central Bank’s Economic Activity (IBC-Br) recorded a third quarter contraction of .32% compared to the 2nd quarter.  This is the first contraction since the first quarter of 2009.  The index of economic activity of the Central Bank (IBC-Br) recorded in the third quarter of 2011 contracted by 0.32% compared with the second quarter.

The second quarter of 2011 recorded a IBC-BR growth rate of .5% the slowest growth rate since 2009.  In September, the index also had a slight increase of 0.02% compared with August.

The last time Brazil saw this index growth rate turn negative the government took a series of measure that resulted in a quarterly growth rate of 3.07% in the last quarter of 2009.

Inflation accelerates in 5 of 7 cities surveyed

Inflation measured by Consumer Price Index – Weekly (IPC-S) accelerated in five of the seven capitals surveyed by the Getulio Vargas Foundation (FGV).
 IPC-S recording for November 7 thorough 15, 2011
São Paulo increased from .38% to .46%
Porto Alegre increased from .58% to .64%
Salvador increased from .16 to .17%
Belo Horizonte increased from .48% to .52%
Reclife increased from .35% to .46%
Brasilia decreased from .55% to .35%
Rio de Janeiro .25% to .22%

 

The Latin America’s Economic Climate Index (ECI) declines indicating the region is entering a declining phase from its recent boom phase.

The FGV reported Wednesday the Economic Climate Index decreased from 5.6 to 4.4 points between July and October 2011. This is a departure from the boom phase from July 2010 to July 2011.

The Present Situation Index (ISA) decreased from 5.9 to 5.2.  Any recording above 5 indicates a favorable assement about the present situation.  However, the Expectation Index (IE) shrank from 5.3 to 3.5 point, indicating a deteriorating near future economic situation.  The index reached it lowest level in January 2009 with a recording of 2.3 points.
The Economic Climate Index fell in all countries of South America except in Peru where there was an increase from 6.1 to 6.2 points.

Bolivia, Brazil, Chile, Mexico and Venezuela ECI register below 5 points, revealing an unfavorable economic climate.

Among the problems faced by Latin countries are:
  1. The lack of international competitiveness
  2. The lack of skilled manpower
  3. Lack of confidence in government policies
  4. Inflation
  5. Unemployment.

In Brazil the factors that lead to a decline in confidence were

  1. Competitiveness
  2. Inflation
  3. Lack of skill labor
  4. Public deficit
  5. Shortage of capital


Monetary easing through tax unwind: why now?

The Central Bank of Brazil is seeking to prop up economic growth through making consumer debt cheaper.  On Friday, the Bank announced taxes slapped on consumer loans, payroll loans, and automobile loans, would be lifted.   These taxes were implemented earlier this year to cool the expansion of credit.

Is now the right time to lift those taxes thereby making consumer debt cheaper?

There are those that would argue that making consumer debt cheaper when the economy is slowing allows for domestic demand to fill the economic activity gap created by a slowing world wide economy.  The recessionary environment Europe is finding itself in due to its debt crisis is cooling markets around the world.   Less commerce in the EU means less commerce in China and therefore Brazil.  A quick fix to this economic growth may be to make it easier for Brazil’s newly minted middle class to borrow more thereby creating internal demand.

Yesterday, the Bank of Brazil (one of Brazil largest consumer banks) lowered the interest rates charged on consumer debt.  If the large private banks follow Bank of Brazil, it will mean that these banks don’t want the nation’s largest publicly owned bank taking a disproportionate market share of the consumer lending market.  If these banks don’t lower their interest rates, it could mean they foresee higher default rates as Brazil’s economy cools further.

During this reporting season, all three of Brazil largest privately held banks (Itau, Banco Bradesco, and Santander) noted they would be increasing reserves to cover growing defaults in their consumer lending.  Last week, the S&P rating agency noted one of the negative factors in Brazil financial service industry was the highly leveraged consumer with limited income to service that debt.

The policy makers must use causation moving forward.  Making debt cheaper will allow the growing middle class to borrow more and most will.  However, the consumer’s appetite for debt is not an indicator of the consumer’s ability to service that debt.  The EU and the United States have learned this lesson the hard way.

Is it now Brazil’s turn?

Long term impact of raid on Rocinha

News for November 15, 2011
  • Brazil slum raids impress, but what’s the impact? AP
  • Brazil capital markets: lots done, more to do. FT
  • Files Currency-Dumping Proposal In WTO To Protect Against Cheap Imports WSJ

Bank of Brazil lowers interests rates on consumer debt

Today the Bank of Brazil announced it lowered interest rate on payroll loans, personal loans, and vehicle financing.  The publicly owned bank (68% owned by the National Treasury), hopes to keep demand high for consumer debt thereby minimize the effect of a slowing economy.

The Bank has begun to institute polices it had used during the crisis of 2008 to stimulate economic activity by making debt cheaper.  “At a time like this, our policy is very deliberate,” said the vice president of the bank’s retail business, Paulo Rogério Caffarelli.  He added “Bank of Brazil  works in a countercyclical process by its role and character as public bank,”

Interests charged on payroll loans fell from 2.50% to 2.17% a month.  Interests on vehicles loans were also lowered to help facilitate the normally robust car-purchasing season of November and December (start of Brazil’s Summer holiday season).

Mr. Caffarelli justified the lower interests rate by explaining the role of Bank of Brazil, “We, the Bank of Brazil, live with this dichotomy between being a public bank and private sector competitor. Our principal shareholder is the National Treasury, … but at the same time we compete with private banks”  It has been speculated that Brazil’s three largest privately held banks will soon follow Bank of Brazil’s lead by lowering their consumer debt interest.