Research Dept. News
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Monthly Report, num 347 - June 2011
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International review - Brazil
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Brazil: the real, inflation and other setbacks
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The Brazilian government reduces its growth forecast for 2011 to 4.5%, in line with our forecasts.
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In May, the Brazilian government reduced its gross domestic product growth forecast for this year by half a point, down to 4.5%, a figure that now coincides with our forecast. It also upped its forecast for inflation this year to 5.7% and revised the exchange rate from the previously expected figure of 1.70 reais/dollar to 1.61.
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The Brazilian real is one of the currencies appreciating the most over the last few years (40% against the dollar since the end of 2008) and this has undoubtedly had its consequences. To start with, it has made imports cheaper, helping to boost domestic expenditure, something that helped the country get back on its feet more quickly after a very brief recession but ended up applying notable pressure on prices. On the other hand, the strong real entails a loss of competitiveness for Brazilian exports, especially for manufacturers seeing as the demand for raw materials continues to be very difficult.
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Given this context, the Brazilian economic authorities are facing a dilemma: if they don't combat inflation with the entire arsenal they have available, the risk increases of an abrupt, forced adjustment in the future. But using their entire arsenal obviously means raising the official interest rate and, if they raise rates, the trend in the real's appreciation will get worse, complicating the performance of Brazil's export industry.
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For now, they have opted for the middle way: interest rate hikes have been less aggressive than expected but supported by restrictive measures of a macroprundential and fiscal nature. On the other hand, the real has been contained particularly by intensifying capital controls.
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Brazil is taking measures against the Argentinean restrictions on imports of Brazilian food.
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Nonetheless, exporters are still agitated. Recently, the Chairman and CEO of Siemens in Brazil demanded further measures to contain the currency as well as warning of the risk entailed for the export sector of a dollar being worth over 1.50 reais, and that this might even lead to «a deindustrialization of the Brazilian economy». This agitation might lie behind the reaction of the Brazilian authorities to the protectionist measures introduced by Argentina a few months ago, affecting foodstuffs from Brazil.
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In mid-May, Dilma Rousseff decided to respond to these restrictions by introducing a licence system for importing vehicles and their parts. Although the measure is also applied to products from Mexico and South Korea, the repercussions for Argentina are significant as 82% of its car exports and 65% of its exports of car parts are aimed at Brazil. In the last few days, these two members of Mercosur have restarted conversations to resolve the trade conflict and the bulk of the evidence available suggests that this will result in their trade getting back to normal. However, this conflict is symptomatic of a competitiveness problem in both countries.
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