Publicado por: Guilherme Byrro Lopes | 19/11/2010

Brazil – Perspective for 2011 (Nov/10 Update)

This blog has been writing about the perspective of the Brazilian economy since sept/09, although it was all in portuguese. I’ll put some effort in translating the last one of these articles about the expected performance of our economy, based on the market expectations ( Focus-Market Readout) and share some opinions with the non-portuguese speakers as well. According to its result, I just might do it more often (and I do apologize for weird constructions and possible translation errors along the post)!

The Brazilian Central Bank (BCB) collects expectations among institutions, the main ones presented here are the GDP, inflation and interest rates expectations. For the last months, little has changed in the expectations of the economic agents. So far so good for 2010 and 2011 will still present a very positive result, milder then 2010 though. It is a wrong perception to believe that 2011 should be better then 2010, because we were recovering from the crisis and blah, blah, blah, because we suffer little in the crisis, mainly in 2009 but we recovered (and I could say) almost all of it in 2010, as it would become more clear in the next paragraph. According to FOCUS (the market expectations gathered by BCB), until 05/11/2010 expectations, the scenario for the official inflation rate (IPCA) over the target (4.5%) and the 2-digit interest rates are pretty much consolidated both for 2010 and also 2011.When we are considering the Gross Domestic Product growth, the expectations don’t stop showing a very positive scenario for the country this year and not less optimistic for 2011, but a more moderate growth.

The market expectations median for the GDP in 2010 points out an outstanding 7.6% growth rate, leading the more enthusiastic to even say that it is a “Chinese-like growth” (very popular expression among those in the government) and a milder growth for 2011, around 4.5% (graph1). Despite the 2010 expected growth rate 3 p.p. (percentage point) higher then one year ago (04/11/2009 – 4.83%), the 2011 expected growth remains stable for the last 12 months, in 4.5%. That means that since late 2009 and during this whole year, NOTHING really changed the perception of the economic agents, there were no improvements in structural conditions would allow us a higher growth, not even the elections campaigns and its outcome changed that. Denying here the Chinese- like growth, China’s GDP growth in 2009 was 9.1% and it is expected from the IMF (October 10 – World  Economic Outlook Report) a 10.5% rate, so we are not so close as some might say. Besides that, comparing the 2009/2010 biennium, the Brazilian GDP growth (-0.19% and 7.6% expected by FOCUS) show a composed 3.6% yearly rate while China shows a solid 9.8% yearly rate (9.1% and 10.5%, IMF projection, respectively), so looking this way, we should not dare yet to talk about Chinese-like growth. How the Brazilian economic performance does looks like against the rest of the world? According to the IMF projections (October WEO), South America should grow 6.3% in 2010 and 4.1% in 2011 (Brazil, Chile and Uruguay contributing mostly for this result). The “Advanced Economies” and the “Emerging and Developing Economies”, there is a 2.7% and 7.1% growth for 2010-11, respectively. For 2011, it is projected more moderate rates, 2.2% and 6.4%, in the same comparison. The World GDP is projected 4.8% and 4.2% for this year and the next after falling -0.6% in 2009 (graph2). Trough these lens, Brazil results are more then positive!

Other economic indicators that we can analyze as well are the inflation and the interest rates. For 2010, it is expected a 5.31% inflation rate (considering the already registered 4.38% year to date inflation, until October), reported by IBGE (Brazilian Institute for Geography and Statistics). Considering the market expectation median for the price index IPCA for the following 2 months, on top of the 4.38%, the inflation will already reach 5.43%. This year was particularly difficult for the economic agents and institutes to get anything right, when it comes to monthly inflation, although I still believe in the full year forecasts, free of season impacts. In the beginning of the year, the inflation surprised everybody, though it was because of seasonal factors, like heavy rains that increased the food prices, specially the vegetables, greenery and fruits, more then the normally expected (graph3). The food prices then came a lot lower then the expected starting on May until august, saving the full price index from a inflation over 6% for 2010 and higher interest rates (SELIC). Despite all, the end of the year is normally more pressured for price increases and the market expectations are still not reflecting it that much. The inflation scenario for 2010 got worse especially after the BCB stopped raising interest rates, taking its time to evaluate the accumulated 2 p.p. raise (shown in graph 4). During the last 2 meetings, the COPOM (equivalent to the FOMC, in the US) has decided to keep the annual interest rate SELIC in 10.75% and, therefore, given the heated demand, the inflation projections are pointing 5.0% rate, higher then the 4.5% target, like this year. What is the consequence of a higher inflation? Well, since next year is not a election year, the BCB might just be more energetic and take more actions to keep inflation under control, if the next elected president Dilma doesn’t want to change the “pseudo-called” independency of the BCB (it is not independent in Brazil, by law, although the presidents are trying to interfere in its business, since BCB has acquired a strong respect internationally). There are those who say that Dilma is more inclined to “development ideas” (or more heterodox) and will increase public expenditure (like Lula did, not only due to social projects, but also the not so well executed infrastructure development package (a.k.a. PAC) and hiring a lot more people). If this is the way to be taken, for sure we can expect more inflation and therefore increases in interest rates to fight that. There are also those who believe on the contrary, that she will take  more conservative measures, making the fiscal adjustments and “put order in the house”, respecting the institutions and the stability legacy of the last 16 years or so. If this is the way to be taken, them, there will be less inflation and then the interest rates can drop to a 1-digit rate. What will really happen? Nobody actually knows, that seen through the lens of the market expectations, or at least it is not yet “priced” by the market (otherwise there would be something reflected on the expectations). It is easier to believe that she will keep the same trajectory, for now. For this reason, the price index evolution should be re-directed to 4.5% (because there is a target, right?!) to keep inflation under control and this puts pressure on BCB to raise interest rates, leading the market expectations median to SELIC to 11.75% by December 2011 (graph 5).

Depending on the elected president’s mood, a lot can change when it comes to interest rates and inflation, that to be determined by her ideas of austerity or expansionary development and the role of the State in the economy, by the economic team and the maintenance of Lula’s ideals (her predecessor and also mentor), now almost a former president. A right or wrong attitude of the president can destabilize the multi-party government (PT has gained elections with the support of PMDB and several small parties), can paralyze the Senate and the Congress and risk the 4-year mandate (almost like what happened in the 1st mandate of Lula, though no one likes to talk about it). The 4.5% GDP growth is more reasonable to believe (a bit more or a bit less depending on inflation and interest rates), since it doesn’t depend that much on the president’s and politics actions but in the belief on the institutions and the society confidence on the future.


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