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In Brazil’s domestic demand will sustain growth, but …

Editor's Note: Today we move into Brazil and its economy. Now in its article yesterday, Hilary told us on improvements to internal demands of the South American countries ... some red flags in Brazil, not serious, but that need attention. I can send your comments to: paola@moneyweekes.com

In Brazil's domestic demand will sustain growth, but ...

Buenos Aires, Argentina
February 19, 2008

Today I want to return in part as discussed in the article yesterday, where they commented that, overall, one of the reasons why I believe that Latin American economies will not feel both the impact of the crisis in the U.S. is explained by the dynamics observed in domestic consumption, which has been recovering from the hand of the decline in unemployment and real wage growth.

And I want to focus on the specific case of Brazil, where the dynamics of consumption are helping to offset the weakness that you start looking at the external sector. This really is good news for Brazil, but attention, because there are some risks that we must not lose sight of it may hinder the sustained growth of this country, which awaits the much coveted "investment grade".

Consumption growth has accelerated in recent years, recording in 2007 an estimated increase of 5.5%, while during the last decade, average growth was 2.4% per year (and had reached 4.5% average growth in 2004-2007). While there are still improvements to be achieved in income distribution issues, clearly the Brazilians will be able to say that all the past was better.

The increased consumption is due to improved income levels and decreasing unemployment. For 2002, income per capita in Brazil amounted to U.S. $ 2,794 since late 2007 reached an estimated $ 6,943 (one 148.5% increase in just 5 years!). True, I should explain that much of this improvement in per capita income in dollars is due to the exchange rate appreciation during that period, but this appreciation of the exchange rate also implies an improvement in the purchasing power of population benefits of "cheapening" of imports. In relation to the evolution of unemployment remained the same between 2001 and 2003 over double digits and was to decline and reached in December 2007, its lowest level in the last 10 years, to settle at 7.4% .

What is happening with Brazil's external accounts? The external sector shows a marked deterioration in the current account as a result of the appreciation of the nominal exchange rate (which in 2007 was 17%) and in the last quarter of 2007 closed in red. I must say that the exchange rate appreciation did not stop exports continue their growth dynamics (increased by 19.5% in the last quarter of 2007), but generated an explosive growth in imports than in the last quarter of year rose by 42% (in annual terms).

The deficit from Brazilian current account surplus caused by lower trade deficit combined with increased services and the prospects for persistence of this deficit is a warning light to be followed closely. Do not be concerned that the appreciation of real exchange rate in Brazil, partly inflated by external capital flows, transform into chronic deficit as happened in Argentina in the period of convertibility.

Turning to the issue of inflation, in the end of 2007, although the targets located within the Central Bank of Brazil, it did on its upper limit. It made the Monetary Policy Committee decided to keep the benchmark rate (Selic) at 11.25%, but is likely to occur in the same raise in 2008 to control inflationary pressures. This could affect domestic demand and increase pressures on the exchange rate, which lights another warning light.

The fiscal account deficit is another issue to monitor. On a positive note, although Brazil has been dragging a fiscal deficit for several years, the same is in decline and the end of 2007 its estimated value was 2% of GDP. The brake that was imposed earlier this year the tax package Congress made it harder things to Lula, who had to increase taxes aliquots of two other existing financial and cut costs equivalent to about U.S. $ 10,000 million as partial compensation for the purpose of tax on financial transactions that Lula wanted to renew. Lula hopes to close the fiscal slump by increasing product revenue increased economic growth and more efficient collection. We'll see if it succeeds.

In recent weeks a series of rumors arose that were aware of potential energy problems in Brazil (and have in Argentina and Chile). The head of the National Electric Energy Agency of Brazil (ANEEL), Jerson Kelman, warned that there could be rationing of energy by the drought in two key regions and a shortage of natural gas supply. But this warning was rejected both by Lula who said: "We are ready to grow 5% and a little more smoothly Energy" and Energy Minister Nelson Hubner, who said, "is ruled a power outage in 2008 and 2009 ". In the meantime, a delegation from the Brazilian government will agree to Buenos Aires for Bolivian gas distribution between the two countries. We'll see what can happen ...

In Brazil there are warning lights on several fronts, although they do not generate a serious concern, it does require the government to take care of them. What is clear is that with continued economic growth, domestic consumption will grow vigorously and businesses targeting the same have a good growth potential. In this myself and as I mentioned in yesterday's article, noted that the Chilean holding Cencosud was just installed in Brazil.

The momentum is going the Brazilian population is also reflected in the level of popularity of Lula, whose government has a 52.7% approval (in October was 46.5%), as shown in a survey conducted by the Sensus Institute.

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