Brazil's Fast Recovery Spurs Concern

April 27, 2010 - PRLog -- Elation over Brazil's fast recovery from  the global economic downturn has shifted to something more ominous: Concern  that the giant South American economy is starting to overheat.
To cool it off, the central bank is likely  to start a series of interest-rate increases on Wednesday, analysts say.Some of  Brazil's economic speed gauges are bouncing near red lines. The economy grew at  least 10% in the first quarter, estimates Goldman Sachs. Car sales rose 18% in  the same period. Brazil has attracted steadily rising foreign direct  investment, reaching $26.3 billion in the 12 months leading up to  March."The economy is overheating," says Alberto Ramos, a senior  Goldman Sachs economist. Brazilian officials play down the concerns about http://www.abercrombieofficial.org/ . "The economy is hot, but not super-hot," Finance Minister Guido  Mantega told reporters in Washington last week.
On Monday, he forecast Brazil's economy  will expand by 5.5% this year—though some economists expect the growth rate to  reach 7%, its fastest pace in decades.Brazil's predicament underscores how the  fortunes of emerging and developed markets are diverging. The International  Monetary Fund forecasts that "advanced economies" will expand by  2.25% in 2010 and by 2.5% in 2011, after a decline of more than 3% last year.  Growth in emerging markets and developing countries is projected to be above  6.25% a year in the same period, following more modest growth of 2.5% last  year.
That has created an unusual situation in  which emerging-market countries such as India and Brazil are starting to rein  in money supplies that were allowed to swell during the financial crisis—even  as money remains cheap in the U.S. and Europe.
Fast growth and rising sales are usually  good things, especially for developing nations trying to lift millions of poor  into the ranks of the middle class at http://www.abercrombieofficial.org/mens-abercrombie-fitch....  The concern is that accelerated growth rates are spurring inflation, long the  Achilles' heel of commodity-rich economies like Brazil's. Inflation rates were  in the four-digits in the early 1990s, a chaotic period that remains fresh in  the memories of many Brazilians."What you hear is that if we grow too  fast, we'll get inflation," says Fernando Teixeira, who sells magazines in  São Paulo's middle-class Moema neighborhood. "I don't know if that's true,  but it makes you worry."  
However, interest-rate increases can have  unwanted side effects. Global investors increasingly are borrowing at near-zero  interest rates in dollars, thanks to the U.S. Federal Reserve's aggressive  stance, and investing that money in emerging markets to collect higher yields.
That can cause the emerging-market  currencies to strengthen too fast, and potentially create bubbles in hot  sectors such as real estate. This dilemma has prompted the IMF, once firmly  against imposing controls on inflows of capital, to reconsider its view. A few  countries have experimented with them. Brazil imposed taxes on foreign  investment in locally traded stocks and bonds.
Net private-capital flows to emerging  markets, which fell sharply to $531 billion last year, are forecast to climb to  $709 billion this year and $747 billion next, according to the Institute for  International Finance, a Washington-based group of big international banks.
"Rapid improvements in emerging market  assets have started to give rise to concerns that capital inflows could lead to  inflationary pressure or asset price bubbles," the IMF said in its Global  Financial Stability Report earlier this month. Brazil is expected to act  quickly in part because of its long history of boom and bust cycles. Starting  in the mid-1990s, leaders worked to reduce inflation and stabilize the  currency. To prevent inflation's return, Brazil kept real rates among the  highest in the world.
But inflation is starting to creep up as  government spending, easier credit and foreign investment drive consumption. A  yearslong commodity boom is also fueling growth. Inflation in Brazil was at  5.22% as of April 15. That is nowhere near the out-of-control days of the past,  but above the central bank's target of 4.5%. Brazil's Central Bank President  Henrique Meirelles said in an interview in Washington on Sunday that the bank  would act decisively to ensure inflation doesn't rise too far above government  targets in http://www.abercrombieofficial.com/abercrombie-accessorie....  Indeed, he has come under fire from some local bank executives who say the  central bank should have started raising rates earlier.  
Economists and traders expect the central  bank to raise rates on Wednesday for the first time since September 2008. They  see an increase of 0.5 to 0.75 percentage points that would begin a series of  tightening moves that will lift the rate from its current 8.75% to 11.75% by  the end of the year.
Some economists, however, say inflation  concerns shouldn't be overblown. Brazil's economy was growing very quickly  before the global crisis hit and, according to Barclays Capital Economist  Marcelo Salomon, inflationary pressures still aren't as pronounced as they were  in the precrisis days.
Brazil, the world's biggest exporter of  iron ore, beef, chicken, sugar and coffee, rebounded quickly from the global  turmoil, with economic growth of 4.3% in the fourth quarter of 2009. Government  agencies and state-controlled banks quickly injected billions of dollars of  credit. On top of that, the government slashed taxes on sales of cars and  household appliances, leading to a surge in consumption.While the economic  stimulus helped Brazil weather the storm, it may now be contributing to rising  inflation. But with presidential elections looming in October, the government  is unlikely to take its foot off the gas pedal. President Luiz Inácio Lula da  Silva's hand-picked successor, Dilma Rousseff, is running on the government's  record of expanding welfare programs and funding infrastructure  projects.Interest-rate increases are politically unpopular in a country where  interest on retail bank loans often tops 42% a year. Mr. Meirelles's ability to  bring the central bank's benchmark overnight rates to record lows from around  25% when the da Silva government took office—all while inflation remained in  check—has helped boost the government's popularity.

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