Brazil: Riding the greenback

Brazilian banks are betting on a growing economy for 2004. But President Lula da Silva's economic advisers are warning a continuous devaluation of the dollar represents a danger to the economy.

An influential group of businessmen at the Council of Economic and Social Development want an exchange of around 3 reais per dollar.
However, if this past Tuesday was any indication, Brazil might see another week of bright economic news and shattering records.

The world continues betting the country is going to grow and that Lula and his team are adopting all the right and necessary measures for this to happen.

Behind all this commotion was the belief that Fitch Ratings - the rating agency that provides global credit markets with forecasts - would soon be upgrading Brazil's credit ratings.


Fitch last week released its quarterly report for Latin America in which it praises President Luiz Inácio Lula da Silva and the pension reform he pushed through Brazilian Congress.

Roger Scher, director for Latin America's sovereign debt of Fitch, noted that Brazil expects a trade surplus of US$20bn and stressed that the drop of the inflation would allow "a loosening of the monetary policy which might be able to sustain a robust economic recovery in 2004."

Brazil’s risk recently fell 4.63 per cent to 576 points, the best result since July 1998. The Brazilian C-Bond, the country's most traded bond, was being sold at a record 94.6 per cent of its face value. The Brazil-40, another Brazilian bond, was traded for its full value before dropping to 99 per cent of its face value.

However, according to Rafael Guedes, executive director of Fitch Atlantic Ratings, it's too early to know what his agency is going to do.

"We are faster than the other agencies. We usually position ourselves first, be it for improving or lowering the rating. But there isn't anything concrete yet to prompt an alteration now," he said.

Brazil's sovereign rating has got a "B" from Fitch. Mexico and even Colombia and Peru have a better rating. Since June, however, the agency has been hinting at an upgrade for Brazil.

Such an upgrade would make life much easier for entrepreneurs, banks and the government, which would be able to get foreign loans at attractive interest rates.

Dollar hits a trough

The dollar continued to slip and closed at R$2.83 per dollar, the third lowest dip this year. The drop resulted from the operations of Brazilian exporters and the entry of foreign private capital. According to brokers, a number of investors who bought dollars in the morning reversed their positions in the afternoon.

The São Paulo Stock Market stayed above 18,000 points and closed 0.64 per cent up, the best level since March 2000. More than US$300m was traded. A good share of this money came from 7,400 foreigners who have invested close to US$2bn dollars this year in the Bolsa de Valores de São Paulo (Bovespa).

When computed in dollars, stocks have risen more than 100 per cent this year alone.

According to Agência Brasil (AB), Brazil's trade balance registered a US$611m surplus in the second week of (6 to 12) October, the result of US$1.8bn in exports and US$1.2bn in imports. For the month, foreign trade shows a surplus of US$1.1bn, with sales of US$2.8bn and purchases of US$1.7bn.

So far this year, the trade balance has accumulated a US$18.7bn surplus. Exports stand at US$55.6bn, and imports, US$36.7bn. This information was released by the Ministry of Development, Industry, and Foreign Trade.

Inflation

Still, according to AB, Brazilian inflation should amount to almost 10 per cent in 2003. This is the forecast recently made in Focus Bulletin, published by the Central Bank and based on a survey of financial consultants and institutions.

Compared with last week, this expectation stays unchanged. However, with regard to next year, the forecast for inflation fell slightly, from 6.2 per cent last week to 6.1 per cent.

In the short run, however, the market believes that this month's inflation, as measured by the IPCA (Broad Consumer Price Index) would surpass its initial estimate of 0.53 per cent, made last week, and finish the month at 0.55 per cent. The estimate for November is 0.5 per cent.

Balance of trade

Expectations are very good as regards the trade balance, which should close the year with a US$21.4bn surplus; foreign direct investments should rise from US$8.65bn to US$9bn; the exchange rate should stand at R$3.05 per dollar at the end of the year, as against the R$3.10 projected last week; and, for the first time since 1992, current accounts should close the year in the black, with a US$500m surplus.

On the negative side, the ratio between net government debt and the Gross Domestic Product should increase from 56.46 per cent to 57 per cent, according to market expectations.

“New Agenda”

Meanwhile, a group of businessmen from the Council of Economic and Social Development has prepared a document called New Agenda of Economic Development and Proposals for Growth Resumption in which they suggest that the government maintain exchange rates "compatible with the present effort to export and the reduction of the foreign vulnerability in order to guarantee competitiveness for the national economy and obtain high commercial surpluses."

For Benjamin Steinbruch, president of the Companhia Siderúrgica Nacional (CSN), the largest steel complex in Latin America, Brazilian companies would not be able to guarantee the growth of exports with the dollar under R$3.10.

The president of Fiesp (Federaçao das Indústrias do Estado de São Paulo), Horácio Lafer Piva, echoed the same idea, saying the ideal would be to maintain the exchange rate at three reais for one dollar.