Full Steam Ahead

RIO DE JANEIRO — Brazilian authorities signaled their bullish outlook on the economy in August, when Finance Minister Guido Mantega changed the name of the government’s Commission on the Crisis – launched during the depths of the global financial slump – to the Commission on Competitiveness.

Spurred on by revived consumer demand and better access to credit, the Brazilian economy is expected to expand at a rate of 1 percent for all of 2009, with an accelerated rate in the second half of the year of 3.5 percent, according to Mantega. “Brazil is undergoing a very fast recovery, bolstering the possibility that we will post positive economic growth this year,” the finance minister told reporters recently.

The encouraging signs of recovery have cheered the private sector.

Olavo Monteiro de Carvalho, CEO of the Monteiro Aranha Group, a diversified industrial and energy holding company headquartered in Rio de Janeiro, said Brazil’s underlying economic strength had made the problems short-lived.
“We were the last to be hit by the crisis and one of the first to emerge from it,” said Monteiro de Carvalho, who until recently headed Rio’s Chamber of Commerce.

To stimulate economic growth, the government of President Luiz Inácio Lula da Silva injected nearly $100 billion into public works and other projects. In one move to encourage consumer spending, the Lula administration lowered sales taxes on new car purchases by 6 percent. Automobile sales shot up 6.4 percent so far this year. Earlier in the year, the sector had been bracing for a 4 percent drop in business.

The inflation rate remained within the government’s targeted 4.5 percent for the year. Interest rates have been cut from 13 percent in August 2008 to 8.75 percent by this summer, improving access to credit for both consumers and businesses. The Bovespa stock exchange soared almost 50 percent in the first eight months of the year.

A recent survey by the Getúlio Vargas Foundation showed that consumer confidence has returned to pre-crisis levels.
The bellwether mining industry is experiencing a pick-up in demand for iron ore and other commodities from European and Chinese customers. “The [customers] are channeling purchases to production,” not just to restore inventories, according to Paulo Camillo Penna, president of Brazil´s Mining Institute.

The rebound in mining helps lift the rest of the economy. “Minerals are raw material for various sectors – from agribusiness to manufacturing, from the service sector to the equipment and technology industries so if mining goes well, so do all those industries,” Penna said.

Despite the economic downturn in the first half of 2009, the rates of unemployment and poverty were virtually unchanged year-over-year as of June – “very good news,” according to Marcelo Neri, an economics researcher at the Getúlio Vargas Foundation in São Paulo.

Employment stability means that the approximately 27 million people who emerged from poverty to join the ranks of the middle class over the past five years will largely hold onto those economic gains.

“Based on this huge domestic market, which expanded at a rate akin to China, the forecast for the future is good,” Neri said.
The government estimates a steady 4.5 percent increase in GDP in 2010.

But there are potential bumps ahead. A pending corruption investigation of José Sarney, president of the Senate, could prove politically disruptive, especially during the 2010 presidential election year, when voters will choose a successor to Lula. An official probe into alleged irregularities and improprieties at Brazil´s state-managed oil giant Petrobras has gained the attention of foreign oil companies with interests in Brazil. The Lula administration also recently proposed reforms to energy laws that would establish rules for private/government-shared production in new offshore reserves. Officials have denied this would discourage foreign investment.

Bolivar Lamounier, director of the Institute for Economic and Political Studies, a São Paulo think tank, is skeptical of the official forecast of 4.5 percent growth next year. “Economic growth in 2010 will be larger than in 2009 but nothing exceptional, due to the delicate situation of the fiscal environment,” Lamounier said. “Government spending during President Lula´s second term increased a lot, while reforms to increase productivity were not undertaken.”
But at the Getúlio Vargas Foundation, Neri is more optimistic. He believes the 4.5 percent growth rate is achievable and praised Brazil for finding a “Third Path” between American faith in “magic of the marketplace” and the hyper-nationalism of Venezuelan President Hugo Chávez.

“This is not the Washington consensus, nor the Caracas consensus,” Neri said. “It’s the road in between: respecting market rules and contracts and at the same time practicing a social policy.”

“The challenge now is to resume the strong growth we had in the last five years,” he added.