Published by Minyanville

The two main candidates for the leadership of the International Monetary Fund made their way to Brazil this week, demonstrating that country’s extreme might amongst emerging markets, all of which are currently pulling in different directions on their preferred candidate.

French finance minister Christine Lagarde was first in town. The frontrunner is keen to overhaul the organization to give emerging markets a greater say in its management. Lagarde will want to get Brazil on side as many emerging nations have come out and said that they're not pleased with the tradition of having a European banker lead the IMF. Brazil, however, has sat on the fence somewhat.

There were even rumors last week that Brazil would give tacit backing to Lagarde, though the official line is more diplomatic. “There could be good emerging-market candidate, or a good candidate from an advanced country,” said Brazilian finance minister Guido Mantega. “There should be no vetting based on nationality… What's important for Brazil is that the IMF maintains the trajectory of reforms begun over the past three years," he said.

Lagarde was keen to emphases that the IMF did not belong “to anyone in particular, not to any group of countries.” She added the world “chang[es] faster than every five years,” noting the five-year reviews in which member countries’ weights are calculated.

"It's difficult to see any scenario where Lagarde doesn't get the job," Eswar Prashad, an economist at Cornell University and a former IMF official, told the Wall Street Journal.

That’s bad news for president of Mexico’s central bank Agustin Carstens, the other candidate for the position. He was also in Brazil this week in an attempt to gain support from the Latin American giant.

He claimed that he's mistakenly being labeled an “orthodox economist”, perhaps thanks to his studies at the University of Chicago. The criticism has been leveled at Carstens in Brazil, with its left-leaning government. Carstens claims, instead, to be a pragmatist who will deal with the European crisis, support the Arab Spring revolutions in the Middle East and push quota reforms which will broaden representation at the IMF.

While Brazil is sitting on the fence, the country is thought to be leaning towards the French candidate Lagarde, who's seen to have more clout within the organization. “I wouldn't be campaigning if I didn't believe my candidacy was viable,” Carstens said, however. He now heads to Argentina, India, China and Japan. The new director is to be named at the end of this month.

Economy "Overheating"

The Financial Times this week warned that Brazil’s economy was “overheating”. An article by Moisés Naím points out credit’s huge growth over the last five years, now at 45% of the economy. This ease of obtaining credit is leading to a surge in the country’s middle classes, all able to buy homes, cars and other consumer goods for the first time.

Brazil’s exports of minerals and agricultural products have fueled this growth. However, the Times suggests that “besotted” investors need to calm down. Brazil’s real is the most overvalued currency in the world, 47% higher than its average rate over the past decade.

“Take all this together, and it begins to look not just overheated, but worryingly like the beginnings of a bubble,” says Naím. President Dilma Rousseff has a choice, the author says. She can “turn down the heat” with politically unpopular decisions or she can wait for small gradual reforms to “do the job”.

“The danger is that Ms Rousseff does not act now and financial markets will in time impose the necessary corrections in a more brutal way. Exuberance and complacency are the two enemies threatening Brazil’s current success.”

The country posted its second highest trade surplus in just under two years this week. The figures for May show the surplus up to $3.53 billion from $1.86 billion the previous month. This compares with $3.45 billion in May 2010.

It's the exports fueling the growth in available credit, which shot up 31% to a record $23.2 billion from May 2010. Imports also reached a record high of $19.7 billion, up 38% from the same period.

“One can say that we’re going back to a new normal, with economic growth more balanced and stronger on emerging markets,” Daniel Ribeiro, an economist at Credit Suisse Hedging-Griffo in Sao Paulo told Bloomberg. “To have strong trade surpluses again, Brazil will need to increase savings and stop buying so much.”

Boosting Rare Earth Activity

Brazil is looking to compete with China as Vale (VALE), the world’s biggest iron ore producer, looks to make its move on rare earth mining, according to science and technology minister Aloizio Mercadante. The company recently saw a change in leadership, thought to be at the request of the country’s new government.

“Vale would bring big benefits to Brazil by entering into this rare earth market and I think it’s an important thing for the west as a whole. It would also benefit Vale as a company,” Mercadante said.

The country has large reserves and will be looking to plough them into a promising technology industry, the crux of which at the moment is Apple (AAPL) supplier Foxconn’s $12 billion investment there.