Published by Minyanville
A week after interest rates in Brazil rose yet again this year, the real has strengthened further as foreign investors are attracted by the country’s huge growth.
On Monday, the currency held its highest level against the US dollar since 1999, at 1.5391 per USD. This is a rise of 7.9% this year alone and 72% since 2002.
The country’s benchmark lending rate is now at 12.5%, having risen for the fifth time this year as the government tries to curb rapid inflation.
The paradox with rapid economic growth and inflation is demonstrated well by Brazil and other emerging markets in the region, such as Mexico, Peru, Chile, Panama, and Argentina.
“Rapid growth also fuels the spiral of inflation, which can eventually snuff out the benefits of growth and also cause hardship for those on the lower rungs of society,” Wellington Miyazaki of AFP wrote this week. “While exporters can earn more dollars for their products, they can also be confronted with rising world prices for raw materials, and their exports may rise in price on foreign markets.”
By raising the interest rate last week, however, authorities played a difficult game. In doing so, they would lure in foreign investment, pushing the value of the real up further.
“Brazil has really had the worst of both worlds since November, where it trades off on global macro news, the idiosyncratic problems it’s facing, coupled with this inflation problem,” Frederick Searby, Latin America equity strategist at Deutsche Bank AG, told Bloomberg. “These global issues, in tandem with Brazil’s own domestic issues, haven’t been good for Brazilian equities.”
Brazil, according to Financial Times, is “shaping up to be one of this year’s worst-performing equity markets,” thanks to inflation and political interference in some of its biggest companies.
The problems are not solely inflation-based, argues Samantha Pearson in the London paper. They include government interference in fertilizer production, rising Chinese steel imports, and a national shortage of bricklayers.
Mining giant Vale (VALE) has seen much pressure from the government to re-align its interests with those of Brazil. (See Underlying Inflation in Brazil's Thriving Economy Scaring Investors.) Pearson, however, argues that this interference has dragged down “what might otherwise have been one of the Bovespa (index)'s strongest performers.”
Steel producers are suffering thanks, again, to the strength of the real, which is making their exports too expensive for the foreign market.
Imports into Brazil are surging, however. Fuel imports are likely to rise 10% this year compared to 2010, according to state oil company Petrobras. Imports in 2011 are looking to read 328,000 barrels per day compared with 299,000 last year. This is thanks to growing demand, including a much wealthier middle class.
The company is positive. It plans to more than double output and is hoping to end reliance on debt within a decade. A staggering $224.7 billion is to be invested through 2015 as the company works on some of the hemisphere’s largest discoveries in 30 years.
Brazil will soak up 95% of the huge investment, leaving $11.2 billion for the rest of the world. As well as off its own coast in Brazil, the company is developing discoveries in the Gulf of Mexico, Nigeria, and Angola. It also has refineries in the US and Japan.
Oil output is to be increased to around 4 million barrels per day by 2015 and 6.4 million by 2020. These figures dwarf June’s output of 2.64 million barrels per day.
The company’s spending is not supported by all its investors, however. Private investors, who own 51% of the company’s stock, claim that its investments are a waste of money. They would rather the company focus on existing operations such as the deposits off Brazil’s own coast. Stock in the company has therefore fallen about 40% in the previous two years.
The country’s Bovespa index was hit by worries in Washington over the US debt ceiling. The market fell 1.05% on Tuesday to 59,340 points.
(See also: The Debate Over Brazil's Credit Bubble.)
World Cup Worries
There are concerns that Brazil’s infrastructure is unable to cope with 2014’s World Cup. With the qualifying draw taking place this weekend in Rio de Janeiro, several of the venues are behind schedule.
Brazil’s airports are expected to have to cope with 2.25 million extra passengers during the games, meaning that extra capacity is much needed. Several airports are to be privatized.
“Only Jesus can get Brazil to host the best ever World Cup,” said Brazilian soccer legend Romário. “If he shows up in three years time then it will be possible."