News for Credit Professionals       NACM-SE

Brazil Growth Improves, Central Bank Seeks to Cool Inflation

Brazil’s overall GDP growth recovered a bit in the fourth quarter of 2011. After falling by 0.1% in the third quarter, the Brazilian economy grew by 0.3% to close out last year, bringing the real GDP growth for all of 2011 to 2.7%.

At first glance, this would appear to be good news. However, compared to 2010, which saw Brazilian GDP hit a blistering 7.5%, the 2.7% annual GDP figure begins to look far less impressive.

Due to the disappointing GDP growth, among many other reasons, Brazil’s efforts to contain further appreciation of the real are expected to continue for the foreseeable future. According to Fitch Ratings, exporters and investors can expect the government to remain focused on stimulating domestic growth throughout 2012 as demand for Brazilian exports remains under pressure.

Capital inflows have boosted the value of the real to the point where Brazil now has trouble competing globally, and all at a time when slow external demand growth has already weakened trade and current account balances. Fitch noted that as exports, industrial output and GDP growth slows, the Brazilian Central Bank (BCB) could continue to ease monetary policy by cutting the benchmark interest rate further.

But the BCB, and the country’s Ministry of Finance have already begun to take actions that seek to curb capital inflows into Brazil in an effort to cool the real’s appreciation. Last week, the Ministry of Finance announced that it would extend the 6% transaction tax on foreign loans to maturities of three years, up from two years, while the BCB imposed tougher limits on certain types of trade financing. Specifically, the BCB’s latest regulation exempted export prepayment loans from taxes for maturities shorter than 360 days. Transactions that last longer will be forced to pay the previously mentioned 6% transaction tax, and only importers will be allowed to take out these trade financing transactions.

Despite the continued efforts of the BCB to slow down the real, which has appreciated by 10% since the start of 2012, Fitch expects Brazilian growth to improve to 3.2% this year.

Jacob Barron, CICP, NACM staff writer