Domestic demand fuels Brazil’s growth

Domestic demand fuels Brazil’s growth
By Jonathan Wheatley in São Paulo

Published: February 26 2008 23:28

Data this week showing that Brazil ran up a current account deficit of $4.23bn in January should, on current performance, be cause for alarm.

The figure was much worse than the $2.7bn (€1.8bn, £1.4bn) expected by many economists and gave Brazil its first accumulated 12-month deficit (of $1.17bn) in five years. Nor does this look like a hiccup. Most economists expect deficits to continue at least for the rest of the year.

So the fact that the country’s trade surplus is likely to shrink from about $40bn last year to about $33bn this year should be a worry.

Yet the shrinking trade surplus will be caused not by falling exports, which are still rising, but by even more quickly rising imports. Rising employment and wages, cheaper credit and higher rates of investment have made the domestic economy Brazil’s new engine of growth.

Indeed, while the current account – which adds up the value of imports, exports, services, interest on foreign debt, tourism and other transfers – is going into the red, the capital account – covering foreign direct investment, portfolio investment and debt – is strongly in the black. In January, it showed a surplus of $7.5bn, driven by foreign direct investment of $4.8bn.

Brazil’s currency, therefore, continues to appreciate. The real was trading at less than R$1.70 to the dollar on Tuesday morning, its strongest level since May 1999.

That has allowed the central bank to go on accumulating reserves, to the extent that Brazil became a net creditor with the rest of the world in January. Foreign reserves stand at about $188bn, some $7bn more than the total stock of public and private sector debt. That has happened even as global financial market turmoil led foreigners to withdraw $3.1bn from Brazilian equities in January, largely to cover obligations in other markets.

Can Brazil shift easily from a dependence on ex­ports and foreign portfolio investment to one on domestic demand and foreign direct investment? Most economists see no reason why not.

“There is no sign of any imbalance so far,” says Alexandre Schwartzman, chief economist at ABN Amro in São Paulo. “Even if the current account does become a problem, the obvious cure is that the currency will depreciate.” Mr Schwartzman says FDI will push Brazil’s overall rate of fixed investment up from about 17.5 per cent of gross domestic product at the end of last year to about 19 per cent by the end of 2008. That should push the rate at which Brazil can grow without provoking inflation to a little more than 4.5 per cent a year.

This is much less than Russia, India and China, the other members of the so-called Bric group of emerging market champions. Most economists say it would grow further if President Luiz Inácio Lula da Silva’s government enacted long-awaited fiscal reforms.

But with the speeding growth in recent years having already made Mr Lula da Silva Brazil’s most popular leader in living memory, most Brazilians are likely to remain happy.