ECONOMY-BRAZIL: Limited Recovery Feeds Scepticism

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Oct 22 2003 (IPS) - The Brazilian economy is sending signals of recovery that are stirring up optimism among government officials and some areas of the private sector, but have so far failed to diminish the scepticism of critics of President Luiz Inácio Lula da Silva’s economic policies.

Industrial productivity began to grow again after many months in decline, the inflow of foreign capital doubled the Sao Paulo Stock Exchange index in the past 12 months, while Brazil’s "country risk" fell to around 600 points, against more than 2,400 in September 2002.

"Country risk" measures investor perception of a state’s ability to pay its debts, based on its capacity to place bonds on the market, calculated in comparison to "zero risk" U.S. long-term bonds.

Brazil’s trade balance this year has an accumulated surplus of 19.4 billion dollars as of last week, which would allow the country to finish out the year at even standing in current accounts (measuring the trade of goods and services and investment flow), an unusual occurrence in recent decades.

But the recovery will be slow and somewhat limited, and the "spectacle of growth" that Lula announced will not come to fruition if he does not alter his economic policies, says Edgard Antonio Pereira, economics professor at the State University of Campinas, outside Sao Paulo.

It is essential to cut interest rates and stabilise currency exchange rates at levels that stimulate exports, Pereira told IPS, marking concurrence with the analysis made by his colleagues at CECON, a research centre at the same university.

Brazil’s gross domestic product (GDP) will grow zero to 0.5 percent this year, according to CECON economists. Their forecast is more pessimistic than the Central Bank’s, for 0.6 percent growth, revised down from the 1.5 percent prediction made in June.

The increase in industrial production in August – 1.5 percent with respect to June’s figures – has fuelled the current wave of market optimism, as has the decline in inflattion and the increase in investor confidence, reflected in an unprecedented hike in Brazil’s foreign debt titles.

But "the recovery is precarious," given that industrial activity intensified as a result of the "export dynamic" and incentives for specific areas, such as the automotive manufacturers, which were favoured by a temporary tax cut, explained Pereira.

Domestic consumption in general remains stagnant as a result of unprecedented unemployment of 13 percent and the continued decline in wages over the past few years.

A close look at the figures on industrial production makes it clear that the sectors that export more grew more, while those that depend on the domestic market had a poor showing, particularly textiles, footwear and electronic and telecommunications products.

The few existing driving forces for the economy tend to be short-lived, says Pereira. Tax incentives boost sales in the short term, because "consumers do not usually buy new cars one after the other," and the decline of the Brazilian currency, the real, in relation to the dollar since March could take a toll on exports in early 2004, he said.

Given the likely continuation of the policy of high interest rates to contain inflation and persistently unstable exchange rates, as well as the free flow of speculative capital, the economist believes Brazil will maintain a "low yield economy," one that will not be able to grow more than two percent a year.

In the current context, greater growth increases inflation and imports, which leads to containment measures in "perverse" cycles, he said.

The recession of this year’s first semester reflected the Central Bank’s decision to raise its basic interest rate to 26.5 percent, one of the highest in the world, to try to meet the inflation goal agreed with the International Monetary Fund: 8.5 percent, a full four points less than 2002.

Hiking up interest rates reduces the circulation of cash, which in turn contributes towards halting inflation in a recessive framework.

The Central Bank’s basic rate fell since June, and currently stands at 20 percent, but the cuts came too late and were not enough to jump-start economic recovery, agree representatives of the productive sectors and many economists.

But the government’s economic officials assure that the economy could grow 3.5 percent in 2004.

Planning minister Guido Mantega said that this year will serve to establish a solid basis for future take-off, and predicted that average annual GDP growth in the next three years will be four percent.

So far, the weak performance of the Brazilian economy is not only affecting the popularity of the Lula administration, but also Brazil’s partners in Mercosur (Southern Common Market – Argentina, Brazil, Paraguay and Uruguay).

Argentina, for example, is losing its usual surplus in trade with Brazil. Last year Argentina came out 2.4 billion dollars ahead in bilateral trade, falling to 394 million in the first eight months of this year, and the results of recent months show a slight shift in favour of Brazil.

Leaders of some sectors of the Argentine economy blame this turnaround on the "invasion" of Brazilian products, driven by the opposing trends of the two giant South American economies: Argentina’s strong growth and Brazil’s recession (declining GDP in two consecutive quarters, which in this case were the first two of this year).

More Brazilians are joining the ranks of the poor, and as that trend becomes more manifest, Lula has seen a slight decline in his popularity in recent polls.

"I have lost several clients, and many others are seeking my services less frequently," manicurist Alita Santos da Silva told IPS. For the past 28 years she has provided in-home manicures to middle class clients in Rio de Janeiro, charging 25 reais (just over 8.5 dollars).

"Inflation remains high. I see it when I go shopping. Lula has aggravated Brazil’s problems and is doing the same thing as Fernando Henrique Cardoso," his predecessor, said Da Silva, who admits she voted for Lula last year.