ECONOMY-BRAZIL: GDP Surge Outdoes All Forecasts

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Jan 10 2005 (IPS) - With GDP growth of around five percent, the Brazilian economy out-performed all forecasts in 2004.

There was a virtual consensus among local analysts that the economy would expand by around 3.5 percent. Nor did the economists predict a trade surplus of over 33.6 billion dollars, the result of a nearly 32 percent increase in exports from 2003.

The experts even believed that higher economic growth could hurt Brazil’s exports, due to the need to meet rising internal demand.

The results were especially surprising because they were achieved despite macroeconomic policies which include aspects that tend to have a depressive influence, such as high interest rates, strong fiscal adjustments, and swings in the foreign exchange market.

"It is the Brazilian miracle to have a functioning, and even growing, economy" amidst so many variables that appear to be incompatible with normal economic activity, economist Geraldo Biasoto Junior, a professor at the State University of Campinas, located 100 km from the southern city of Sao Paulo, told IPS.

Brazil’s benchmark lending rate, set by the Central Bank, has been among the highest in the world for decades. It was lowered to 16 percent last year, but in September it once again began to rise, until reaching the current 17.75 percent.

But that rate, which the Central Bank pays, is almost insignificant compared to the interest charged by the country’s commercial banks for loans to companies and individual clients, which are over 30 and 60 percent a year, respectively.

And for credit card debt and purchases on instalment plans, interest rates are often above 150 percent a year.

The exchange rate, meanwhile, which stood at 3.65 reals per dollar in February 2003, when the government of leftist President Luiz Inácio Lula da Silva was in its second month in office, dropped in early 2004 to 2.88 reals to the dollar, rose to 3.20 in May, and is now 2.69.

But the unstable exchange rate did not curb the growth in exports, although the strengthening of the national currency has made exporters nervous.

With a rate below three reals per dollar, it will be impossible to meet the official target of increasing exports 12 percent this year, said the president of the Foreign Trade Association, José Augusto de Castro.

The real currently stands at the level it was at in 1999, when Brazil was struggling to withstand the effects of the Russian financial meltdown, and was forced to devalue the local currency. But the effects of that decision were not felt in the balance of trade until two years later.

Biasoto said one part of the current rise in exports is "structural," due to adjustments made by companies, the foreign competitiveness of local products, and headway made in new markets – in other words, aspects that will not be affected by a strong real.

But it is "madness" to believe that exports will continue to grow, with the current exchange rate, he argued.

Despite a trade surplus that has totalled 71.6 billion dollars over the past three years, the Brazilian economy remains "very vulnerable" to international financial turmoil, due to its heavy reliance on foreign capital, said the economist.

"It is a house of cards that could collapse at any moment," he maintained.

The most recent example was the 1997-1998 crisis, which forced Brazil to seek aid from the International Monetary Fund to ward off collapse, after the capital flight that followed the economic crises in southeast Asia and Russia.

Another weakness noted by Biasoto is "the unbalanced industrial structure" in which there is excess installed productive capacity in some sectors and a shortage in others. Growth applies pressure on the latter, he said, triggering outbursts of inflation.

The government’s current economic policy, which fights inflation by simply raising interest rates, without using any other tools like credit or tax incentives, is "absurd" under these conditions, according to Biasoto.

Another cornerstone of the Lula administration’s economic policy – achieving a primary fiscal surplus of 4.5 percent of GDP, which is aimed at improving public accounts but limits the state’s spending capacity – is also vulnerable because it depends on growth, without which "more cutbacks than spending" would be necessary, with the subsequent political fallout, he said.

But Professor Antonio Marcio Buainain, Biasoto’s colleague at the University of Campinas, takes a more upbeat view.

Buainain was closer on target with respect to projections for economic expansion in 2004, as from the start he predicted GDP growth of "more than four percent".

He said the conditions were in place for strong economic growth last year, and that "differences and confusion within the government" actually delayed the recovery. In the first three quarters of the year, GDP grew 5.3 percent compared to the same period in 2003.

In his opinion, the country’s interest rates are worrisome if they remain high for too long, although they hurt the Brazilian economy less than might be expected, because they do not always serve as the actual benchmark for investment decisions. On the other hand, expectations regarding economic growth are key.

GDP growth is largely ensured over the coming year by the momentum already achieved by the economy, said Buainain. Companies "are no longer scaling back their operations or personnel" because of problems that might be only temporary, he added.

In his view, now is the time for the recovery of the domestic market, which would reduce the relative weight of exports and, hence, of the exchange rate.

There are important sectors, like the car industry, which made heavy investments in past years and today have spare productive capacity, said the analyst.

Buainain only laments that the Lula administration lost "a great opportunity" in its first year in office, 2003, to slash the basic interest rate, which would have created better conditions for sustained growth.