The recoverys momentum increases in Brazil

Brazils economy grows at 9% year-on-year, the highest rise for 14 years. The rapid economic recovery has translated into improved payment behaviour by Brazilian companies.
Analisis Credito y Caución
Madrid - 09-ago-2010

Brazils economy continues to boom as, according to the Brazilian Statistics Office IBGE, in Q1 of 2010 GDP grew 2.7% on the previous quarter and 9.0% year-on-year - the highest rise for 14 years and faster than any other Latin American country. This fast paced growth has been driven by domestic demand and industrial production, which recorded a 17.3% increase between January and May. The tax break for car purchases, which boosted car sales in the post-crisis period, ended in March, with a surge of purchases before the cut-off date. Retail sales generally have been exceptionally strong over the past four months as a result of labour market improvements, with many new jobs both temporary and permanent being created. Credit conditions remain flexible and financing costs have reached historic low levels, providing a stimulus to consumption.

The rapid economic recovery has translated into improved payment behaviour by Brazilian companies. According to the information agency Equifax, in the period January to April protested cheques decreased 18%, the number of bounced cheques fell 18%, deferred judicial recovery decreased 22% and the requirement for bankruptcy fell  3%.

Automotive, rubber, chemicals and petrochemicals, healthcare and beauty are among the industries exhibiting a good payment performance. However, in recent months, late payment has still been an issue in the textile and clothing sector, machines, metal manufactures, plastics, IT, food distribution, civil construction material retail and electric retail.

The exceptional high growth rates cannot be maintained

The high growth rate in Q1 of 2010 and the pace of growth expected for the following three quarters [7.4% on average] have triggered an increase in inflation, which, according to the governments benchmark price index, reached 5.3% for the 12 months to mid-May - above the Central Banks target rate of 4.5%. While Finance Minister has said that the economic recovery has reached its peak, with second quarter figures already showing a decelerating trend, the financial markets fear the economy may be overheating.

At the end of April the Central Bank consequently raised the SELIC benchmark interest rate [its overnight lending rate] by 75 basis points - to 9.5% - and by another 75 basis points in June to 10.25%. This is only the second increase since October 2008, as the Central Bank was initially very reluctant to raise interest rates for fear of attracting speculative capital. Before the June increase, Brazils real interest rate was 4.24%, the third highest in the world after Croatia and Latvia. With signs that the economy is not decelerating, the consensus in the local financial market is that the Central Bank will hike interest rates again as a way to aggressively tighten monetary policy.

A negative factor in Brazils success story is the high proportion of government expenditure. Government spending accounts for more than 20% of Brazil's gross domestic product and, after a reduction of 150,000 in the 1990s, the number of federal civil servants has doubled. To make things even worse, much of last years stimulus was directed at employing public sector workers and increasing pensions and social benefits, instead of improving the countrys poor infrastructure. Even with rising revenues, the average 8% rise in the annual rate of federal government spending may not be sustainable without imposing higher taxes and lowering investments.

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