Dilma Rousseff takes over a Booming Economy, but can she keep The Brazilian growth clock ticking Amidst Rising Inflation and Skyrocketing Interest rates?
As 63-year-old Dilma Rousseff took over as Brazil’s first woman President from her extremely popular predecessor Luiz Inacio Lula da Silva on January 1, 2011, she vowed (during her inauguration) to cut taxes, rein in public spending & control inflation. She repeated almost exactly the same points on which she had stressed on during her statesmanlike victory speech on October 31, 2010. “But can she?” is the question that many have started asking now, not only in streets of São Paulo, Brazil’s financial capital, but across the globe.
Reason: Challenges galore! While Brazil’s economic growth is expected to slide to 4.5% in 2011 (from an enviable 7.6% in 2010), inflation at 5.91% continues to be well above the government target of 4.5%. In fact, inflation in Latin America’s largest economy is already running at a six-year high, with food prices rocketing to 10% in 2010. And with memories of dreadful hyperinflation in initial years of this decade (see chart) still alive in the minds of Brazilians, new President Rousseff surely wouldn’t allow this plague to return to destroy Brazil’s impressive performance.
No doubt, the most logical move for Rousseff would be to boost interest rates. But then, Brazil’s interest rate, at 10.75%, is already among the world’s highest and raising them further would only give foreign investors yet another reason to buy its currency – the real – that has soared almost 35% against US dollar since the start of 2009. This directly points towards Rousseff’s other big task – to cope with the rising strength of the real.
With interest rates at all-time lows in much of the developed world, the 10.75% return on benchmark 10-year government bonds is attracting funds from all across the globe. Foreign investors have poured over $110 billion into Brazilian debt & stock in the past two years, which has lifted the real astronomically. Considering this Goldman Sachs has recently dubbed real as the world’s most overvalued currency. This not only puts Brazilian exporters on the backfoot, but also hampers the economy’s growth in the long term.
Reason: Challenges galore! While Brazil’s economic growth is expected to slide to 4.5% in 2011 (from an enviable 7.6% in 2010), inflation at 5.91% continues to be well above the government target of 4.5%. In fact, inflation in Latin America’s largest economy is already running at a six-year high, with food prices rocketing to 10% in 2010. And with memories of dreadful hyperinflation in initial years of this decade (see chart) still alive in the minds of Brazilians, new President Rousseff surely wouldn’t allow this plague to return to destroy Brazil’s impressive performance.
No doubt, the most logical move for Rousseff would be to boost interest rates. But then, Brazil’s interest rate, at 10.75%, is already among the world’s highest and raising them further would only give foreign investors yet another reason to buy its currency – the real – that has soared almost 35% against US dollar since the start of 2009. This directly points towards Rousseff’s other big task – to cope with the rising strength of the real.
With interest rates at all-time lows in much of the developed world, the 10.75% return on benchmark 10-year government bonds is attracting funds from all across the globe. Foreign investors have poured over $110 billion into Brazilian debt & stock in the past two years, which has lifted the real astronomically. Considering this Goldman Sachs has recently dubbed real as the world’s most overvalued currency. This not only puts Brazilian exporters on the backfoot, but also hampers the economy’s growth in the long term.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
