Brazil Forecasts Further Slump; Real Rises

Despite continuing pessimism about the state of Brazil’s economy, its real currency gained 0.5 per cent on Thursday after the central bank dumped dollars on the market.

The central bank’s sale of as much as $500 million – for the second time in a week – is meant to increase greenback liquidity on the market.

But it also signals that the central bank does not want to see the dollar score higher than 3.8 reals; on Thursday, the dollar traded at 3.78 reals. The real has fallen more than 50 per cent in the past year – on November 7, 2014, it traded at 2.55 to the dollar.

The central bank’s move helped push Brazil’s stock index Bovespa up by 0.42 per cent making it the second best performer among Latin American markets.

The central bank may have been prompted to increase the amount of dollars it releases to the market following two of its own reports that government measures are just not working to resuscitate the ailing Brazilian economy.

On Wednesday, the central bank forecast GDP growth of -3 per cent in 2015 and -1.5 per cent in 2016.

The International Monetary Fund also predicts a 3 per cent contraction this year.

The bank also said that runaway inflation, which has plagued the government’s fiscal efforts to revive the economy, will increase to just under 10 per cent in this quarter.

The government maintains that it expects the annual inflation rate to subside to 6.5 per cent by the end of the year. Economists say 4.5 per cent – with an additional 2 per cent band – is ideal to spur economic growth.

The government has in response to the fiscal crisis revived unpopular taxes amid several austerity measures.

In early October, Brazilian President Dilma Rousseff announced a major cabinet reshuffle saying her government will eliminate eight ministries and reduce remaining ministers’ salaries by 10 per cent, among other cuts.

The move appeared to express solidarity with less privileged sectors of the society that have seen social programs curtailed as the government reacted to an economic slowdown by implementing unpopular austerity measures.

Brazilian Finance Minister Joaquim Levy said the government is “reducing expenditures, because people are not that tolerant of taxes.

“But then you have to do whatever it takes to get to a 0.7” per cent primary budget surplus, Levy said, referring to the government’s 2016 target.

“We have to do that as soon as possible, because the longer it takes, the higher the toll for the economy.”

Jorge Arbache, a professor of economics at the University of Brasilia, says that Brazil is going through one of its worst ever economic crisis.

The crisis has more immediate causes associated to the political crisis and exhaustion of the recent growth spurt based on consumption and public spending, he says in an op-ed for The BRICS Post, but also much deeper causes associated with low productivity and competitiveness.

“A new development model is long overdue and the more Brazil procrastinates to recognize it, the greater will the challenges be to ensure a competitive economy in the 21st century” he says.