Brazil
Growth is picking up in Brazil in 2007, responding to monetary policy easing after inflation was brought on track with central bank objectives, but is also expected to slow in 2008. Brazil has done a very good job over the last few years in moving ahead its reform agenda. Its growth has reached historic highs. The country would need to grow at a relatively high rate over the medium term. For this, it needs higher investment. Early this year, the government announced its new Growth Acceleration Program that puts the emphasis on public infrastructure investment that is needed to meet the bottlenecks.
A much greater emphasis by the government is on public investment. However, economists also see capital inflows and private investment, moving ahead rapidly. So in both public and private investment, the emphasis is high. Net inflows of US dollars to Brazil surged last month on a jump in exports and as foreign investors poured cash into domestic bonds and stocks. Inflows reached $6.72 billion in October, compared with outflows of $3 million from the country in September. Inflows from trade-related transactions jumped to $5.89 billion last month, compared with $1.98 billion September.
Brazil had net dollar inflows of $828 million from financial transactions, compared with outflows of $1.98 billion in September. Dollar inflows to Brazil in 2007 through October reached $76.78 billion. At the same time, the currency has gained about 23pc so far in 2007. Banks had long dollar positions of $2.97 billion in October, compared with $1.77 billion at the end of September. A long position on the dollar is a bet that the currency will strengthen against the real.
In Brazil, foreign exchange inflows in the first half of 2007 were double their level in the same period of 2006, driving an appreciation of the real to its strongest level against the dollar in seven years, notwithstanding heavy intervention. The exchange rate appreciation has contributed to containing inflation, giving room to the central bank to continue to lower interest rates, thus reducing the wide interest differential with other countries.
According to some private sector economists, the Brazilian economy is expected to grow by 4.0pc in 2007 after 3.7pc growth in 2006. Lower inflation and interest rates will help fuel consumer spending (including housing for lower middle income families). However, demand for imports will likely increase. Infrastructure bottlenecks and high taxes continue to limit growth and job creation in Brazil. The Brazilian Minister of Finance, on the other hand, projects a growth of 4.8pc in 2007 and close to 5.0pc in FY08. The figures of growth of the IMF for Brazil are 4.4pc for the economy in 2007 and 4.0pc in 2008.
Besides that, the IMF seems to believe that Brazil should let the dollar lose its value against the real until the markets find a point of balance. So the Finance Minister expects a more active action of the Brazilian government in dampening this lowering of the dollar. The fact is that Brazil’s growth has touched 5pc. It shows that Brazil can grow at 5pc. At the same time, Brazil’s central bank has established a well-tested inflation-targeting framework, which has delivered very good results.
The Brazilian central bank has brought interest rates down to historic lows and inflation down to around 4pc, well within or even below the central bank’s target. Consumer prices climbed 0.38pc in November from the previous month, according to the government’s statistics agency. Consumer prices, as measured by the government’s benchmark IPCA index, rose more than the 0.30pc pace in October. The increase was also more than the median 0.30pc increase forecast in a Bloomberg survey of 43 economists. Brazil’s inflation rate in the 12 months through November was 4.19pc, the agency said.
Higher economic growth forecast has prompted the economists to cut their 2007 and 2008 net debt to GDP estimates. For 2007, they forecast net debt of 46.6pc of GDP, compared with an earlier estimate of 48.4pc, the survey showed. The economists expect net debt to drop to 44pc of GDP in 2008, compared with a forecast of 45.4pc a week earlier Brazil’s main stock index rose to a record on the expectation that US measures to contain mortgage losses will maintain economic growth and spur demand for emerging market assets.
The Bovespa index of most-traded shares on the Sao Paulo exchange rose for an eighth day, the longest winning streak since January 2004 The Bovespa gained 0.7pc to 65,367.45, eclipsing the Oct. 31 high of 65,317.70. Petrobras, Brazil’s state-controlled oil company, rose 1.3pc, to 79.50 reais. Vale, the world’s largest iron-ore miner, gained 20 centavos, or 0.4pc, to 53.60 reais. The two companies make up about 35pc of the Bovespa index.
Mexico
Mexico’s government forecast economic growth of 3.5pc next year in its 2008 budget plan. It expects that the expansion would be even stronger if lawmakers agree to tax reforms. The budget plan did not include additional revenue from a pending tax reform that the government is seeking in order to generate extra cash for education and roads. The reforms would boost the government’s tax coffers by $10 billion. The tax changes would have an even bigger impact on growth in future years. The Finance Ministry wants to boost tax revenues to make the economy more competitive. Approval of the proposed tax would lead to extra funding into 2008 budget proposal.
At the same time, Mexico cut its 2007 economic growth outlook to 3pc on the back of economic concerns in the United States, its top trade partner. Previously, Mexico forecast growth of 3.3pc. The Ministry is proposing that 76pc of all the funds from the reforms are to be allocated to infrastructure works, above all roads, companies and energy projects. Mexico hopes the state oil monopoly, Pemex, will produce an average of 3.14 million barrels of crude per day next year, down slightly from current levels, and export 1.678 million barrels of oil a day on average in 2008, slightly above current export levels.
Crude oil output has averaged 3.162 million bpd so far this year. Mexico’s Congress has approved the 2008 budget revenue bill, injecting more cash into government coffers than initially projected because of more income from new taxes and higher oil price estimates. The upper house Senate approved the revenue bill for next year at about 2.56 trillion pesos ($239 billion). Mexico depends heavily on oil exports to fund more than one-third of the federal budget. Mexico is boosting its forecast for economic growth to at least 3.7pc in 2008, fueled by a newly passed tax package that can spur investment.A key plank in the tax package would allow corporations to deduct investments from their tax bills, and this would help growth. The tax overhaul marks Mexico’s most far-reaching economic reform in a decade and has boosted investor confidence. The government would now turn their attention to energy reform. The government is now going to push other less significant reforms, but important ones, in the financial sector. Mexico needs to increase tax revenues so it can make the economy more competitive with better schools and roads.
Economists say Mexico also needs to reduce its dependence on oil-related taxes that fund over a third of government revenue and starve Pemex of investment funds needed to keep oil production from declining. Without the tax package, the government had forecast slower economic growth in 2008 of 3.5pc. The tax reform should increase the country’s growth potential by 0.5pcage points of gross domestic product beginning in 2009. The bank expects economic growth of between 3.25pc and 3.75pc in 2008.
In Mexico the new government has already made significant changes in fiscal policy, and has announced an initiative, a kind of long-term framework, that shows Mexico’s per capita income rising very rapidly over the next 20 years. And through various pronouncements, the new government has indicated the areas where it intends its reforms to touch. The fiscal overhaul should increase Mexico’s tax revenues by 2.1pcage points of gross domestic product by 2012. Government revenues in 2008 will jump by about 115 billion pesos ($10.34 billion).
The cornerstone of the plan is a minimum income tax rate for companies at 16.5pc in 2008, rising to 17.5pc by 2010. Meanwhile, an increase in gasoline prices within the new law should have a “minimal” inflationary effect. Inflation is forecast to have an upward trajectory in the first quarter of 2008, reaching a peak in the second quarter. In the medium and long-term inflation expectations are above the bank’s 3pc target. The Mexico’s central bank projects inflation to be between 3.5pc and 4.0pc in the last quarter of this year and will tick upward to between 3.75pc and 4.25pc in the first three months of 2008 and then hold above 4pc over the following six months.
Colombia
Colombia has been doing very well. It has been experiencing very strong inflows of FDI and exports have been growing very strongly. The trend suggests that Colombia is coming off a period where growth has been above 6pc. Now, economists see Colombia’s growth rate remaining strong over the medium term. Its medium-term growth rate is expected to be around 5pc, which is much better than in the past. But there is likely to be some cooling off in coming months, partly reflecting the rapid growth. But this is still a very strong growth rate expected next year.
The economy grew 6.8pc in 2006, a 29-year high as investor confidence is bolstered by President Alvaro Uribe’s US-funded security crackdown on the country’s long-running left-wing insurgency and violence. The economy is expected to grow as much as 7.8pc this year, as security improves and foreign investment increases. As Colombia’s economy grows and foreign investment flows in, the peso has surged over the last year and investors fret over inflation. Consumer prices have already risen 4.11pc since the start of the year.
Colombia’s trade deficit widened to $316 million in August from $91.7 million in the same month a year earlier. The country reported a trade deficit of $1.46 billion for the first eight months of the year. Exports climbed 16.6pc in August to $2.48 billion compared with the same month a year earlier and rose 15.5pc in the first eight months to $18.24 billion, driven up by car sales. Exporters of products such as flowers and bananas, however, have also warned about the negative impact the strong peso and inflation are having on their industries.
Meanwhile, Colombia’s central bank is likely to impose a reserve requirement as it seeks to keep inflation within the 3.5 to 4.5pc target range for this year and slow the appreciation of the peso, which has strengthened more than 12pc over the last year. This seeks to moderate growth of credit to reduce growth of spending with the purpose of contributing to help inflation toward targets set by the central bank.
The bank has instituted requirements for banks to hold reserves of 27pc on current accounts, 12.5pc for savings and 5pc on fixed income with maturities below 18 months to trim funds available for lending. According to the Finance Minister, the measures were moderate and would not affect direct foreign investment. The increase in reserve requirements to lead to an increase in domestic interest rates, which should dampen the fast growth of domestic credit and help ease inflationary pressures.
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