With inflation this month reaching a projected 6.3 percent per year and a currency that has increased 47 percent against the dollar since the end of 2008, could the Brazilian economic miracle be just a bubble? Though there are warning signs, there are also positive signals that indicate Brazil be able to power through--though at significant cost.
First the negative signals. Chief among these is the signs of an overheating economy. In June the Central Bank’s adjusted, upward, the rate of inflation to 6.3 percent--slightly over its target. Add to this near full employment, the limited efforts to reduce the Brazilian government’s stimulus (through BNDES and federal spending--especially in preparation for the World Cup and Olympics), and the promise to increase the minimum wage by 14.5 percent next year and it looks like a pressure cooker. Granted it doesn’t approach Argentina or Venezuela, but 6 percent-plus inflation touches the upper limits of the government’s comfort level and is Brazil’s highest rate since 2005.
Second is the overvalued Brazilian real. High interest rates (an effort by the Central Bank to contain inflation), record high commodity exports, and a flood of foreign investment have swollen the value of the real. The appreciated value of Brazilian currency against the U.S. dollar and the renminbi has hurt exports and undercut domestic manufacturing. And in an economy in which corporations have come to rely on foreign credit, the appreciated exchange rate has led many to take out dollar-denominated loans. A drop in the value of the real relative to the dollar would place a serious crimp on those corporations. Any sort of devaluation in Brazil’s floating exchange rate will be tough on the economy.
Last on the negative side is the issue of all the bottlenecks to competitiveness. Many of these--until the exuberance over Brazil--had become a standard litany of the country’s economic constraints; now they seem to have been forgotten. But they still exist, and they are still important. Among them are Brazil’s creaky, scant infrastructure, its welter of tax laws, profligate public spending, arcane and arbitrary regulation, and a long-pending pension reform. Some of them are being tackled--like infrastructure--others face real political hurdles--such as the tax laws and regulatory reform. But Brazils’ long-term growth rate depends on those reforms.
There is, though, a positive side. One is the quality of the technocrats and management team, from the President of the Central Bank Alexandre Tombini to President Dilma Rousseff. All of the problems mentioned above--and more--are well known by Brazilian officials who have repeatedly expressed their concerns and—in most cases—their plans to address them. There is also the low level of national public debt. Unlike past booms--in Brazil or throughout the region--this one has not been built on a heavily indebted government. (Consumer debt, however, many be another matter--especially given the high interest rates.) And last is the fact that there is no end in sight for the commodity boom that Brazil has ridden for the last decade. Sure, Chinese and Indian economic growth may slow; but these voracious consumers of raw materials will likely not slow dramatically and nor will their need for resources.
In short, more than a bubble or even a boom, Brazil’s economic situation in the future looks more like a “boomlet” but one that will lift Brazil to the ranks of the developed world. It’s unlikely to near impossible that Brazil will experience a collapse like the ones the country has suffered in the past. More likely is that the challenges and constraints--from the need to control public spending to poor infrastructure--will hobble Brazil’s roaring growth--the result being growth between 4 percent annually rather than 7 percent. But given all the hype and exuberance among Brazilians themselves, the larger question may be if Brazilians will accept that.