It has been a few months since I looked at Brazil and spoke to you about it. The recent data coming out of Brazil have compelled me to take a second look at the economy again.
We had seen the Brazilian real (BRL) take a beating by the global traders when the governments imposed taxes on foreign investment inflows. While in the short term, the government’s misplaced good intentions seemed to work, in the midterm (let alone long term), we have seen the real begin to surge again.
After the taxes imposed by the government in February, we saw the soaring real decline. But the rising interest-rate cycle due to higher-than-acceptable inflation had negated any declines. And now we are observing strong growth in Brazil, which is continuing to put upward pressure on the real to continue to strengthen against the U.S. dollar.
The U.S. dollar hasn’t done itself any favors by continuing to weaken based on dreadful fundamentals, but that is a story for another day.
Headline fiscal readings in Brazil are very positive. The consolidated trade data for the public sector as a whole posted an 18.1 billion real (US$11.48 billion) surplus in April. The trade budget surplus improved from 13.6 billion reals a month before. This indicates that the growth story is intact in Brazil.
So far this year (January-April), the public sector primary surplus has accumulated 57.3 billion reals, or about half of the official target of 117.9 billion reals, for 2011 as a whole. The accumulated primary surplus over the past 12-months stands at 121.6 billion reals (or 3.2 percent of GDP), although a one-time big Petrobras-related accounting boost in September 2010 will eventually drop off of the 12-month sum later this year.
Now some folks would argue that while the trade balance is in surplus, the balance in nominal terms is negative. Folks, it is all about the scale here. The trade balance in nominal terms may be in deficit, but the deficit is about 2.4 percent of GDP. Take the United States, where this deficit is approaching 100 percent by 2014. Suddenly 2.4 percent deficit doesn't seem too bad.
One cloud of worry though is industrial production (IP), which declined 2.1 percent month over month in April. Even though March was revised up (from 0.5 percent m/m to 1.1 percent m/m), IP in April was unambiguously weak. It posted the largest monthly decline since December 2008, when the global crisis had hit Brazil's IP in earnest. In my mind, this data point seems anomalous and I am expecting a big pickup in this area.
All in all, I am seeing a sustained strengthening of the Brazilian economy. Now as the real continues to strengthen, we may see the government tamper with free markets again and raise the foreign capital taxes again. But this time, the markets that have seen them cry wolf too many times in the past, will see through this manipulation and ignore it all together.
I would be buying selected Brazilian stocks as well as the Brazilian reals now as well as on dips when the government announces new taxes on capital inflows.
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