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Asia, Brazil Take Huge, Positive Economic Steps

By Ashish Advani   |   Wednesday, 09 Mar 2011 10:26 AM

I recently discussed the prospects of Brazil and its currency, the real. In the past few days, there have been some very positive developments out of Brazil.

The Brazilian Central Bank raised the internal interest rate by another 50 basis points. The celic rate now stands at 11.75 percent; inflation runs at about 6 percent. Also, Brazil grew by 7.5 percent (GDP growth) in 2010, its fastest growth rate in 25 years.

What was also very interesting to note was that internal consumption grew by 7 percent. So the growth in Brazil has been fueled by domestic growth as well as export gains.

All of this is going to boost the real during the next few months. You don’t have to be a great currency expert to see that.

The last few weeks have also been big for India and China.

India announced its highly anticipated budget on Feb. 28 and it was a “Goldilocks” budget: not too hot, not too cold – just right.

The tone throughout the budget was a good balance between benefits to the common man and benefits to industries, with a strong undertone of a pullback of excess liquidity. This announcement has allayed the market fears.

While Dalal Street (India’s Wall Street) isn’t out of the funk yet, this budget will help the market make a strong recovery during the next few months.

Dalal Street had plunged nearly 20 percent during the past few months amid fears that inflation was out of control and that the government would implement strong controls to control inflation, which would be market negative.

Since this hasn’t happened, the traders are breathing a collective sigh of relief and the markets have started edging up again. This would a great time to buy into Dalal Street again.

Turning to China, there were major macro-level announcements there too. The Chinese government announced its 2011 budget and the beginnings of its next five-year plan. Numerous strategic targets have been announced which give us a pathway to Chinese growth in the next five years.

The primary goals announced are very supportive of rebalancing the economy toward domestic demand as well as rebuilding the industrial infrastructure. In the short term, managing the inflationary pressures remains the top priority.

And how will they do that?

The government has announced the use of liquidity management (read hiking interest rates) along with easing supply constraints (read not too much stimulus withdrawal), which will lead to reducing inflation. While they didn’t announce it, I would add the gradual appreciation of the renminbi (I expect about 5 percent this year) to the list of measures to control inflation.

Once again: not too cold, not too hot – just right.

Inflation is targeted to be contained at 4 percent while growth is targeted at 9 percent for 2011. What is interesting to note is that for the long-range forecast, the growth targets are pegged at 7 percent on average during the next five years, which indicate that red-hot maximum growth strategy is being sacrificed for sustainable growth trajectories.

The long-range policy has also catered to widespread personal growth across China. The government is concerned about uneven growth. Growth in China has been quite segmented. The coastal areas (Shanghai, Ningbo, Guangzhou, Beijing, etc) have grown rapidly while the interiors are extremely poor.

During the next five years, disposable income for low-income workers is to be raised through a combination of raising the minimum wage and reducing income taxes. Subsidies to the agricultural sector will rise to further enhance rural income growth.

The government desires to achieve an average income growth of households greater than the 7 percent real GDP growth. This is a fundamental shift in policy. The past two decades of GDP growth has indicated a slower household income growth compared to headline growth signifying lopsided growth. This has been recognized and addressed this time. If this target is achieved, it would imply higher consumption and lower external surplus.

Sound like a maturing economy as well as a very confident policy move to me.

All in all: a great macro week across Asia.

More good news is expected across Asia as time marches along.

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