Fiscal Policy

The result of public accounts for the month of August was disclosed today. The primary surplus accumulated for the year reached 3.65% of GDP. Spending on payment of the debt interest were 6.05% of GDP. The nominal result, therefore, had a deficit equivalent to 2.41% of GDP. In the past 12 months, the result shows a nominal deficit of 2.05%, and its recent evolution is shown in the chart below.

Source: Central Bank of Brazil

Quarterly Inflation Report

The Central Bank of Brazil released today the Quarterly Inflation Report. This report analyzes the major risk factors for domestic inflation, including domestic and international economic indicators. In a chapter of this release, the inflation projections for the coming quarters are estimated through econometric models. The Central Bank evaluates two main scenarios. In the first scenario, called the "Reference Scenario", the current values of the Selic interest rate and exchange rate are maintained throughout the period, and were respectively 12% and 1.65. In the second scenario, called "Market Scenario", the model uses the forecast obtained through weekly survey with economists, which shows the exchange rate of 1.60, 1.69 and 1.68 for the end of 2011, 2012 and third quarter of 2013, respectively. The Selic rate used in this scenario was 11.44, 11% and 11% by the end of 2011.2012 and third quarter of 2013.

The result of the analysis shows that inflation will stay above the central target of 4.5% in the market scenario and the reference scenario reaches the center of the target only in the second quarter of 2013. The table below shows inflation developments in the scenarios presented by the Central Bank.



Source: Central Bank of Brazil

Exchange Inflow

The Central Bank of Brazil announced today the exchange flow until Sept. 23. The volume of funds that went into the country this month was USD 8 billion. The chart below shows the daily evolution of this flow. The Central Bank through auctions, purchased USD 327 million in this period. The remainder of this flow stood on the banks, which increased their exposure in dollars.

Source: Central Bank of Brazil

Housing Credit

The volume of mortgage lending in Brazil, despite the strong growth in recent years, still stands at a level very low compared to other countries. In August, the percentage of loans increased by 35% compared with last year, reaching 4.6% of GDP. The chart below shows the recent evolution of real estate credit in Brazil.





Source: Central Bank of Brazil



Labor Market and Wages

IBGE - Brazilian Institute of Geography and Statistics - reported the average wages that prevailed in the labor market in the country's six largest cities: Sao Paulo. Rio de Janeiro, Belo Horizonte, Porto Alegre, Recife and Salvador. According to these data, the average salary in July was BRL1,613, equivalent to USD 1,031 per month. Over the past 12 months, real average salary was USD 12,450 in annual basis. Between May '04, which was its lowest value, as we can see from the chart below, and Jul ’11, the average annual growth in real wages measured in constant USD was 3.5% a.a.

Source: IBGE

Brazil and Exchange Rate Policy

Source: Central Bank of Brazil

In recent days, the price of local currency, the real (BRL) fell about 18% against the U.S. dollar (USD), and brought up the debate on what the appropriate exchange rate for the Brazilian economy is. The exchange rate undoubtedly has a direct effect on the earnings of exporters and importers. On the other hand, the exchange rate is also related to a series of economic variables, such as industrial input costs, investment cost, and also an effect on consumer welfare, because it can stimulate competition. An exchange rate stable or predictable gives visibility to investments, and can contribute significantly to economic growth.

Let's see what happened to the exchange rate in Brazil in recent years. The first graph below shows the recent evaluation of exchange rate. Between 1994 and 1999, the exchange regime was fixed, where the Central Bank acted to keep the exchange rate. This was a period with high trade deficit and the current account deficit rose to 4.8% of GDP in mid-1999. The sequence of external shocks (Russia and Asia) has forced Brazil to abandon the fixed exchange rate regime, and the exchange rate began to float since from 1999.

Between 1999 and 2002 there were some events that have left the exchange rate more volatile. Among these events, we mention the process of privatization of state enterprises, which increased transfer of resources abroad for at least 2% of GDP, and external financing difficulties related to the electoral process, which culminated in an agreement with the IMF. It was also a period of low commodity prices, which affected Brazil's external financing. It was a period in which nearly doubled the dollar against the BRL.

The period between 2002 and 2008 was a period of strong global growth, trade balances with higher commodity prices high, as can be seen in the second chart below, and also with strong flow of capital. Brazil has taken this time well, receiving part of this flow, which came as a direct investment and also to take advantage of high interest rates. The volume of international reserves rose from USD 22 billion in late 2002 to USD 200 billion in mid-2008. This was a period of continuous appreciation of the BRL, which lost nearly half its value against the dollar.



Source: Brazilian Central Bank
Elaboration: Mellone Jr.,G



From 2009, after sub-prime crisis, commodity prices rebounded and the flow of resources continued positive, pushing back the exchange rate, and valuating the BRL, at least until the present moment.

As described, both domestic economic policy and especially the foreign scenario were responsible for determining the exchange rate in Brazil. The exchange rate was extremely volatile during this period, which is negative to investment enviroment. This is the great challenge of Brazil: adopt an economic policy that allows an appropriate forecastable exchange rate for investments for a healthy economic growth.

Home Page

I am starting this blog, where I aim to place in a simple and didactic way, information about Brazilian economy. Also, I intend to post comments on issues highlighted in the press and as well personal comments. Therefore, I hope to contribute to a better understanding of Brazil's economy.