RIO DE JANEIRO: As Brazil throws itself into Carnival this weekend, visitors will be seeing an exuberance stemming as much from the nation's sizzling economic performance as the street parades set to samba rhythms.
After all, on Thursday, just before Carnival got underway, the government announced that red-hot growth of 7.5 percent last year meant Brazil was now the seventh-biggest economy in the world, its gross domestic product swelling to $2.09 trillion and overtaking Italy's $2.06 trillion.
The data confirmed two things: that Brazil well and truly shrugged off the global financial crisis that has mired the United States and Europe; and that its growing pool of consumers is proving to be very enthusiastic indeed at spending.
Along with the sustained world demand for the produce and raw materials Brazil exports iron ore, coffee, orange juice, soya and the spike in commodity prices there seem to be many reasons for Brazil to think the party will be a long and satisfying one.
But there are some tremors hinting that the country's rock and roll good times could result in a major hangover.
President Dilma Rousseff, a trained economist whose musical taste runs more to opera than samba, is struggling with two unwelcome guests at the bash.
The first is inflation, which is running at an annualized rate of 6.01 percent according to the latest figure given Friday, above the government target of 4.5 percent.
Although that slowed slightly in February, there is no indication that Brazilians especially those in the middle class who account for more than half the population of 193 million are whipping out their cash and credit cards any less. Their desire for imported products, in particular, is causing Brazil's manufacturers to sweat.
Rousseff has promised to slash $30 billion from public spending, and the central bank this week raised its key rate for the second time this year, to 11.75 percent, but fear of spiraling inflation what Brazilians traumatized by the hyperinflation of the 1980s and 1990s call "the dragon" persists.
The second uninvited guest, in fact related to the first, is the climbing value of Brazil's currency, the real, against the dollar.
The real finished trading Friday at 1.645 to the greenback its highest level since August 2008. It has gained more than 32 percent against the dollar in the past two years, and more than 100 percent in the past eight years.
Those two factors together explain why foreigners visiting Rio for Carnival might be feeling a bit of sticker shock at the $13 cocktails or the $300 a night hotel rooms.
Foreign investment in Brazil, seen by many as a safer bet than other fast expanding economies such as China and India, is one driver in the exchange rate difference.
But the United States' ultra easy monetary policy is also a factor, as Brazilian Finance Minister Guido Mantega has stressed in his past talk about an "international currency war" between Washington and Beijing.
"The expectation is for the central bank, which raised its key rate this week, to do so again in April, and that will mean continued capital inflows because the returns at that rate are so high," said Fernanda Camino, an analyst at XP Investimentos.
"As long as it is attractive to invest in Brazil, and right now it is, it is really difficult for the central bank or the government to slow that trend."
International Monetary Fund chief Dominique Strauss-Kahn highlighted the discordant notes being heard during a visit to Brasilia for talks with Rousseff Thursday.
After speaking of the short term challenge of bringing inflation to heel, Strauss Kahn also stated that in the medium term, "the key challenge is to raise the growth potential of the economy and continue to make progress towards the reduction of poverty and inequality."
He suggested as have many other economists that Brazil reform its stifling and burdensome tax code, cut its budget further, and overhaul a social security system that is linked to the inflation rate. All that may seem so much hard work to contemplate, especially while Brazil is still celebrating.
But just around the corner after Carnival are two bigger functions the South American nation has promised to host: the World Cup football tournament in 2014 and the Olympic Games in 2016. Brazil is already well behind in its preparations for the former. Which in turn is worrying for the latter.
Comments
Comments are closed.