BRAZIL: Brazil's economy comes under close scrutiny as second-round of the presidential election approaches

As the second-round of Brazil's presidential election approached, the economy is under close scrutiny as voters evaluate which candidate could boost economic growth. Brazil's economy, the largest in Latin America, has expanded at a sluggish pace in recent months amid a slowdown in inflation, giving the central bank room to cut rates without compromising its bid to keep prices in check. Brazil has the basis to grow faster but needs to implement tax, pension, agrarian and other reforms, according to analysts. Consumer prices as measured by the benchmark IPCA inflation index, which the central bank uses as a guide to set interest rates, rose nearly 4 percent in the 12 months through September, the slowest pace since a 3.3 percent rise in the year through June 1999. Price rises are well below the bank's inflation target of 4 and a half percent for 2006, giving policy-makers room to keep reducing lending rates to give the economy a boost. Last month the central bank reduced its forecast for Brazil's 2006 economic growth to 3 and a half percent from 4 percent growth. Brazilian President Luiz Inacio Lula da Silva, a charismatic former union leader, failed to make a first round election partially because of a slew of corruption allegations, which plagued his government. But he has emerged largely unscathed from the scandal, touting a healthy economy and the government's social welfare programs. He fought inflation and paid down debt in his first term, hewing closely to sound economic policy and moving away from leftist doctrine. Opposition candidate Geraldo Alckmin is favoured by Brazil's business elite, but his campaign pledges to overhaul Brazil's public finances to pave the way for sustained growth have ignited scant voter enthusiasm. His campaign has been hurt by spurts of gang violence in his home state of Sao Paulo. Although many investors say they would prefer an Alckmin victory, Brazilian assets have taken the probable Lula victory in stride in contrast to four years ago, when the prospect of a Lula win spread near panic in Wall Street. Economic analyst Ricardo Araujo of the Getulio Vargas Foundation said Brazil failed to do its homework in establishing solid economic foundations, beyond its high government expenses and thus has to do something to reduce costs. "Brazil didn't do its homework regarding economic foundations and therefore grows less. Beyond that, government expenses are very high. Thus, Brazil has to do something in that direction," he said. Brazil is a major agricultural power, being the world's largest producer of coffee, sugar cane, oranges and commercial beef and second behind the United States in soybean production. Brazil used to be the world's largest importer of cotton a few years ago, but with investments in crop technology it began boosting output and is now a net exporter of high-quality long-fiber cotton lint. Record Brazilian cotton exports are expected in 2007 due to an increase in the next crop. Brazil's soy area has doubled since 1990 to become the world's second largest after the United States and output has nearly tripled in the same period. Lula and Alckmin pledge to keep walking the line between tight fiscal policy and growth, lowering interest rates, which at almost 14 percent, are among the world's highest. Medium sized businessmen like Joaquim da Costa, who owns a grocery store, frequently complain that the government does not offer proper conditions for their businesses to grow. Da Costa said the government has to lower interest rates and taxes. "The measures that have to be done are, lower interests, lower taxes, a tax reform," he said. The bank's monetary policy committee, known as Copom, has now cut interest rates 11 times in a row, the longest string of reductions in Brazil's history. Borrowing costs have fallen by 6 percentage points from 19.75 percent in September 2005, reducing the cost for consumers to take on loans to buy cars, appliances and homes. The common Brazilian worker, such as Zilda Alves who sells fruits and vegetables in a small tent in a street market, complains about the sales that according to her, have fallen in the past years. Alves said everyone, from the government to the citizens, are lacking money and that Brazil's next president has to be steadier in order to make improvements. "No one is buying anything, the country has no money, everyone (is lacking money), everyone is owing, I mean, our bills arrive and we...(meaning she has no money to pay). It's there, you're seeing it, everything is slow. I think a firmer person has to come in (referring to Brazil's next president) to see if something improves," she said. According to the World Economic Forum's latest report Brazil is failing to fulfill its economic potential and achieve growth rates that would bring more people out of poverty. Brazil dropped nine places in the forum's 2006 global competitiveness ranking, leaving it well behind rival emerging markets like China, India, Russia and Mexico. But Brazil had made significant progress in the last decade in cleaning up its public finances, allowing it to increase spending on education -- a crucial area to improve competitiveness. According to Araujo the government has to concentrate more investments in technology and human capital, in other words in education, since no country in the world can experiment extended in any other way. "Any country in the world only will keep extended growth if it invests in people, in technology and in human capital. For that it is necessary to make massive investments in education," he said. Brazil is also home of the world's largest iron ore producer Companhia Vale do Rio Doce (CVRD), which is one of the four largest companies in the mining industry.

ITN Source | October 26, 2006

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