Henrique Meirelles, the president of Brazil's Central Bank (BC) stated this Friday, November 7, that the Brazilian economy should grow above the global average in 2009, in spite of the international financial crisis.
"The slowdown will not be that strong, we will grow at rates much higher than the IMF's forecasts of average growth worldwide," he said in a lecture at the American Chamber of Commerce for Brazil (AmCham), in the city of São Paulo. The IMF expects a 2.2% growth rate for the global GDP next year.
According to Meirelles, even though Brazil does suffer the effects of the crisis, after all it is part of the world, the country is being less affected than other countries, especially the United States and European nations.
Among the country's idiosyncrasies, he mentioned the fact that the Brazilian economy is being boosted by domestic demand, by the rising wage mass and by investment of companies in their businesses in the country.
Exports now answer to a smaller share of the GDP and destinations are diversified, with 50% of business being made with emerging countries and only 5% with the United States, which is the epicenter of turbulence.
"The GDP for the third quarter is still going to be very strong," he said. The president at the Central Bank stated that the Brazilian GDP has shown sustained growth over the last few years, having risen by 4.1% in 2006, 5.4% in 2007, and with forecasts of remaining above 5% in 2008.
He also said that the country's financial sector was better prepared to face turbulence than in other countries. "The Central Bank also took precautions: in addition to foreign currency reserves of US$ 207 billion at the onset of the crisis, we had purchased a dollars in the futures exchange," he said. "The bank is ready to sell another US$ 60 billion in the futures exchange, which we believe should be enough," he stated.
Meirelles said that loan and swap operations, as well as dollar sales in the futures and spot markets, carried out by the BC over the last weeks in order to stabilize exchange rates and increase liquidity in the export credit area, have not compromised the level of foreign reserves, which currently stand at US$ 204 billion. The bank has already effected exchange market operations worth around US$ 40 billion.
The Brazilian government has adopted other measures, such as reducing mandatory payments that banks must make to the CB in order to provide liquidity to the credit market, authorized public banks to purchase credit portfolios from private banks, and allocated a higher volume of financing to the agricultural sector – and it did so earlier than expected.
The effects of the crisis on Brazil, according to him, consisted mainly of the interruption of foreign financing lines, which harmed especially companies operating in foreign trade. Afterwards, there was a reduction in sales of Brazilian bonds abroad, followed by a reduction in domestic liquidity and, finally, losses were posted by companies that carried out operations with foreign-exchange derivatives and were betting on the appreciation of the real (Brazilian currency). These were caught by surprise with the strong increase in the dollar value, which led to an even greater increase in exchange market volatility.
Meirelles also stated that, in the foreign scenario, there already is a trend of credit resumption, even though at a lower volume than prior to the worsening of the crisis, prompted by the bankruptcy of United States-based bank Lehman Brothers.
In the domestic realm, he explains that financing lines have also been resumed. "Things are not yet back to normal, the value recorded in the last week of October is still lower than that of the last week in September, but there has been a recovery. There was a decrease in early October, but recovery followed as the month went by," he said.
Meirelles asserted that no economy is immune to the crisis in a globalized world, in which trade, finance and information systems are connected. Proof of it is the fact that stock exchanges worldwide have lost US$ 32 trillion since the beginning of the crisis, and bank capitalization, US$ 700 billion.
Another advantage of Brazil, according to him, is the fact that, different than the United States, the country's Central Bank has regulations turned to the supervising of investment banks. Furthermore, another comparative advantage is the absence of problems such as high insolvency rates in the Brazilian financial system.
The obstacles, according to him, can be fought against by means of the actions of the BC. Meirelles said that the BC has 47 billion reais (US$ 21.7 billion) to conduct discount operations for the banks, which were not required yet.
"Brazil has always been cautious in this area," he said, calling attention to other indicators of stability: the total of 270 billion reais (US$ 125 billion) in mandatory deposits made by banks to the BC, and the lowest rate of leverage in the Brazilian financial market compared with other countries.
Meirelles also stated that governments worldwide are struggling to neuter the effects of the crisis. In his opinion, some of the negative effects can be blamed on panic. "Panic is not productive. There is cause for concern, the events must be closely followed and hard work must be done, but serenity is also needed if we are to see this process through," he said.
In a press conference after the lecture, Meirelles talked about the meetings of the G-20 and of the Bank for International Settlements – the central bank of central banks -, which should take place in São Paulo during the weekend.
Representatives of the world's 20 leading economies, which comprise the G-20, will be in attendance, as well as the presidents of 40 central banks, including the Fed's Ben Bernanke, and high-level representatives of the IMF and the World Bank.
One of the main issues to be tackled during the meetings, according to him, will be the establishment of rules for regulating the international financial system. "One of the leading causes for the crisis was the issue of prudential regulations, credit risks incurred by United States-based institutions that turned out to have excessive leverage levels, which translates into a large volume of loans compared with the capital of banks," he said.
He highlighted the priority ascribed to discussion of rules and inspection for international credit and derivatives translations. "Brazil is already regarded as one of the countries that oversees its financial market the best," he said.
"However, there is a large volume of global transactions, and one of the topics in the agenda [of the meetings] is discussion concerning organizations that are able to regulate global financial transactions that exceed the scope of each government," he claimed.
Meirelles also stated that fiscal measures and others are going be under discussion, so as to ensure that international economic activity "goes back to the desired levels." "First off, we are going to discuss how to solve this crisis; secondly, looking towards the future, we will tackle the regulatory issue," he finished off.
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