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Contaminated by Global Unease Brazil Stock Market Plunges 5.72%

Brazil's Stock Market The Bovespa, São Paulo’s stock market, in Brazil, dropped 5.72% this past Thursday.  Today, after a short period on positive territory the Bovespa index, the Ibovespa, fell close to 2%. The only other stock market to fall more was in Buenos Aires (6%), a stock market that is one tenth the size of Bovespa.

So far this year, the Bovespa is down 23.8%.

Like all stock markets around the globe, there are investor concerns with the spending cuts in the United States that are expected to cut growth and the prolonged crisis in Europe that just gets worse as time passes. In Brazil, there is additional concern with commodities.

According to Alcides Leite of the Trevisan Business School, “In Brazil the stock market dropped more due to what is happening with commodities in general. Brazil is a big exporter and international prices have fallen sharply. The biggest drops have been in petroleum and mineral ores.”

Keyler Carvalho Rocha, economics professor at the University of São Paulo, says there is really no justification for the large drop of over 5% yesterday. He admitted that there are a lot of problems worldwide, but called the plunge disproportionate.

“There is no reason for such a violent drop on the stock market. There is a lot of emotion on the Bovespa,” he said, adding that in reality performance in the Brazilian corporate sector has been excellent. “We are talking about big, strong companies with good dividends.”

Leite goes on to say that a large volume of business on the Bovespa is now foreign money and it is more volatile, as it is closer to the global problem. “There is not a lot of stock market investment tradition in Brazil. And the present situation looks like it will persist. There will probably be a lot of ups and downs for a good while,” said Leite.

On the other hand, Rocha says that what will persist is the European crisis. “It will be years before Eurozone problems are ironed out. Meanwhile, Brazilian companies are a good investment because prices are low.”

Latin America’s main stock exchanges suffered strong losses on Thursday much in line with plunging world markets and reflecting contagion of growing uncertainties that the fragile global recovery is again on the verge of a recession.
 
The stock market index of Lima, belonging to the region’s fastest growing economy Peru, lost 3.31%, while Colombia also was down 3.23%. Mexico’s BMV indicator suffered its worst drop since September 2009, loosing 3.37%.
 
Finally the Santiago market lived its blackest day in over a year, having dropped 3.94%.

Greater Brazil Plan

The president of the Commercial Federation of São Paulo (Fecomércio), Abram Szajman, says that the Greater Brazil Plan is more than welcome. He said his only criticism was that it should be permanent and extended to other sectors.

“Simplify the life of a businessman and reduce his tax burden, besides protecting the domestic market by making it more competitive and more productive should be a permanent effort by the government. And not just for the industrial sector,” said the Fecomércio president.

Szajman said the idea of BNDES loans at lower interest rates, which Greater Brazil will provide for the industrial sector, is also a very good idea for the small business segment, along with a reduction of payroll taxes that are also a part of the plan.

Szajman pointed out that Greater Brazil corrects effects as it is impossible to attack the causes of many problems. He cited the exchange rate, which distorts the export sector, government spending and high interest rates. “These problems make it difficult for the government to invest, create jobs and income,” he declared.

“As long as Brazil has the highest real interest rates in the world, the exchange rate will continue to distort our competitive capacity. Unfortunately, we have to get at the causes of our problems. Even so, the measures announced [Greater Brazil] will make commercial operations easier, simpler and more open. There will be a reduction in the tax burden and red tape for domestic firms. That is good news,” said Szajman.

With the launch of the Greater Brazil Plan, the Brazilian Development Bank (“BNDES”) will make adjustments in the rhythm and total amount of its loans this year. According to Luciano Coutinho, president of BNDES, the institution originally intended to actually cut back slightly on loans this year to R$140 billion (compared to R$144 in 2010), However, with Greater Brazil, the BNDES will loan out R$147 billion.

“In the first half of this year we reduced outlays by 6%. In the second half, as part of our participation in Greater Brazil we will expand our working capital fund by around R$7 billion (raising it from R$3 billion to R$10 billion). That is not going to have any significant overall effect on our annual plan,” said Coutinho.

According to the president of the Competitive Brazil Movement (“MBC”), Erik Camarano, “Business leaders in various sectors are enthusiastic about the measures to support domestic industry. They see the Greater Brazil Plan as progress. There is still a lot to do, but it is certainly a step in the right direction,” said Camarano.

Paulo Tigre, who runs a business in autoparts, says the Greater Brazil Plan shows that the government is concerned about industrial development. “This is really a move to defend Brazilian companies that operate in foreign trade, both importers and exporters,” he declared. “I believe there will be more progress in this area with the creation by the government of an intelligence group [specifically for foreign trade],” said Tigre.

Camarano, on the other hand, pointed out that Brazil has a lot of bottlenecks, such as payroll taxes. “The country needs to simplify as well as reduce the burden of taxes. And invest in infrastructure and education,” he concluded.

ABr/MP/Bzz

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