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Brazil: Expect a No-Bubbles Growth

Brazil: Expect a No-Bubbles Growth

According to Brazil’s Central Bank president, Henrique Meirelles,
the country is ready for
renewed growth and there are signs
indicating that Brazil is on the way to a surge of development.

Meirelles believes that positive results should appear by the
last quarter and promised to keep inflation down.



Henrique Meirelles, the president of the Brazilian Central Bank, spoke about bottlenecks that impede a sustained
expansion of the country’s productive capacity and which need to be eliminated, such as the high level of Brazil’s country risk
premium, which reflects the confidence of foreign investors, and elevated bank interest rates, which discourage new investments.

In the same breath, Meirelles declared that the Central Bank knows what is going on in the financial market and is
totally devoted to make it possible for borrowers to count on lower interest rates. "The Central Bank has taken several steps to
reduce bank spreads (the difference between what banks pay to obtain funds and what they charge to lend them) and will
continue to adopt this practice," Meirelles pointed out, stating that he is only following accepted procedures of central banks
throughout the world. Still, with all this, he sounded a warning that the greater availability of funds is not based on artificial
plans that have no long-run basis.

In a speech delivered to business leaders in São Paulo, Meirelles made a point of criticizing economic growth plans
that lack consistency. He observed that "growth is not a momentary heating-up of the economy. He reiterated that "bubbles
of growth are easy to expand. Unfortunately, they explode with even greater facility"

"Our ability to obtain constant surpluses in the primary budget should make it possible to reduce the debt/GDP ratio,
which should go down to less than 40 percent by the end of this decade. In 2002, for example, this ratio exceeded 60 percent."
With regard to foreign accounts, Meirelles cited the US$ 2.6 billion cumulative surplus over the 12-month period ending in
June, indicative of a surplus in current transactions, as against a deficit of US$ 33.4 billion in 1998. Meirelles also announced
the possibility of a trade balance superior to the original expectation of US$ 17.5 billion, as well as a current accounts
deficit less than US$ 4.2 billion.

Meirelles called for the resumption of growth and the definition of the reforms that are underway in the National
Congress. He considered the first-round approval of the Social Security reform bill as a grand success, since the day-to-day
expenses of the federal government will weigh less on private savings, so more public funds will be available for productive
investments. He also affirmed that this will provide an additional incentive to private savings in so far as greater emphasis will
be placed on a system of private retirement savings, rather than a government benefit system.

On Right Track

The country is ready for renewed growth and there are signs indicating that Brazil is on the way to a surge of
development, said Meirelles. According to him, positive results should appear by the last quarter of this year. He adds that in order for
growth to be sustainable over the long-term, it will be fundamental to keep inflation down. Meirelles also said that there have to
be safe investment opportunities. Finally, Meirelles said the reform bills now in congress were very important for
improving government finances and strengthening domestic savings.

Growth Forecast

The Central Bank’s weekly Focus Bulletin, a survey culled from the country’s principal financial institutions,
indicates optimism as far as this year’s decline in inflation is concerned. In terms of the Broad Consumer Price Index (IPCA), the
guideline of government targets, the forecast fell from last week’s 9.74 percent to 9.63 percent. With regard to 2004, the projected
inflation rate dropped from 6.5 percent to 6.2 percent.

As a result of last week’s 2.5 percent reduction in the prime interest rate, other estimates also underwent
modifications. This week’s estimate for the growth in the GDP (Gross Domestic Product) in 2003 declined to 1.40 percent, as against
last week’s 1.46 percent. Even so, the market retained its 3 percent estimate for growth in 2004.

According to the survey, the prime interest rate (Selic) should be around 19 percent in December, instead of last
week’s forecast of 19.8 percent. Last month’s US$ 3 billion forecast for the current account debt fell to US$ 2.3 billion last
week and now stands at US$ 2 billion.

Despite these revisions, the net public sector debt/GNP ratio is expected to remain unchanged at 55 percent. Nor
have predictions been altered in terms of the trade balance surplus: US$ 18 billion. By the same token, the survey puts the
level of foreign direct investments at US$ 8.30 billion, the same as last week. However, in terms of 2004, the estimate for
foreign direct investments has changed: A month ago, US$ 12 billion were projected; last week, US$ 11.85 billion; now, US$
11.50 billion.

Foreign Investments

Foreign direct investments in Brazil in July reached the highest total so far this year. US$ 1.159 billion entered the
country. Of this total, US$ 817 million correspond to the conversion of part of the foreign debt, according to information
provided on Thursday (21) by Altamir Lopes, head of the Economic Department of the Central Bank (BC), who released the
monthly report of foreign sector transactions.

This reflection of greater confidence in Brazil on the part of foreign investors made possible a monthly surplus of
US$ 112 million in the balance of payments, according to Lopes. Current transactions were responsible for a surplus of US$
744 million, while the financial account showed an egress of US$ 731 million. In July, 2002, there was a US$ 2.393 billion
deficit in the balance of payments.

Foreign investments in money market accounts and mutual funds registered a net withdrawal of US$ 221 million.
Net stock purchases totaled US$ 112 million. There were also withdrawals of US$ 332 in prefixed CD’s, US$ 281 million
in notes and commercial papers, and US$ 64 million in short-term financial instruments.

According to Lopes, suppliers’ credits were responsible for a net influx of US$ 765 million, mostly as the result of
US$ 806 million in net short-term loans. The Central Bank also registered net payments of US$ 199 million to multilateral
agencies, US$ 286 million to governmental agencies, and US$ 112 million to buyers.

With regard to the foreign debt, the BC economist revealed that May’s accounts register a total debt of US$ 216.926
billion. This represents an increase of US$ 1.6 billion (0.8 percent) over the previous month. Of this total, US$ 195.521 billion
represent medium and long-term debts, which grew 2.8 percent, while US$ 22.405 billion correspond to short-term debts, which
fell US$ 590 million during the month.

International reserves also registered a positive performance in July. They declined only US$ 311 million. At the
end of July, reserves amounted to US$ 47.645 billion, as against US$ 47.956 billion in June. This total has already
increased to US$ 48.290 billion at yesterday’s closing, according to the BC’s daily calculations.


The material for this article was supplied by Agência Brasil (AB), the official press agency of the Brazilian
government. Comments are welcome at lucas@radiobras.gov.br

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