Weak Dollar Won’t Harm the Bottom Line, Says Brazil

Siemens of Brazil Hydrogenerator The minutes of the last meeting of the Brazilian Monetary Policy Committee (Copom) make optimistic forecasts about the Brazilian trade balance performance for this year. The document states that, even in the face of the appreciation of the real (the Brazilian currency) against the dollar, the balance of trade boasts a "robust performance," as exports are proving more intense than previously expected both by the government and by market analysts.

"Once again, the more pessimistic expectations will not come true in 2007, as the trade balance will once again record a positive performance," according to the minutes. The text goes on to say that the Brazilian trade balance surplus (the difference between a country's exports and imports) totaled US$ 20.6 billion by June, an amount 6.2% greater than recorded in the same period of the previous year.

In the first half of this year, Brazil exported the equivalent to US$ 73.2 billion, and imported US$ 52.6 billion. "Imports are increasing at a faster rate than exports due to the higher level of activity and the strengthening of the Brazilian real, which point to a healthy adjustment process in the balance of trade."

To the Copom, the growth in imports has been a strong ally to the policy of reduction in interest rates, because competition between goods manufactured in Brazil and imported goods helps to keep prices down, thus maintaining inflation under control.

Regarding the foreign scenario, the Copom maintains that "the beginning of a cycle of increasing monetary flexibility in the United States has been postponed to next year, therefore the basic interest rate in that country should remain stable for several months."

The possibility of an increase in the United States' interest rate is closely watched by the Brazilian monetary authority (Central Bank) due to the possibility of investment attracted to Brazil because of the country's interest rates – which are still high – being transferred to the United States, which in turn could disrupt the reduction trend for the Brazilian benchmark interest rate (Selic). The minutes show that, according to the Copom, the risk of new increases in the United States interest rates cannot be entirely ruled out.

"By the same token, the possibility of a stronger deceleration than expected in the United States economy cannot be discarded, especially if the effects of real estate sector difficulties on financial institutions and family consumption should prove more intense and widespread," the text warns.

The Copom acknowledges, in the minutes, that a higher level of economic activity in Europe and the expansion of large Asian economies have been sustaining global growth at a higher level than expected.

"The maintenance of growth rates at historically high levels in several regions has led to increased inflationary pressure, mostly – although not exclusively – in the cases of raw materials and foodstuffs, thus demanding monetary policy responses from various central banks," according to the text.

To the Brazilian Central Bank, the foreign context is still favorable, and contributes for the economy to remain in a growth cycle with stable prices.

ABr

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