Economic growth in Brazil will fall toward two percent in 2005 says Jeph Gundzik, president of Condor Advisers, an investment risk analysis company based in Mammoth Lakes, California.
Gundzik’s latest research on Brazil begins by describing how the results of recent municipal elections have increased political risk.
“The local elections were a boon for the opposition PSDB. They were also good for Lula’s main coalition partner the PMDB. The result is a stronger opposition and weaker coalition.”
According to Gundzik, high political risk will be one of several factors weighing on Brazil’s economy in 2005.
The research continues with an analysis of economic growth risk.
“Contracting investment over the past several years has undermined the economy’s long-term growth potential. This is appearing now as strained manufacturing capacity, infrastructure bottlenecks and rising inflation.
“To maintain any credibility Brazil’s central bank will have to push interest rates much higher over the next six months. Economic growth risk is high as a result,” Gundzik says.
Gundzik details how this year’s strong private consumption growth cannot be maintained while inflation and interest rates are increasing.
“Private consumption is being fueled by credit growth. It’s unlikely that consumer credit demand will continue to grow as interest rates increase,” he says.
The research also describes the factors expected to push fiscal risk higher next year.
“Fiscal risk is misunderstood by investors because the accepted measures of fiscal risk are extremely misleading. For example, 40 percent of the government’s domestic debt must be rolled over in 2005, adding to upward pressure on interest rates.”
According to Gundzik, economic weakness will undermine the exchange rate. In addition, increasing foreign debt amortization next year will prompt a $10 billion reduction in Brazil’s foreign exchange reserves. “The real will depreciate in 2005,” he predicts.
Condor’s research has foreseen, according to the company, all the major emerging markets crises in the last 10 years including Brazil’s exchange rate devaluation in 1999 and Argentina’s default and devaluation in 2001.