Brazil, Brazil

The performance of Placido Domingo, Jose Carreras and Luciano Pavarotti, "Brazil , Brazil"  in 1994, in Roma.

As for this blog, I am not going to talk about opera or classic music(although that is a field that I enjoy a lot) Yet, some recent updates about Brazil really worth some attentions.

To start with, I would like separate BRIC into two groups of countries: I personally really do not like BRIC, or BRICS (with South Africa) as a combined concept. They are actually two types of very different economies: Brazil and Russia have a great share of GDP based on natural resources; while China and India has a strong focus on manufacturing and service industries. They are by no means alike.

Now, let's focus on Brazil:

1.) Brazil, the rise of natural resource super-power
This is the basic ideas of Brazil. Lots of people views it as a natural resource super power. Iron Ore, Oil reserves, corn (turns into ethanol), and soybeans. Overall, it exports everything that matters in our daily life. This week there is a news, regarding to recent GSCI commodity Index rise on Bloomberg.

It is quite fair to say, "When Brazil sneezes, the whole commodity world catches cold."

2.) Capital control and interest rate:
What's the major concerns for a export-oriented economy? Exchange rate!

As Brazil’s President Dilma Rousseff once mentioned as "monetary tsunami" as all countries, the developing or the developed alike, are competing to depreciate their currency.
So, they try to prevent capital inflows that could appreciate their currency. How?

2-1): Tax Measurements:
Impose capital tax on borrowing on foreign currency(6%), yet allow their exporter to hedge on such risk. This is pretty much what every countries are doing now.
2-2): Interest Rate:
Reduce the core interest rate(Selic rate), the key purpose of doing so is to reduce the speculative inflows that prepare to pocket the profit from the interest rate difference.
2-3): Open Market Operation: Brazilian central bank simply purchase U.S. dollar from the market.

3.) Latin America international organization:

IDB, Inter-American Development Bank, warns that now there is building up a crisis environment in Latin America. and they prepare to raise a contingency funds  that might help the region to shelter some key sectors from possible crisis hits. These sectors are social development, public infrastructure, and SME enterprises.

From all of these, several things come to my notice:
1.) Inflation and Interest Rate:
As for Brazil now runs an inflation rate of 5.8%(12 months from Feb, 2011 to Feb, 2012), given their 2011 GDP growth of 2.7%, Brazilian economy now really in a shaky status. To run a interest rate cut and a pro-export exchange rate is quite danagerous.

I still recall, in later 2009, I had this discussion with my professor back then, talking of the possible effect of appreciation to curb on the inflation rate. How it was reported by Bloomberg regarding to India's choice to appreciate their currency. However, such measure might not be suitable for Brazil since they are actually the exporter of natural resource rather than the importer.

My guts feeling tells me that, Brazil might fall to the similiar case as other natural resource exporters. They has the resources, yet they only export such ingredients. The fortune they sit on prevent them from build up the capacity to transform these resources into more valuable products. Take oil for exapmle, they pump oil from the sea, however, they lack the capacity to refine oil locally. Therefore, the major profit of owning such resources would still be pocketed by other international companies. (that happens in Mexico) They end up buying more expensive, refined oil product abroad.

To shake off such reliance, they might need to swift their economy focus. Such things are yet seen to be initiate.

2.) Domestic consumptions and big games:
Brazil is going to host 2014 world cup and 2016 summer Olympic. What does it mean? It means there is a great number of construction will be needed along the way. Actually, it is a prefect timing for Brazil to foster their local capacity on industrial goods. In that sense, they could build up their own sustainable domestic economic force rather than relying on export.

3.) Investment decisions?
I actually just urge my family and friends to clear up their Latin America holdings. The exit decision merely reflects the increase of uncertainty and a good timing to take profits. yet I am still optimistic about the development of the region. Brazil is certainly a place shall deserve a great attention of world capital.

Disclaimer:  The article, and related links, are only express the views of the news agnecy and the blogger. People who read this article has to reach their own investment decision.