Brazil Targeting 5.5% GDP Growth to the Middle of the Decade

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Macroeconomics

Brazil is the epitome of an emerging economy, a country in the process of rapid growth and industrialization. The economy is still heavily reliant on the export of basic products such as iron ore, steel, soy beans and beef, and may become a major oil exporter later this decade if recent deep-water offshore oil finds can be developed effectively. Yet at the same time the country is a modern manufacturer producing aircraft, electrical equipment and cars illustrating how its economy has matured in the last decade and hinting at the potential to come as growth further shifts from commodity exports to domestic consumer.

Spurred no doubt by the forthcoming presidential elections in October, the government has recently announced it’s PAC 2 program of infrastructure investments, following on from the poorly executed PAC 1 that ran from 2007 to 2010. The program states the country will commit to a R$958.9bn (US$534 bn) program of investments over the period 2011 to 2014. The biggest share of investment goes to energy, at R$465.5bn over the period. Second is support for a government program of subsidized popular housing, which will be a major boost to the construction industry, at R$278.2bn. Spending on transport gets R$104.5bn, with the remainder shared among areas such as urbanization, sanitation and electricity distribution according to an FT article.

In addition to laying out spending plans, PAC 2 makes projections for growth over the period. The government is forecasting growth of 5.5% over the four year period, not quite China or India but certainly better than OECD markets. Not all economists agree however, although some economists at Bradesco, a large private bank, are predicting 6% growth in 2010 others such as MB Associados in Sao Paulo are predicting 3.8% for the next two years. A growth rate of 6% would be close to the best Brazil has ever achieved in recent years and with the risk of inflation lurking in the background is hard to see. The central bank will decide next week whether or not to raise its target overnight interest rate from 8.75% a year. The rate, which fell from 13.75% between December 2008 and July 2009, is expected to rise to 11.25% by the end of this year.

Spending plans of this scale if fully implemented – and for a host of reasons not least of which could be insufficient tax revenues will in themselves act like China’s stimulus package channeling funds into metals intensive activities. Fortunately for those fearing a rise in inflation none are really consumption focused though, energy, housing and transportation are basic infrastructure areas needed by an industrializing country of Brazil’s size to meet growth ten years down the line. A large part of the energy investment may well go into off shore oil and gas fields benefiting both domestic and foreign oil firms but predominantly domestic steel producers. As always the devil is in the detail but setting broad spending plans is a first step. Brazil seems to be carrying their success in the last decade into the next with justifiable enthusiasm.

–Stuart Burns



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