Following the financial crises of 1999 and 2002 and the adjustment recession of 2003 Brazil’s economy is back on the scene. Industrial production and above all exports are heading up again. This is the conclusion reached by the economists at Allianz Group and Dresdner Bank in a Working Paper. Behind booming exports is the sharp depreciation of the real in 2002 which, despite a modest recovery in the exchange rate, has boosted the country’s international competitiveness. In addition, Brazil has made inroads into the booming Chinese market, above all with its farming products, and high commodity prices have also provided additional revenue.
Brazil is back!
Brazil’s foreign currency position has rarely been as comfortable as it is today. Both government and central bank are pursuing a targeted buildup of foreign currency reserves which, together with the improvement in the current account, is aimed at isolating the country from external shocks and shielding it from volatile South American capital flows. If the country is spared financial crises going forward, this will boost the country’s growth potential. Brazil’s real GDP could see annual average growth of 4.5 % in the medium term. Yet more dynamic growth is likely to be foiled by the relatively low level of domestic savings.
The government managed to maintain the high primary surplus in the state budget and intends to do the same this year. But spending cuts have largely been at the expense of government investment and this is now leading to growing infrastructure bottlenecks. Indeed, inadequately equipped ports are hampering exports. And scant progress is being made on the planned tax reform. Although income tax revenue is high compared with other emerging markets, it is fueled largely from tax payments from relatively few companies and private households.