Brazil Braces for Gloomy Growth Figures

By: Jonathan Wheatley in São Paulo
November 29 2005
The Financial Times

Results of Brazil’s third quarter GDP show that there is not only a decline in growth, but also that the economic figures are worse than the second quarter. This result comes following eight quarters of consecutive growth, and is particularly devastating because of current scandals surrounding vote buying and illegal campaign financing.

This set-back might result in the relaxation of current financial policies in Brazil. Although these strict policies are what helped secure Brazil’s economic stability over the past three years, other ministers, besides the minister of finance, are eager to relax these public spending policies. Specifically, there is an ongoing dispute between the minister of finance and the minister responsible for coordinating and executing governmental policy.

The largest impacts on the Brazilian economy come from the Central Bank’s high lending rates to control inflation and the increasing strength of the Real, which went from R$3.50 to the dollar, to about R$2.20 in recent times. Additionally, there has been an increase in exports, especially to China. Exports are expected to produce a R$43 billion record trade surplus this year.

Ironically, the increase in the strength of the Real has led to a delay in manufacturing in Brazil. Due to the strength of the Real, it is now more expensive to build manufacturing plants and such in Brazil, than in other countries, such as China. Similarly, foreign companies aren’t as interested in investing in Brazil anymore because of the increase in costs to them.

Questions:
1) The relatively strong performance of the economy over the past two years has helped maintain popular support for President Lula, despite the public unease over the corruption scandal. How will this decrease in economic stability fare for the president?
2) Is it likely that we have another President Collor on our hands?
3) The Real Question is: As presidential elections approach, what effect will this have on Lula’s chance at re-election?