Friday, September 12, 2008

Brazil Shines in a Dark Global Economy

"Brazil Raises Rate to 13.75%, Highest in Two Years (Update 1)"
"Brazil Stocks Rise on Commodities Rebound; Mexico's Bolsa Drops"
"Morgan, Goldman, Deutsche Say Brazil Stocks are Cheap (Update 2)"
"Lula Achieves Record Approval Rating of 64% in Datafolha Survey"
"Mexican Market Has Tried but Still Lags" Wall Street Journal
BM&F Bolvespa Official Site

Brazil's $1.3 trillion dollar economy is one of the few bright spots in the global financial world today. Brazil has been enjoying strong economic growth, despite the current global economic downturn. During the second quarter, Brazil exceeded general growth expectations when its gross domestic product increased 5.9 percent from the previous quarter. Brazil's Central Bank President Meirelles stated, "Brazil lives today a sustained growth cycle, supported by price stability." While other countries cut interest rates to spark growth and investment, Brazil's central bank has recently raised benchmark interest rates to the highest in almost two years, from 13 to 13.75 percent. The bank hopes that higher rates will cool accelerated growth and curb inflation.

Brazil's performance is certainly atypical. For example, six years ago, the Mexican and Brazilian stock markets were roughly the same size. Today, Brazil's market is more than triple the size of Mexico's based on the value of companies listed. Brazil's larges stock exchange, BM&F Bovespa, has become the largest stock exchange in Latin America. Much of the stock market growth is attributed to Brazil's Novo Mercado ("new market"). The Novo Mercado is a listing of shares issued by compaines that voluntarily abide by corporate governance practices and transparency requirements beyond those required under Brazilian law.

Perhaps it is no surprise that Brazilian President Lula currently enjoys record approval ratings, which rose to 64 percent in September from 55 percent in March, according to Datafolha, a Sao Paulo-based polling company. Datafohla explained that this is the first time Lula has won approval from the majority of the population, across all social, economic and geographical sectors.

Of course, the future is not all rosy for Brazil. BM&F Bovespa has dropped nearly 20 percent this year, declining commodity prices threaten Brazil's export revenue, and inflation is a continuing concern. Yet major investment banks, including Morgan Stanley, Deutsche Bank and Goldman Sachs, encourage investment in Brazilian stocks. These banks say Brazilian stock have become cheap after the 20 percent decline this year. Goldman Sachs added that Brazilian stocks are the cheapest in the Americas when comparing estimated earnings for the next twelve months.

Is Brazil's growth sustainable in the face of falling commodity prices?
What lessons does Brazil offer to other Latin American countries?
What should be next in Brazil's economic development strategy?

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