Brazil Implements Crisis-Management Strategies

Sources: The Wall Street Journal: Brazil Inflation Remains Tame, Opens Door for July Rate Cut; Chinaview.cn: Brazil Acts Swiftly Against Financial Crisis

Brazil now finds itself in a technical recession after experiencing two consecutive quarters of falling GDP. The country’s GDP contracted 0.8 percent in the first quarter from the fourth quarter, and 3.6 percent in the fourth quarter from the third quarter. In response to the global downturn, Latin America’s largest economy promptly adjusted its economic policies.

The basic annual interest rate (Selic) of Brazil’s Central Bank, which was 13.75 percent in January, stands at 9.25 percent—the lowest since its inception in 1999—after the bank recently slashed it by a full percentage point. Further, President Luiz Inacio Lula da Silva signed a law in January that established a 14.2 billion reais (6.4 billion dollars) sovereign wealth fund.

Banks, automakers, airlines, and construction firms have enjoyed tax breaks. A cut in the industrialized products tax triggered a recovery of production in Brazil’s auto industry during the first quarter of 2009. Thanks to the tax break, a record 271,494 new vehicles were sold in March, 17 percent higher than the same period last year. Car sales for the first quarter of 2009 also set record numbers at 668,314 registered sales.

Brazil has also encouraged banks to lend to the agricultural sector. Farmers and agricultural enterprises are projected to receive at least 15.8 billion reais (6.79 billion dollars) in loans this year.

When central bankers meet in July, the continued signs of quite growth in consumer prices thus far in June may usher in lesser reductions in interest rates. The country’s mid-month consumer price index, or ICPA-15, rose 0.38% through mid-June. Through mid-May, this figure climbed 0.59%. Moreover, through mid-June, the 12-month IPCA-15 figure fell to 4.89 percent, as compared to 5.44 percent through mid-May. The government’s target is 4.5 percent.

The meeting next month, on the other hand, may mark the floor of the low rates as central bankers look to the future, since the effects of these rates on domestics demand will not be fully realized until 2010.

Discussion Questions:
1) What measures might the Brazilian government enact to stimulate the economy as the central bank grows more conservative? How will inflation rates in 2010 affect the decision-making process?
2) How can Brazil work with other nations to pull from the global economic slump?