Brazil: it’s not for the want of stimuli

After a disappointing first quarter and without very good signs for the second, the Brazilian authorities are still looking for the defibrillator that can revive growth. The latest attempt consists of a new package of stimuli valued at 53 billion euros (133 billion reals), announced in August, and more are expected.

This new programme aims to take the Amazonian giant out of its economic lethargy based on an investment plan that will have financial backing from the National Development Bank (BNDES) but which will also involve the private sector via licences. This programme will be implemented over the next 25 years, although half the budget will be spent in the first five and licences will be granted in September 2013.

The plan is to lay more than seven thousand kilometres of roads and ten thousand of railway lines, including the already projected high speed train that is to link Río de Janeiro with São Paulo. Similarly, apart from the plan already announced, President Rousseff herself presented additional actions related to ports and airports.

If the new plan is implemented properly, it could result in huge benefits, although not necessarily immediately. Everyone knows that one of the greatest structural weaknesses of the Brazilian economy is its lack of good transport infrastructures and, although the measures announced are merely a first step in the right direction, they could lay the foundations for greater advances that are vital to boost potential economic growth in the medium and long term. Similarly, some of the infrastructures programmed are crucial to ensure that the 2016 Olympics in Rio are held without any great setbacks.

Nonetheless, in the short term, the stimuli planned on the monetary front will have a greater effect. At its next meeting at the end of August, we expect the Monetary Policy Committee to continue reducing interest rates with another reduction in the SELIC rate of 50 basis points, which would leave the official interest rate at 7.5%, a new historical minimum.

Price trends are not disturbing the expansionary nature of monetary policy too much: although year-on-year inflation picked up slightly in July, we expect it to remain relatively moderate until mid-2013, when we expect most of the recently implemented measures to become fully effective, pushing up inflationary pressure.

Nonetheless, in spite of the arsenal of stimuli implemented over the last year and those expected over the next few weeks, the Brazilian economy is more than likely to grow less than 2% in 2012 (we predict 1.6%). A figure that, like the medal tally achieved at London 2012, is quite disappointing for the next Olympic host and which, undoubtedly, must improve if Rousseff wants to assure her place in the 2014 elections.