Brazil: from swan to ugly duckling

It has been difficult for Brazil to change from an ugly duckling into a beautiful swan, economically speaking. The country might grow less than all the others major emerging markets which compose the BRICS’ economies (acronym for Brazil, Russia, India, China and South Africa).

The Brazilian central bank, in its quarterly inflation report today, announced a reduction in its growth forecast for 2012 while the bank increased its estimates to inflation. According to the bank, the forecast for inflation rose to 5.2% this year, from 4.7% in the June report. On the other hand, its forecast for Latin America’s biggest economy this year decreased to 1.6%, from 2.5% in June.

This means that the forecast for the Brazilian economy this year is lower than the 2.15% expected in the U.S. and 2.5% in Japan. After growing 7.5% in 2010 and 2.7% in 2011, the global slowdown has hit Latin America’s biggest economy hard and Brazil has been struggling to put its economy on track again. The country has the lowest growth estimate compared to its peers in the BRICS group.

Brazil’s central bank believes, however, the economy will heat up in the next months and the gross domestic product (GDP) should grow 3.3% in the second quarter of 2013.

In the last months, Brazil has been using all kinds of monetary instruments to revive its economy. Brazil’s central bank has been reducing interest rates sharply in order to fight against its economy slowdown. Over the past year, for instance, the government cut the country’s interest rate by 500 basis points, more than any other group of 20 nations. The Brazilian benchmark Selic interest rate is 7.5%, a historic low level.

The efforts to revive the economy, nevertheless, have been creating another problem: inflation. According to the Brazilian central bank, the efforts to revive growth through tax breaks and spending increases are contributing to inflation which reduces the room for additional monetary stimulus.

The central bank said the fiscal policy is moving from a “neutral to slightly expansionary position” and any future rate cut must be carried out with “maximum parsimony”. As a result, traders immediately reinforced bets that the Brazilian policymaker will not cut interest rates at their next meeting in October.

Brazil has to pay huge attention to prices’ stability since the country had a painful period of hyperinflation. In 1990, for instance, Brazil’s inflation rate was about 3000%. It is unquestionable that measures have to be taken by Latin America's biggest economy to revive its growth, but the price stability can't be jeopardized. 

BRICS millionaires lose ground

The slowdown in economy has impacted the number of millionaires in emerging markets, especially in BRICS (acronym for Brazil, Russia, India, China and South Africa).  According to a report elaborated by Wealth-X, the number of ultra high net worth individuals (UHNWI)—with a net worth of US$ 30 million or more—diminished 3.5% this year comparing to the same period last year.

In 2011, the number of ultra high net worth individuals in the BRICS countries was 26,465 while their richness was evaluated by US$ 4,410 billion. In 2012, the number dropped down to 25,545, and the total amount was US$ 4,075 (-7.6%). The report considers a high net worth individual who has more than US$ 30 million after accounting for shares in public companies, residential and investment properties, art collection, planes, cash and other assets.

The intensification of the Eurozone crisis has especially impacted Russia within BRICS. The total wealth in Russia suffered a drop of 14.8% while the number of high net worth individuals fell 11.3%

In China, the situation was not different: the total wealth decreased 6.8% while the number of millionaires shrank 2.3%. According to Wealth-X, the number of millionaires in China was impacted by three factors: the weaker Chinese GDP; the slowdown in property market; and the stock market, which has been performing poorly this year. The crisis has especially hit export-oriented economies, where the reduction in demand has impacted growth, says Wealth-X.

A similar trend has seen in Brazil, where the number of millionaires reduced 1.8%, while the total wealth dropped 6.5%. Europe’s sovereign debt crisis has eroded demand for exports from emerging economies, reducing the demand for commodities, which affected particularly Brazil’s economy. “As the impact reverberates along the global supply chain, commodity prices are likely to be constrained, contributing to slowing economic growth in Brazil for 2012”, says the report. During the measuring period, Brazil’s “GDP saw modest growth, however that was offset by the 10% decline in equity markets and the 31% devaluation in the Brazilian Real.”

In India, the total wealth amount suffered a drop of 5,7%. According to Wealth-X, the Indian equity markets—which declined by 8% during the measuring period—caused a significant impact on the local UHNW population while the Indian Rupee fell 25%.

South Africa was the only country within BRICS that has experienced growth in number of millionaires from 2011 to 2012: the number of UHNW individuals increased 8.3%. “Wealth-X projects that South Africa’s UHNW population will expand an average of 6.2% over the next five years driven by a surge in property and equity markets. Total wealth is expected to grow 12.4% in the same period”, says the report.

Globally speaking, the ultra high net worth population stands at 187,380 with a wealth of US$ 25.8 trillion. The combined wealth attributable to this segment shrank 1.8% from a year ago. According to Wealth-X, there are 2,160 billionaires globally. This group of billionaires, representing the top 1.2% of the world’s UHNW population, controls 24% of the total fortune attributable to the ultra wealthy. On average, these billionaires are worth US$2.9 billion each.

The United States leads in terms of real growth in UHNW population numbers, with 2,250 UHNWIs joining the ranks of the ultra wealthy. The combined total wealth of the American high net worth population has expanded by US$ 265 billion, despite the weakness in global markets and the tepid recovery within the U.S.

Canada is expected to see moderate growth in terms of millionaires, going from 2.5% in 2011 to 2.1% this year.

http://wealthx.com/wealthreport/Wealth-X-world-ultra-wealth-report.pdf

Will QE3 benefit the BRICS countries?

Today, the US central bank (Federal Reserve) announced a third round of the program called quantitative easing (QE3), which means the government will expand its holdings of long-term securities with open-ended purchases of US$ 40 billion of mortgage debt a month. The program is another attempt to boost the economy and reduce unemployment. The Federal Open Market Committee (FOMC)—a committee composed by twelve members where five of them Federal Reserve Bank presidents—also said the federal funds rate might be kept near zero through at least the middle of 2015.

Will the third round of the quantitative easing benefit emerging markets, particularly BRICS (acronym to Brazil, Russia, India, China and South Africa). This question has two possible answers, and both are correct: yes and no.

At the first moment, the QE3 program benefits emerging markets. As the American central bank will buy debts from commercial banks and other private institutions, it is inject money into the economy since banks will have more money to lend to companies. Entrepreneurs, in their turn, might invest to increase productivity reducing the unemployment rate. With more money circulating into the economy, part of them may have the emerging markets as a destiny, especially the largest ones.

Another benefit came from commodities. As the amount of money circulating into the economy will increase, investors tend to become more worried about inflation pressures. Then, they look for commodities, particularly precious metals such as gold, silver and cooper, to reduce their invest risks, and emerging markets are huge producers of such materials.

Commodities prices might rise also because the QE3 program is designed to benefit sectors like construction, housing and consumer staples. Approximately 98% of iron ore, for instance, is used to make steel and this material is used in construction. The major producer of iron ore is Brazil, China, Russia, India and Australia.

However, not everything in this history is a bed of roses. As the United States has been increasing the economy’s liquidity, one of the consequences is currency pressures, weakening the US dollar and strengthening the other currencies. So, emerging markets governments and central banks leaders can have to interfere in the market if their currency strengthens too rapidly due to surge in capital inflows.

As BRICS, especially Brazil, have been struggling to revive their economy, the QE3 program can bring more benefits than problems to the major emerging markets.

China: new stimulus bets

Place your bets. Will China announce new economic stimulus to boost economic growth? Will the world's largest economy and the biggest market between BRICS (acronym to Brazil, Russia, India, China and South Africa) be able to drive a recovery across the globe? What can be said for sure right now is the expectations for new stimulus to boost economic growth in China have been increasing around the world. 

The speculation has risen after the Chinese government announced last week infrastructure plans to build highways, waterways, urban rail and waste water treatment plans estimated in 1 trillion yuans (approximately US$156 billion). The Chinese government did not describe the investments as a stimulus package, but analysts say the measure signals a shift in policy.

Hope for new stimulus measures to boost Chinese economy has increased even more after the industrial figures released yesterday. China’s industrial production grew 8.9% year-on-year in August—the lowest result since May 2009, when the world was in the depths of the global economic crisis. Imports unexpectedly fell 2.6% in July as well, with softened domestic demand.

On Saturday, President Hu Jintao said the “underlying impact of the financial crisis is far from over”. To some analysts, this was another signal that the Chinese government is worried about the economic slowdown and has become open to resorting new stimulus measures. China's gross domestic product (GDP) expanded 7.6 percent in the second quarter of 2012 the worst performance in three years and the sixth straight quarter of easing.

After the infrastructure investment plan, it seems that Chinese policymakers might consider implementing more fiscal measures to support economic growth. Speculation is that the Chinese government will likely act soon, possibly even cutting interest rates.

The Chinese government has taken steps this year to stimulate growth by cutting interest rates twice in quick succession. The government also slashed the amount of funds banks must keep in reserve as ways to increase lending. In 2008, China carried out a huge 4.0 trillion yuan fiscal stimulus package to fight against the global financial crisis. 

Brazil GDP: nothing to celebrate

Brazil has reasons to worry about its economy. Last week, the Brazilian national statistics office reported the second-quarter gross domestic product (GDP), which expanded 0.5% compared to the previous year. The result shows the country had the worst second-quarter GDP growth between BRICS (acronym for Brazil, Russia, India, China and South Africa). 

While Brazil’s gross domestic product expanded 0.5 percent, China grew 7.6% at the same time. India, in its turn, expanded 5.5%, Russia’ GDP increased 4.0% and South Africa, 3.2%. This was the fourth quarter in a row that Brazil’s growth is lower than the other major emerging markets.  

Even the United States, which the economic crisis is still echoing, expanded more than Brazil. The American GDP grew 2.3% in the second quarter from the previous year.

It means that Brazil has a hard work to do to put its economy on growth track again. The good news, however, is that comparing to the previous three months, Brazil grew 0.4%, the fastest pace in a year. According to economists, this is a little evidence of recovery, but the recent measures to spur consumption might not be enough to ensure Brazil’s economy growth this year will exceed the United States one.

Brazilian central bank survey says GDP will grow just 1.64% in 2012. So, the forecast for the Latin America’s biggest economy this year is lower than the 2.15 percent expected in the U.S. and 2.5 percent in Japan. And given all Brazil’s infrastructure bottlenecks and structural problems, the government’s biggest headache might be soon not its growth but the fight against inflation.