The problems affecting financial systems in the United States and Europe have still had little effect on Brazil which is experiencing the best economic consitions for years with rising growth, higher employment, a solid trade balance, a strong currency, high foreign reserves and the prospect of obtaining investment grade this year. In this interview, one of Brazil´s most respected economists, Odair Abate, who is chief strategist at Santander Private Bank, talks about why this has happened and  why he believes Brazil´s achievements to date are here to stay and reveals that foreigners now beliew the "B" has returned to the "BRICS".

Odair Abate: Brazil´s good economic fundamentals and the strong level of activity which can be been seen in other economies with a similar GDP mean it is now in a stronger position to cope with any recession in the United States. However, it is clear that in a globalized economy some impact is likely to be felt both in the real economy, with the weakening of world trade, as well as in the financial area, with the rise in risk aversion. On the other hand, the impact should not be as strong as we were accustomed on other occasions before the stabilization of the Brazilian economy, the improvement in the public and external accounts, as well as the political risks which worked against the country in the past.
 
Do you think the US is heading for a recession?

Abate: The signs are raising concern and are pointing to a strong decline in activity in the first quarter. However, it is not certain that there will be a recession. The aggressive monetary policy implemented by the Fed, the fiscal measures, albeit modest, considered by the Bush government and the greater efficiency in the management of inventories by companies have created an impressive array of elements to prevent or weaken the strength and duration of any recession.
 
What are the main problems which could appear in Brazil if there was a recession in the US?

Abate: The reduction in commodity prices, the cooling of world trade and greater risk aversion by global investors are the main problems. Generally speaking, even though the Brazilian economy is much better prepared to take on an adverse situation like this, we would probably see a decline in the level of domestic activity and more unstable financial markets. Both would have a negative effect on the consumer confidence indices and probably those of the investors. However, there is nothing that could reverse the positive trend we have seen over the last few years in the long term. Although a lot still needs to be done, Brazil has done its home work and the gains it has made are irreversible as far as I am concerned.
 
Do you foresee any chance of interest rates being increased this year?

Abate: I hope not! The international crisis could have a mild dampening effect on the domestic economy which would help maintain inflation below the target for the year of 4.5%. At the same time is highly unlikely that the exchange rate will perform differently from the way it has in recent years, with all the changes on the international front. This is because any increase in the differential of Brazilian interest rates encourages the entry of strong currency into the country and offsets the fall which we should see in the trade balance, as does the expansion of direct foreign investment. On the other hand, the Central Bank is faced with an expanding economy and usually takes a more conservative stance, in line with its official duties. I believe interest rates are already at a sufficiently high level but we need to watch the signs given out by the Central Bank.
 
Could you give us your projections for this year – GDP growth, inflation, exchange rate etc? Are there any areas where you differ from the market consensus?

Abate: Our main forecasts are: GDP - 4.2% (market consensus = 4.5%); IPCA index - 4.2% (market consensus = 4.5%); and R$/US$ - 1.65 (market consensus = 1.80). There is a slight difference in terms of GDP and a moderate difference for inflation. We are more aggressive than most market observers in terms of the exchange rate since we believe that international crisis will be overcome fairly quickly, the attraction of the differential in terms of interest rates, productive foreign investments, and the chance of Brazil obtaining investment grade this year (which potentially have a positive effect on appreciating the currency). Why then do we not believe that there will be a greater depreciation of the Real against the dollar? Because the Central Bank should continue to buy dollars in large volume.
 
Is the economy in danger of overheating due to rising activity, high demand and easy credit?

Abate: We are not using to see Brazil growing for more than two consecutive years. The weakness of the external accounts, which holds back the increase in imports, the lower size of productive investments and the “doubtful" fiscal numbers, rapidly demand tougher actions in the monetary field. This does not mean that all the problems have been solved and the risks of the economy overheating still exist. However the strangleholds are fewer today even though we should cannot forget the risks (energy, for example). It is worth highlighting the strong growth of the capital goods sector, which jumped by 19% in 2007, and helps to foresee a less uncertain future. Brazil may be now at a stage that the economy is ready to take off in a sustainable way for some time. However, it is obvious and worth repeating that investments in infrastructure are absolutely essential to prevent bottlenecks which are holding back growth in the long term.
 
When you talk to foreign clients what issues do they raise?

Abate: They are basically optimistic in term of Brazil. The “B” has returned to the BRIC, which had been transformed to the RIC for some time. They tend to see more risks in the international economy. The overcoming of the fears which still exist, despite the favorable climate, depend on a more solid fiscal structure and expansion of the productive infrastructure. Compared with the kind of fears which existed in the past, these are fairly weak challenges and can be overcome.
 
© John Fitzpatrick 2008