Can Brazil Maintain Economic Growth?

By Doug Gray, Senior Contributing Reporter

RIO DE JANEIRO – With President Lula still riding the wave of unprecedented popularity as his second mandate slowly draws to a close, it is not unreasonable to wonder whether the source of much of that popularity – Brazil’s undeniably impressive economic growth over recent years – will continue beyond his successor’s “honeymoon” in early 2011. How clear front-runners Dilma Rousseff or José Serra handle the possibility of an economic slump that could loom in the distance may dictate their entire legacy as President.

Government spending has been key to much of the growth since Lula came to power, taking advantage of the sound economic footing bequeathed to him by Fernando Henrique Cardoso. The knock-on stimulus throughout the country of such spending has induced frequent use of words like “resilient” and “robust” in relation to an economy that had for a long time been considered risky and volatile.

Abundant credit for a spend-happy emerging lower-middle class, rocketing property prices and an avoidance of the worst of the global financial crisis have taken Brazil to an enviable position of continued growth, but still the question remains: is it sustainable?

In a bid to tighten the reigns on lending and slow the current boom conditions, the Brazilian Central Bank recently raised its SELIC interest rate (the overnight rate of daily financing guaranteed by the federal government) by 0.75 percent to 9.5 percent. Analysts predict this is only the beginning of a series of hikes set to continue into 2011.

The negative impact on the burgeoning domestic mortgage market could be strong, and with overseas investors now balking at inflated prices and less attractive exchange rates, it would be of little surprise if there is at least a leveling off, if not significant fall back in property values in all but the most exclusive zip codes.

Last week Luciano Coutinho, the president of BNDES, the Brazilian Development Bank whose own interest rate has dropped from nearly ten percent in 2005 to six percent in April this year, told a seminar in Madrid that he believed it was necessary to further increase financial tools for the good of the country. The bank is preparing to foot the bill, already into the billions of reais, for the 2016 Rio Olympic Games, but the levels of spending can surely not be sustained with the country face spiraling inflation.

Coutinho told the press on Friday, “We need to moderate Brazil’s economic growth a little to reduce the impact of the European economic crisis on the country” and thus lessen the impact of a potentially major decrease in exports to that region.

The state’s role in the private sector has continued to increase this year too, and while this helped steer the country through the recession as global investment monies dried up, is is questionable whether the increase will continue to be necessary. The notorious bureaucracy itself could suffocate growth, and it is precisely that inefficiency that has plagued Brazil’s financial systems in the past, leading it to hold the defunct but commonly-cited “country of the future” tag for so long.

Fortunately the boom is built on solid foundations – abundant natural resources and a huge market in China for exports rather than a web of bonds and bad debts. Rousseff has been uniquely placed since her arrival as Lula’s “deputy” to witness the continuation of Brazil’s economic strength, but it will not be long until we see, should her chance arise, if she will be able to maintain the policy of “as we were” in matters of this complex and vast economy, and whether Brazil will pay the price for gambling on short term gains at the expense of its future financial health.