Brazil going through the growth pains

Brazil: growing pains need tough treatment

Published: March 29 2011 19:08  – Financial Times

Brazil, the enfant terrible of the global economy, is growing up fast. But the speed of its growth has led to confusion and, occasionally, serious policy mistakes. And when the country’s finance minister complains, repeatedly that Brazil is at “war” to keep its currency under control, it sounds petulant.

The growing pains are sharp. Booming consumer credit growth combined with lax government spending pushed the inflation rate above 6 per cent in February, the highest annual rate since 2008. But a new round of monetary tightening –benchmark rates are now pushing 12 per cent – continues to make returns irresistible to foreign investors. Currency inflows in the first three months of 2011 already exceed all of last year, according to The Economist Intelligence Unit. Hence, the real keeps rising. The result is a surge in imports and pressure on domestic producers and exporters.

In response, on Tuesday yet another tax was introduced to try to cool it: now local companies are being told to pay 6 per cent on international loans and bonds with an average minimum maturity of up to 360 days. This effectively raises their cost of capital, and is supposed to put a dampener on lending. It should work at the margin. Last year’s tax hikes on foreign buying of fixed income securities changed the composition of currency inflows, notes Goldman Sachs.

But ultimately such tinkering is beside the point. Put simply, Brazil needs to grow up. The public sector should shrink (state banks account for half of the financial system) and spend more wisely (public investment isonly 2 per cent of output). Labour and tax reform is needed to make domestic companies more competitive. It is all part of the growing process for all develop ingnations. The teenage prodigy has ridden the commodity horse admirably. An adult will find it easier to dismount.

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