beyondbrics

It has one of the world’s most popular presidents, the World Cup in 2014, the Olympics in 2016, and an economy that seems to have broken free of its crisis-ridden past. But now many think Brazil is now enjoying too much of a good thing.

Finance Minister Guido Mantego disagrees. “The Brazilian economy is not overheated. If by any chance it does overheat, we will be taking measures.”

Growing pains

The Brazilian economy has a trend rate of growth of about 4 per cent, but is ripping along at about a 5.5 per cent rate this year, the International Monetary Fund forecast this week. That difference may not matter while there is still spare capacity in the economy. But RBC Capital Markets forecasts the output gap will close by October.

Thereafter, a “red hot” economy, torqued up by public sector bank credit and a $500bn investment program, can only lead to “growing imbalances, asset bubbles and inflation with deep momentum that could be difficult and risky to correct,” RBC says.

Rates, going one way

The first test of Brazil’s willingness and ability to cool down the pace will come next Wednesday, when the central bank decides on interest rates. In a Reuters survey of 25 economists, 16 believe it will hike the key Selic rate by 50 basis points to 9.25 per cent; the rest that it will jack up rates by 75bps.

FDI overload

One further problem: higher Brazilian rates could suck in yet more foreign capital, pushing up the real currency, depressing exports, and open up a current account gap equivalent to almost 3 per cent of gross domestic product – a level last seen in 2002 when President Inacio Lula da Silva first came to power.

There are a few chinks in the Brazil story; that’s one of them.