Brazil economy well-placed for election year swings

Tuesday February 23, 2010 09:17:17 AM GMT

BRAZIL-ECONOMY/ELECTION (ANALYSIS)

* Policymakers have more tools to contain volatility
* Macroeconomics have become more stable
* Uncertainty remains, but is not a looming fear

By Luciana Lopez

SAO PAULO, Feb 23 (Reuters) - Brazil's economy is better-positioned to weather election-year volatility than at any time in the recent past, buoyed by a more solid economic base and a greater range of policy tools.

In recent years, presidential elections such as the one slated for Oct. 3 brought wide swings in financial markets, including stocks and foreign exchange, even when the favored candidates were incumbents with well-known positions.

But stronger fundamentals and a wider range of economic tools mean policymakers have more options to preserve stability and contain fluctuations this year.

"The economy is more mature," said Alessandra Ribeiro, an economist with Tendencias consultancy in Sao Paulo. "There are instruments to deal with volatility, things we never had in the history of this country."

Among those tools are the country's now-considerable reserves. As recently as 2005, they stood at $53.8 billion.

But the central bank, under its current president, Henrique Meirelles, has aggressively bought dollars. As of Feb. 19 reserves totaled about $240.7 billion - the sixth-largest in the world as of December last year, according to the CIA World Factbook.

"In the last few years, Brazil has become a net dollar creditor," said Tito Cordella, lead economist for Brazil with the World Bank. "Now Brazil lends in dollars, it doesn't borrow in dollars."

Those reserves have been credited with helping Brazil ride out the global economic crisis. Latin America's biggest economy emerged from a six-month recession last year in the second quarter, well ahead of many more developed nations.

Brazil's growth last year helped draw investors even as other nations struggled. The benchmark Bovespa stock index <.BVSP> jumped about 83 percent in 2009, and the currency, the real , strengthened 34 percent against the dollar.

In contrast, the Bovespa lost 26.2 percent in 2002 through Oct. 27, when President Luiz Inacio Lula da Silva was first elected after a volatile campaign marked by doubts about the former union leader's ability to steer the Brazilian economy.

"There's no doubt it's completely different now," Cordella said. "I do not see much election year volatility."

PATH LAID IN 1990s

The groundwork for a more developed economy began earlier.
In 1999, when Lula's predecessor, Fernando Henrique Cardoso, was president, the market forced Brazil to devalue its grossly overvalued currency after it burned billions in reserves in a vain attempt to prop up the real.
The government then opted to let the real float to absorb shocks in the world economy and help control inflation.

"Under a fixed exchange regime, movements tended to be much more abrupt," Ribeiro said. "Under a floating exchange regime, they're a lot smoother."

That same year, the government began targeting inflation, using that mark as a guide when setting interest rates.
The Selic, the benchmark interest rate, reached as high as 45 percent in 1999. In contrast, last year, policymakers hacked 500 basis points off the Selic, and on Jan. 27 they held it at a record-low 8.75 percent for a fourth straight meeting.

Twelve-month inflation through January tallied 4.59 percent, well within the government's target of 4.5 percent plus or minus two percentage points for the year.
Those measures, among others, helped turn around a country long viewed cynically even among its own people.

Brazil's gross domestic product averaged 1.9 percent growth a year from 1987 to 1997, according to the World Bank. From 1997 to 2007, that average jumped to 2.8 percent.
While lagging emerging market peers such as China and India, those numbers are solid for Brazil.

In the most recent central bank survey of local economists, analysts pegged Brazil's 2010 GDP growth at 5.5 percent.

"The macro position is consolidated now," said Zeina Latif, chief economist at ING in Sao Paulo. "This reflects the value that Brazilian society has given to low, moderate inflation."
In September, Moody's became the last of the three major ratings agencies to stamp Brazil's sovereign debt investment grade, a nod of approval that seemed to seal the country's move into the ranks of more stable economies.
Moody's cited the high level of reserves and Brazil's swift exit from recession as among the reasons for the upgrade.

Yet uncertainty remains, especially as the presumed major presidential candidates -- Dilma Rousseff, of the ruling Workers' Party, and Jose Serra, of the centrist PSDB -- have said relatively little about their monetary or fiscal positions.

Each has indicated, though, that they are unlikely to stray far from the path laid in recent years. That is in marked contrast to past elections, which were seen as riskier.

"This is much less of a transformational election than in the past," said Geoffrey Dennis, Latin America strategist for Citigroup. "It's going to be relatively minor."