MORNING BID – Only a dream in Rio
Among the BRIC nations, Brazil’s the one that’s been repeatedly whacked with a brick in the last couple of years, seeing its currency depreciate and its stock market trashed as it steadily ratchets up interest rates to an expected 10.25 percent this evening (or perhaps even 10.50 percent).
Most emerging nations were hit hard in the last year as the Federal Reserve announced it would start changing its strategy toward reduced bond buying, which will reduce some liquidity among dealers and result in less cash sloshing around in the vast ocean of world markets.
The last year was a rough one for Latin America overall, with most major averages sinking anywhere from 25 to 35 percent, but Brazil was in the unlucky position of already being kicked when it was down.
The MSCI Brazil Index now posts just a 4.1 percent return (annualized) over the past five years, which compares unfavorably with the other BRIC giants of China, India or Russia, to say nothing of Indonesia, Korea, Mexico or Peru.
So like Joe Btfsplk of the Li’l Abner comic, always walking with a dark cloud following him around (nobody got that reference to a Depression-era comic strip? Ok, never mind), Brazil has been faced with the poor choices of letting inflation get out of hand or continuing to try to pull a Volcker-style situation out of one’s hat, breaking inflation’s back in a way that somehow still results in things getting better later.
The IPCA consumer price index rose nearly 6 percent in 2013, as price increases have outpaced expectations for four years running (economic predictions in Brazil being about as accurate as they are in the United States).
Optimism in Brazil has dimmed of late, falling for the first time since the 2009 global financial crisis, according to public polling firms there.
The inflation problem is likely to get worse, according to Brown Brothers Harriman researchers, who said controlled prices were up just 1.5 percent in 2013 – meaning all other prices rose at more than a 7 percent clip in that year – adding “it’s likely that the pass-through impact from the weaker currency has not yet shown up fully in the numbers.” So, they’re forecasting a bump in the Selic rate to 10.5 percent from 10 percent, rather than the half-measure implied by a quarter-point hike.
Whether that brings back investors is another story: Latin American flows have been weak all year, according to Lipper data. The region hasn’t seen steady inflows since 2009, and that didn’t change in 2013, with more outflows.
The weakening real and slipping equity market would seem to provide an opportunity – this is, after all, the world’s seventh largest economy, as the World Bank says.
Years of rapid growth, though, have given way to the more recent 2 to 2.5 percent rate of growth, fine for a fully developed economy like the US (ok, it’s not, but work with me), but not so much for a faster-growing nation, and 2013 saw more than $12 billion in net forex outflows, the worst in a decade.
With Brazil’s current account deficit large and growing ($54 billion at the end of 2012, ranking it seventh worldwide), if sentiment turns even further from emerging markets, it’s Brazil, already getting hit this year, that could get it worse.