Tuesday, July 3, 2007

Brazil: Good Policies with a Bit of Luck

Lars Rasmussen, from Danske Bank, praises Brazil’s macroeconomic stability. The growth in 2007 is based on an increase in domestic consumption as well as favorable external conditions. The external position has improved with a strong trade surplus, increase in international reserves and decreasing external debt ratio. In his view, the currency is being supported by the ‘strong current and financial accounts’ and not by the Central Bank intervention in the FX markets. Rasmussen praises that inflation has fallen and remained low, paving the way for expansionist monetary policy. It seems that the conservative monetary policy is reaping its benefits. This is so because inflation tends to remain at low levels which allows the Central Bank to decrease interest rates even more.

As long as external demand remains buoyant, the fact that exchange is overvalued is not a major problem. However, the fact that the Brazilian Real is still seen as a risky asset the main fear is an eventual flight to quality.

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