Currency continues rebound
as Argentina contagion eases
Despite default and devaluation in Argentina,
the Real continued to appreciate strongly at the end of last year. In
September, the deteriorating investor confidence spillover from Argentina
had caused the currency to weaken by an annual rate of up to 30% against
the US$ and had driven the Real to 2.80 to the US$. However, in October
the Brazilian economy appears to have decoupled from the Argentine
contagion and the currency rebounded strongly in the last two months of
the year, appreciating 6.1% and 9.0% in November and December
respectively. As a result, the Real closed 2001 at 2.32 Real to the US$.
The strengthening of the Real has prompted participants to expect a
stronger currency this year with the Real closing at a level, which is
5.6% stronger than the forecast last month.
Lower interest rates and
easing of energy rationing to spur growth
A continued strengthening of the exchange rate
is likely to give the Central Bank leeway to ease monetary policy this
year. In its meeting on 19 December, the Central Bank board decided to
leave the benchmark SELIC interest rate unchanged at 19.0%. Monetary
authorities cited the favourable trend of a strengthened currency and the
likelihood of lower oil prices this year as key factors behind a more
favourable inflationary outlook for 2002. The prospects of declining
price pressures this year should enable the Central Bank to lower interest
rates, which would help to foment a pickup in economic activity.
Participants expect the monetary authority to lower interest rates in the
first quarter of this year and to continue easing throughout the year,
with the SELIC rate dropping further by year-end.
Growth to begin recovery in
second quarter of this year amidst improved credit environment
Aggregate supply and demand data for the third
quarter of last year indicate that the slowdown in economic activity – GDP
growth dropped to just 0.3% over the same quarter in 2000 – was prompted
by an abrupt deceleration in consumption. Private consumption suffered
the consequences of a deteriorating currency, higher interest rates and
energy rationing and dropped 3.3% over the third quarter 2000, which
represents a strong deceleration from 3.0% growth in the second quarter.
Imports declined a staggering 15.6%, down from a 14.9% expansion in the
second quarter. Additionally, the softening in the global and regional
economy also served to undermine export growth, which declined 5.3%, after
having grown a healthy 18.5% in the second quarter. Only investment
managed to exhibit positive results with 1.7% growth over the same quarter
in 2000, compared to 2.8% in the second quarter.
Participants expect the economy to have
entered a recession in the fourth quarter 2001. The meagre growth
recorded in the final two quarters of the year helped lower the annual
growth rate, which is seen to have reached much less than the 4.3% in
2000. Economic activity is expected to remain subdued in the first
quarter of this year but should begin recovering in the second quarter, if
energy rationing subsides and the exchange rate remains stable enough to
enable the Central Bank to ease monetary policy. Participants expect the
economy to rebound strongly in the second half of the year and to boost
the annual growth rate to 2.1%.