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Central
Bank tightens to stem currency deterioration and rising inflationary
expectations
The acceleration in the deterioration of the currency in the past couple
of months prompted the Central Bank to act decisively to tighten monetary
reins. In mid-October, the monetary officials raised bank capital
requirements to cover foreign exchange exposure from 75% to 100%, reduced
the limit on foreign exchange exposure for banks from 60% to 30% of net
assets and raised reserve requirements on demand, time and savings
deposits to 53%, 23% and 33% respectively. Finally, the Central Bank
decided to increase interest rates by 300 basis points on 14 October,
raising the benchmark SELIC rate from 18% to 21%. The Central Bank
justified the measure by claiming that the recent exchange rate
depreciation has led to deterioration in inflationary expectations and has
raised prices beyond the Central Bank’s target. In the regular meeting of
the Central Bank board on 23 October, monetary officials confirmed the
earlier rate hike. Participants anticipate that the uncertain trajectory
of the exchange rate and rising inflationary expectations are likely to
keep interest rates at their current levels for the remainder of the year.
The Consensus for the SELIC rate has been raised substantially from 17.5%
last month. Similarly, even though the incoming government is expected to
lower interest rates next year, the levels of interest rates are expected
to be higher than anticipated last month, as the forecast for the SELIC
has been raised by 1.6 percentage points in 2003.
Fiscal
balances on target
The accumulated primary fiscal surplus in September reached a record 47.6
billion reais, or 5.1% of GDP. The September result was well in line with
the target agreed to with the International Monetary Fund (IMF) under the
terms of the 15-month, US$ 30 billion stand-by agreement signed in
September. The government is now well positioned to meet the annual 3.75%
of GDP fiscal primary surplus envisioned for this year. Participants have
revised their non-financial public sector deficit forecast significantly
this month to reflect the improved fiscal balances. Panellists remain
optimistic that the new administration will abide by current fiscal
discipline and as a result the deficit is expected to remain unchanged in
2003.
Trade
surplus grows amid improved export performance
The strong depreciation of the past months is feeding through to healthier
external balances. Exports were up 29.4% in October over the same month
last year, while imports declined 10.3% for the same period. As a result,
the annual trade surplus continued to widen from US$ 9.2 billion to US$
11.2 billion – the highest surplus observed since November 1994. The main
reason behind the current widening of the trade surplus is the result not
only of a more competitive exchange rate but also weak domestic demand.
Participants anticipate the trade surplus to remain roughly at its current
levels, as stronger export growth is likely to be offset, in part by
weakening global demand. Nevertheless, participants have made a
significant upward adjustment to their forecast, with the surplus now
anticipated to reach US$ 11.1 billion, which is up from the US$ 8.7
billion expected last month. The improved trade scenario has also prompted
participants to slash their projections for the current account deficit
this year. Improved export performance is likely to raise the trade
surplus further next year. As a result, the current account deficit is
expected to narrow further by year-end.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Brazil. For more details please click here.
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