Brazil’s growth goes negative in the third quarter–can the central bank and the government head off a recession?
Want to know what an economic hard landing of the kind investors fear in China looks like?
Just take a glance at Brazil this morning where a central bank determined to slow growth to fight inflation by raising interest rates has produced a drop in GDP of 0.04% in the third quarter from over the second quarter. Brazil’s economy has grown by just 2.1% in the last twelve months. That’s quite a come down from the 7.5% growth rate in 2010
The Banco Central do Brasil, fearing exactly this kind of overshoot started cutting interest rates in August—after raising rates repeatedly in the first half of 2011. The August cut of 0.5 percentage points was the first of three that has lowered the benchmark Selic rate to 11% from 12.5%.
The moves by central bank president Alexandre Tombini might have been enough to steer Brazil’s economy around a slowdown except for the additional braking effect from the euro debt crisis. Added to the effects of a more expensive real—which made Brazilian goods more expensive on global markets—the slowdown in European growth as an effect of the euro crisis clobbered Brazil’s exports and led to a flood of cheaper goods from China in the first half of 2011. Now that the Brazilian economy itself has braked Brazilian consumers have gone into a slowdown themselves. In the quarter the services component of Brazil’s GDP fell by 1.1%.
The government of President Dilma Rousseff has suspended a tax on foreign investment, and cut taxes on appliances, food staples, and consumer credit in an effort to get the economy going. And the government continues to call for 3% growth in 2011 and acceleration to 5% growth for 2012.
That seems unlikely given the contraction in the global economy produced by the euro zone crisis. Read more
(I’m on vacation until August 24. Until then JubakPicks.com will operate on a reduced schedule of one or two posts a day. I’ll resume the full schedule when I return.)
Forget about news that Petrobras (PBR)–one of the stocks in my long-term Jubak Picks 50 portfolio– has made a new oil discovery off Angola with at least 500 million barrels of oil. Or that it is beginning production from the Urugua off-shore oil field this week.
The only discovery that counts for Petrobras shares is what price the Brazilian government will charge the company for as much as 5 billion barrels of deepwater reserves in the deep, deep water pre-salt deposits off Brazil’s South Atlantic coast.
As part of a complex plan to finance the development of the offshore fields such as the apparently giant Tupi field that Petrobras has discovered but now needs to put into production, the government plans to sell Petrobras 5 billion barrels of reserves. The company will raise the purchase price for the reserves through a stock offering. The new reserves would then give the company assets that it could use to back the debt or equity financing it needs to develop these new fields. The cost of that has been put at $224 billion by Petrobras.
So, in essence, the price that the administration of Brazilian President Luiz Inacio Lula da Silva charges partially state-owned oil company will determine how much Petrobras has to pay to finance this development. Estimates in the last week or so range from $5 to $6 a barrel—or about $30 billion—to $8 a barrel—or about $40 billion.
A higher price for the reserves would make it harder for Petrobras to sell stock to cover the purchase price—since investors would be getting fewer barrels of oil for their money. That would increase the number of shares Petrobras would have to issue to raise the purchase price. And that would, in turn, increase the dilution suffered by existing shareholders as a result of the sale of new shares.
The government has had difficulty settling on a price and the share sale has been repeatedly delayed. On June 22 Petrobras delayed the sale of shares until September. That pushes the offering dangerously close to the October presidential election.
That increases the risk of more political intervention—which makes already nervous investors even more nervous. Read more
As headlines go yesterday’s “Brazilian economists raise forecasts for interest rate increases” is no “Dewey defeats Truman.”
But it is still downright misleading. If all you read is the headline, you’re likely to come away with a belief that the turn in Brazil’s interest rates is much further off than anyone expected and that the day to invest in Brazilian stocks has been pushed way out into the future.
Exactly the opposite is actually the case. Those pessimistic economists are just confirming a forecast that sees Brazil’s central bank ending the interest rate increases that are slowing the Brazilian economy and putting additional downward pressure on Brazilian stocks in December 2010.
Here’s what’s behind the headline. Read more
International credit markets may still be tight for companies in the developing world, but Brazil’s domestic bond market looks ready to pick up the slack. As of June 15 five Brazilian companies have bond sales worth $2.2 billion on tap. That’s a huge shift from the first half of June when no Brazilian company sold bonds because fears that the euro debt crisis would spread to Brazil had closed down the local debt market. No Brazilian company has raised money overseas since April 30, according to Bloomberg.
And where is this cash going? Into a continued expansion and restructuring of the Brazilian agricultural sector with an emphasis on exports of food and ethanol from sugar cane.
In other words Brazilian domestic investors are putting their money where the country’s strengths are. And that’s unleashed a spate of deals, financed by local debt or by companies that suddenly feel confident that they can tap the local debt market.
Some deals? Read more
The big picture, macro reasons for putting more emerging market stocks in your portfolio are compelling enough.
But you don’t need to buy into the top down macro argument. The micro, stock-by-stock reasons are just as compelling. Put a developed economy stock up against a developing economy peer and much of the time the developing economy stock is cheaper. Much cheaper. If you think that the way you make money in the stock market is to buy low and sell high, that’s a very convincing argument for emerging market stocks. Read more