Abruzzese, stated that Brazil has been exporting with better prices, but specially to Argentina, Colombia, Mexico and China what may generate risks because these countries sell to the USA, therefore, Brazil ends up suffering the consequences. The impact, however, shall not be too severe, once that Brazilian economy is much more diversified.

Following, the whole article as published:

HIGH INTEREST RATE THREATENS GROWTH, SAID ANALIST

Date: 20/Apr/2008
Newspaper: FOLHA DE S. PAULO – SP
Editorial: DINHEIRO
Main subject:
RELATED SUBJECTS

To the Economist Intelligence Unit Director, Brazilian Central Bank is running the risk of cooling down the economy more than what would be desirable
According to him, the recession in the USA may affect other economies such as China and India and reduce pressure over the prices of commodities.

DENYSE GODOY
FROM LOCAL REPORT

Although the Brazilian Central Bank is correct in acting towards the prevention of an uncontrollable inflation rate, it is necessary to be very careful with the scale of increase in the interest rate in order not to terminate the growth cycle in which Brazil has entered in the past few years. This is the opinion of Leo Abruzzese, editorial director to the Americas of Economist Intelligence Unit, a consulting company, research branch of the group responsible for the publishing of the British magazine "The Economist". Next, read part of the interview granted by Abruzzese to Folha de São Paulo.

FOLHA - Generically, the beginning of a recession period is defined as two consecutive trimesters with retraction in the value of the IGP (Internal Gross Product), what has not happened yet in the USA. Still, you state that the recession is already present over there. What are the signs that convinced you of that?

LEO ABRUZZESE – Recession has been on its way for some months now. It started with the default in the real state area and got worse when problems started to reach final consumers. In the USA, the expenses are responsible for 70% of the activity. With the decrease of housing prices, they remained with less money available to buy. Now, the crisis has reached the labor market, the most important sign of retraction. Recession shall last until the end of 2008 or the beginning of next year.

FOLHA – What are the consequences of this situation to Brazil?

ABRUZZESE – Probably they shall not be as severe as they would have been ten years ago. The connection between the USA and emerging countries has weakened because the growth of the last is based more in the internal market than in exportation. External sales also help to explain the over 5% growth in Brazil in 2007. Being a great producer of commodities, the country is selling a lot to Asia. This year, the growth may slow down to about 4.6%, exactly because the exporting market will not be so good. The country shall suffer the effects, but it will no be a hard strike.

FOLHA – The perception that the consequences may not be so severe this time has made a part of Brazilian businessmen adopt an overestimated optimism, believing that the decreasing of the Sales to the USA may be easily compensated with the commerce with other Latin American countries. Is this vision correct?

ABRUZZESE – According to this conception, Brazil and other countries are supposedly disconnected from the USA. It is partially true. It is possible for Brazil to sell more to Argentina, Colombia and Mexico replacing the USA. However, Brazil also exports a lot to China, which will slow down due to the USA retraction, since they sell a lot to the USA as well. It is dangerous and wrong to say that the American recession will have no impact at all or that this impact shall be minimum, because it affects other nations that interact with Brazil. It will have an impact, but at a smaller scale, because the Brazilian trade balance is more diversified.

FOLHA – Some specialists have stated that more than the risks of a recession in the United States, inflation may be a great problem in emerging countries. What are the risks to Brazil?

ABRUZZESE – The high interest rate, for a long time, has prevented the economy to grow. Now the Brazilian Central Bank is starting to raise the SELIC (Brazilian basic interest rate) again because they don’t want to let the inflation rise – that is their responsibility. Knowing that the general public gets more nervous in relation to their country when there is a threat of higher prices, since Brazil has a History of hyper-inflation, the Central Bank raises the interest rate to send the message that they are vigilant to the situation. However, in these procedures, the growing cycle in which the country is in may be interrupted. The inflation we witness are provoked by the increase on the prices of the commodities, due to the increase of the demand in Asian countries. If the world economy slows down with the recession in the USA, China will follow and India too, what would moderate the inflationary pressure.

FOLHA – So, domestic demand is not an issue as source of inflationary pressure?

ABRUZZESE – Considering that monetary policies take a little time to be effective, the cuts in interest rate performed last year are yet to be felt, in what demand is concerned, until the end of second trimester. There may be still some pressure. However, it makes no sense imagine that the inflation will raise a lot if the economy in Brazil and in the rest of the world is slowing down.

FOLHA – Financial market expects the SELIC to reach until 1.5 percent over the present value until the end of 2008. Do you think that such increase is reasonable?

ABRUZZESE – The Brazilian Central Bank is being very conservative, what is good, they have to be. But 1.5 additional increase is a lot, it is too much. The monetary authority knows that the world economy will slow down. The Central Bank must look ahead, not behind. Na increase of 1.5 percent would have the effect of cooling down the economy more than what would be desirable.

FOLHA – In long term stabilization trajectory, are such adjustments expected?

ABRUZZESE – Of course. Brazil is definitively in the right direction. However, if the country wishes to someday grow in a strong rhythm, the path shall be lowering the interest rate. If this rate remains in the 14% zone, the country will never accomplish its full potential.