Download Interview: Marcelo Carvalho, Chief Economist for Latin America

Interview: Marcelo Carvalho, Chief Economist for Latin America, BNP Paribas Bank
--“The Central Bank will have to act against inflation on the monetary side because the government
isn’t acting on the fiscal side.”—
Brazil is bucking global trends in a way that could compromise its growth and development for years to
come, according to BNP Paribas Chief Economist for Latin America Marcelo Carvalho. Persistent inflation
and deteriorating public accounts are problems not likely to be solved in the election year of 2014, he
contends. Carvalho recently spoke to financial sector reporters in São Paulo. Excerpts follow:

On GDP growth: “Brazilian growth will be lower in 2014 than it was in 2013. Brazil will be one of
the few such cases. While the rest of the world has low inflation and low interest rates, we will
continue to have an inflation problem necessitating high interest rates.”

On U.S. Federal Reserve policy: “Fed tapering will mean less investment money coming into
Brazil. Our capital accounts will deteriorate. China’s growth may be more modest than in the past,
meaning our exports will suffer. We’re forecasting 2014 growth of only 1.5%.”

On government accounts: “Brazil’s fiscal accounts have been deteriorating and that will
continue in 2014, an election year. Interest rates will continue to rise. The Central Bank will have
to act against inflation on the monetary side because the government isn’t acting on the fiscal
side.”

On threats to Brazil’s sovereign credit rating: “Brazil is two notches above investment grade
so we could survive a downgrade. Investment would still come in. Fiscal accounts are the key to
Brazil’s sovereign rating and fiscal accounts are deteriorating. A downgrade is a distinct
possibility in the next few months.”

On demand and imports: “Brazil has a supply side problem. We’re relying on imports to fill gaps
in demand, but that is now producing a larger and larger current account deficit. We have hit the
limit for utilization of our own industrial capacity.”

On the current account deficit and the Brazilian Real: “The current account deficit is going to
lead to further depreciatiion of the currency. We’re projecting R$2.60 to-the-dollar by the end of
2014. The election, meanwhile, will provoke uncertainties that will also tend to depreciate the
Real.”

On the threat from inflation: “We’re predicting 6.5% inflation in 2014. No one believes the 4.5%
goal is within reach. The composition of inflation is also a problem. It’s being kept down by
government-controlled prices. Real inflation is more like 7%. Sooner or later, pressure will rise to
adjust those government-controlled prices.”
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Top News of the Week
World Bank shows Brazil lagging global economic growth in 2014 and 2015. Brazil’s economy will
grow this year and next but inflation, high interest rates and the need for massive new investments will
mean a lag against global and emerging-country growth, according to a World Bank report last week. The
bank sees Brazil’s economy growing this year by only 2.4%, falling behind the global level of 3.2% and far
below the average of 5.3% among emerging countries. In 2015, the picture will not be much different, with
Brazil expanding 2.7% but the rest of the world averaging 3.4% and emerging countries 5.5%. Heavy
investments in infrastructure, ahead of the 2014 soccer World Cup and the 2016 Rio de Janeiro Olympics,
will only begin to pay off in 2016, according to the report. That year, Brazil could see growth of 3.7%,
higher than the global average of 3.4% but still lagging emerging-country peers, which should expand at
an average rate of 5.7%. High interest rates needed to curb inflation, currently 5.9%, will crimp investment
and growth, the report said. Brazil will also be hurt by a burgeoning current account deficit, which could hit
3.7% of GDP this year, scaring off foreign investment.
Central Bank hikes base rate to 10.5%, signaling more increases to come. The Brazilian Central
Bank last week raised its base interest rate by a half percentage point to 10.5%. In a unanimous decision,
the bank’s monetary panel signaled that more rate hikes may be in the offing as the institutions struggles
to tame inflation. Brazil ended 2013 with inflation of 5.91%, higher than the 2012 figure of 5.84%.
December monthly inflation was especially worrisome, weighing in at 0.92%. Inflationary pressures are
likely to continue in 2014. Brazilian fuel prices, controlled by the government, are out of synch with global
trends. The depreciation of the Brazilian Real against the U.S. dollar is making imports more and more
expensive. Government spending will be pressured in 2014 by the soccer World Cup in June and by
general elections in October. The current round of monetary tightening is one of the longest on record.
Rate hikes began in April of 2013, when the base rate was at an historic low of 7.25%.
Argentine group purchases Eike Batista stake in key semiconductor venture. Argentine
conglomerate Corporación América last week purchased a 33% stake in Brazil’s SIX semiconductors.
The Argentine group bought the stake from troubled Brazilian billionaire Eike Batista for an undisclosed
sum. The balance of shares in SIX is held by Brazil’s National Development Bank (BNDES), which is
helping finance the construction of a semiconductor plant in Ribeirão das Neves in the state of Minas
Gerais. The plant is slated to cost $560 million and will begin production in 2015. The SIX semiconductor
factory will be Brazil’s first. The BNDES has given a high priority to the project, considering
semiconductors as a critical element in upgrading the quality of Brazilian technology and manufactured
products. The Argentine company is already active in Brazil through partnerships in airport concessions.
Government introduces new, nationwide unemployment survey. Brazil’s government last week
introduced a new, nationwide unemployment survey. The National Household Survey will be released on
a quarterly basis and will include more than 200,000 respondents in 3,500 municipalities. The existing
Monthly Unemployment Survey includes only 45,000 respondents in Brazil’s six largest metropolitan
areas. During the course of 2014, the government will release both surveys. In 2015, it will drop the
monthly survey. Both surveys are conducted by the Brazilian Census Bureau (IBGE). In its first release of
the new survey, the IBGE said average nationwide unemployment in 2012 was 7.4%. That was higher
than the average rate of 5.5% shown by the more limited monthly survey in 2012. Economists said the
new survey will consistently show higher rates of unemployment because it includes economically
underdeveloped small towns and remote rural areas. The new survey also showed average
unemployment in the second quarter of 2013 at 7.4%, higher than the 6.2% rate shown by the monthly
survey.
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Business News
Investment News:
Brazilian conglomerate Ultra last week announced its 2014 investment plan, calling for
some R$1.5 billion, or 3% more than in 2013. The company will investment a little more
than half that total in its Ipiranga fuel distribution network. The rest of the capital budget
will go to units covering chemicals, natural gas and logistics. The company said it does
not intend to make any acquisitions this year.
Company News
French energy group Total will put as much as $2 billion into its Brazilian operations this
year, the company said last week. Some $300 million of that total will go to oil and gas
development. Total holds a 20% stake in the huge Libra offshore oil and gas prospect.
Partners include Shell and Petrobras. Total will also invest in petrochemicals and fuel
distribution, possible through acquisitions.
Brazilian Calendar
Friday, January 24, Brazilian Central Bank release of 2013 current account data, Brasília
Friday, January 24, President Dilma Rousseff speech at World Economic Forum, Davos,
Switzerland
Indicators
Foreign exchange rate: R$2.35 = $1.00
State-run energy giant Petrobras reported last week a 1.5% increase in its proven
reserves of crude oil and natural gas in 2013. Proven reserves rose to 15.97 billion
barrels of oil-equivalent (BOE). Reserves rose on new discoveries in the offshore pre-salt
region. Proven reserves are based on rigorous technical and commercial criteria.
According to petroleum engineers, actual Petrobras reserves could top 30 or even 40
billion barrels.
Brazilian retail sales jumped 0.7% in November against the previous month and 7.0%
against November of 2012, in inflation-adjusted terms, the Brazilian Census Bureau
(IBGE) said last week. It was the ninth month in a row for rising retail sales. The increase
in sales was led by supermarkets, furniture and electronics goods. The only losing
segment was data processing, which was hurt by higher costs due to the depreciation of
the Brazilian Real against the U.S. dollar. Economists said retail sales have remained
strong because of a sturdy job market.
Brazil’s utilization of industrial capacity continued to decline in November, despite
strong retail sales (see item above), the National Confederation of Industries (CNI) said
last week. Utilization dropped to 82.0% from 82.2% in October. Overall industrial billing
was down 1.8% against the previous month. Brazilian industry has stalled, despite strong
retail activity, because of competition from cheap imports. Brazilian consumers are still
buying, but they are not buying domestic products, economists said.
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