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Brazil’s Bovespa is having another terrible day today, losing another -1.9%, trading down to 62,232 and adding to the concerns that are permeating bearish global equity market conditions.

As you can see in the chart below, Brazil remains broken from both an immediate term TRADE and intermediate term TREND perspective. Underneath the chart we have compiled Moshe Silver’s primarily translated local Press Notes from Brazil as of the last 48 hours. Local consensus is as local consensus does.


Brazilian Breakdown Continues - Bovespa

Brazil Press Notes – Sunday 16 May 2010

O Globo headline: “Lula will leave his successor a gross national debt of 64% of GDP, the largest in the last ten years.”

O Globo reports total public sector debt may rise to 64.4% of Brazil’s GDP by the end of 2010, the highest level in ten years.  The paper reports this is primarily attributable to a special loan program implemented since last year between Brazil’s treasury and the BNDES – the Brazilian Development Bank, and funded by bonds issued by the Brazilian treasury.  It is projected that Brazil’s public sector debt could reach R$2.2 trillion in December, or 64.4% of GDP.

Growth of public sector debt is in sharp contrast to Brazil’s external debt, reported at barely 3.4% of GDP.  This disparity has economists troubled, particularly in light of the current wave of credit miseries afflicting European nations.  There is concern that Brazil’s hard-won fiscal credibility is now at risk.

The 2009 global fiscal crisis opened the way for a radical change of approach by the Lula administration.  The accumulation of surpluses, which had reduced debt as a percentage of GDP, was replaced by a combination of increased expenditures, and an expansion of credit by increasing public indebtedness.

Commentary: Lula may be Brazil’s Jack Welch.  Having overseen impressive economic growth, and having fostered social programs that have improved the lives of millions of his countrymen, Lula may leave behind a nasty twin surprise as he steps down. 

First, the economy may turn out to be an absolute shambles.  This is not completely his fault, as he can not be blamed for the US and European financial crises.  (As the US economy was infecting its neighbors with the fiscal equivalent of AIDS, Lula observed in a global forum that the black and yellow and brown people of the world were now all going to suffer tremendous harm at the hands of white bankers.  “I don’t see any one among them with dark skin,” he said.  “They are all white.”)

The second nasty surprise may be just how intractable the nation’s drug and gang violence is.  While Lula insists that the violence is largely contained to well-known sections of the major cities – and that people will be all right if they stay in the right part of town – his administration doesn’t seem to have made a dent in the staggering level of violence.  The nation also reports 23,000 drug-related homicides a year, and foreign tourists have a nasty habit of turning up dead in the middle of downtown Rio and Sao Paulo.  It doesn’t take many reports of random violence to scare people away.  The nation has already fallen behind on its “ironclad” schedule to prepare stadiums for the World Cup.  The FIFA President made an offhand remark the other day about other countries being able to host the games on short notice – it was not taken as a threat, but things can change.  Two years out, Brazilians may regret not having replaced Lula after his first term.

Government Must Cut Spending

The government will have to cut public sector spending far more than the R$10 bn announced last week if they are to restrain growth in the economy.  Economists are now saying that the accelerated level of economic activity, and its attendant inflationary pressure, can only be contained by severely restraining public spending.  In order to cool off demand and bring down the price level, the government must withdraw liquidity from the economy, say economists.  In order for this program to be effective, economists say the additional budget cut must be at least R$30 bn.  The government has already implemented a budget reduction of R$21.8 bn this year, but this measure was accompanied by a reduction in receipts already foreseen for the period, which means the drop in revenues is preventing the budget cuts from having an effect.  The government just announced a further R$10 bn in possible cuts, but the budget is already set, and it is difficult to see where these cuts will be taken.

Last year, public expenditures were R$571 bn, of which barely R$19 bn were subject to cuts as being nonessential items.

The government is supposed to identify where further cuts will be taken.  The announcement is supposed to come by the end of this month.

The ex-director of the Central Bank observed that the European crisis will force the government to move more slowly in issuing bonds, which means the rate of deceleration in the economy will be less, complicating the situation into the year 2011.  Growth is projected at 7.5% this year, and the economy will likely be overheating going into 2011, with minimum projected growth of 5%, which will require still higher interest rates, requiring additional budget surpluses to service the debt.


Month of May Inflation Surprise 

General price levels rose more than expected for the month of May, due to a strong increase in wholesale prices.  The General Price Indicator (IGP-10) rose 1.11% in May, after a 0.63% rise in April, according to the Getulio Vargas Foundation.  A Reuters poll of economists had foreseen an increase of 0.78%, an average estimate based on a range of 0.7%-1.04%.  The reported figure is above the top end of the range of estimates.

The wholesale price index rose 1.34% in May, after advancing 0.51% in April.  The consumer price index rose 0.64% in May, versus an earlier increase of 0.80%, due to a cooling off in food price increases.  Food prices were up 1.12% in May, versus 2.58% in April.  The national index of construction costs, which was up 1.01% in April, rose 0.77% in May.


Brazil Press Notes – Monday 17 May 2010

Headline from O Globo: “Chinese Competition Reducing Brazil’s Africa Exports”.  The guiding principle of the Lula government’s foreign policy – South-South integration – risks a severe setback due to the interruption of trade and logistical cooperation between Brazil and African nations, particularly in the area of transportation.  The situation is seen as being exacerbated by an aggressive Chinese presence in the region, as Chinese purchase large tracts of land, and engage low-priced manual labor by offering competitive wages, depriving established Brazilian companies of contract laborers.

An alarm was sounded a few days ago when the April trade figures were released.  Brazil’s exports to Africa fell 32% versus April 2009, the only market to record a reduction.  In the first four months of 2010, trade declined 14.8%.  Brazil sold fewer automotive parts, machinery and equipment, cereals, iron ore and airplanes to African customers.

Welber Barral, Brazil’s Secretary of Foreign Trade, says Brazilian companies are losing important contracts in infrastructure projects to the Chinese.  “The data are somber,” he said.  “In 2009, China’s sales to Africa were US$50 Bn , corresponding to a third of Brazil’s total exports.  The Chinese have a very aggressive financing mechanism,” said Barral.

Keith R. McCullough
Chief Executive Officer

Moshe Silver

Chief Compliance Officer