Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Brazil Trys Some Old-Fashioned Capital Controls First

Currencies / Brazil Oct 23, 2010 - 09:09 AM GMT

By: Paul_L_Kasriel

Currencies

Best Financial Markets Analysis ArticleRichard Thies writes: With the second round of the Brazilian presidential election set for October 31st, we thought it would be a good time to focus on the country and steps the next administration can take to limit growing imbalances in the economy as well as the strength of the real. The election has gone mostly unnoticed by markets, in sharp contrast to the 2002 contest, but one need only look to the last few weeks to understand the importance of the vote.


The government has been one of the more vocal in the current 'currency-war' debate, viewing appreciation of the real as a detriment to exporters and the economy at large. Thus, in addition to using the traditional intervention method of selling reais in exchange for dollars (at a considerable loss on the yield differential), Brasilia has been experimenting with some less traditional methods. On October 4th, the IOF tax was increased from 2% to 4% on foreign investment in fixed-income securities only. The policy acts as a de facto tax on corporate issuers and simply funnels more of the foreign capital into equity markets. This had little effect on the value of the real and the impact it will have is distortionary. Just over two weeks later, that tax was increased from 4% to 6%. (Chart 1) This time, the real did see some depreciation, probably due more to concerns over policy uncertainty than actual fundamentals. The other stated goal of the IOF tax when it was first initiated was to increase the percentage of foreign direct investment relative to the potentially flighty portfolio investment. By this measure, the tax has had no visible impact. (Chart 2)


So how does this all relate to next week's election, you ask? It is our belief that Brazil has a tool at its disposal to counteract some real strength that would not need come with unnecessary distortions - fiscal restraint. The likelihood of this tool being used depends largely on the winner of next week's poll. Though the policy stances of the two candidates have not been well-flushed out, it is our view that Lula's handpicked successor, Dilma Rousseff is much less likely to reduce spending than her opponent, José Serra. In fact, we view a Rousseff victory to mean increased future government spending. Despite recent polls showing a narrowing between the two candidates, we continue to find it very unlikely that Serra will pull off an upset on the 31st.

Government consumption accounts for a large portion of nominal GDP in Brazil and the level has been steadily rising in recent years. On a real basis, we expect government spending to increase 4% this year. While it is hard to attack a government for fiscal profligacy when we only project a general government shortfall of 2.3% this year, the deficit only tells half the story. When it is taken into consideration that government revenues increased 14.77% y-o-y at the most recent reading, the government's fiscal stance becomes decidedly expansionary, as well as pro-cyclical.

To understand the pro-cyclical nature of the spending, consider that Q2 GDP figures showed an 8.7% y-o-y expansion. (Chart 3) Unemployment has fallen dramatically, from 7.7% last September to 6.2% in September 2010. As could be inferred from the robust employment growth, private consumption is also up strongly this year. This is all a way of saying that government stimulus is no longer necessary. We acknowledge that the country is still in need of considerable social welfare programs to address rampant poverty; however, we believe in the long-term that achieving lasting poverty reduction will be best achieved through macroeconomic stability.

With all else equal, including no changes from the central bank, a reduction in government expenditure should reduce the value of real by slowing down aggregate demand. Admittedly, it is difficult to quantify what the actual nominal impact on the exchange rate of a spending cut would be. However, why not cut unnecessary spending when it will help in the 'currency war,' improve confidence in a historically spendthrift government, and reduce the likelihood of an overheated economy? Seems like a win-win, and then some, but a win-win that becomes less likely with a Rousseff win.

By Richard Thies

http://www.northerntrust.com
is an Associate International Economist at The Northern Trust Company, Chicago. He currently monitors emerging markets in sub-Saharan Africa, as well as several European and Asian countries.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules