Financial News

Brazil economy is a tough nut to crack

The Brazilian economy is a tough nut to crack as the government struggles to balance slowing growth, a decline in consumer consumption and sky high borrowing costs.

The International Monetary Fund (IMF) has already pared estimated GDP growth by 0.6% to a moderate 2.5% for an emerging economy.

Meanwhile, the Brazilian Central Bank (BCB) has steadily hacked back interest rates, which are 8% after eight months of successive cuts.

More reductions are likely as the BCB cites slowing domestic demand and easing inflation – down 0.1% to a two-year low of 4.9% in June – could leave the door open for extra cuts.

The IMF praised Brazil for strong financial stability underpinned by a robust banking system and framework for regulation and supervision.

“The economy expanded only slowly in early 2012, reflecting weak investment and business confidence and slowing trade volumes. Industrial output remains sluggish,” said the IMF.

“However, consumption has been recovering since late 2011 on the back of improving confidence and buoyant labor market conditions, including the large minimum wage increase.”

However, Brazil has one of the highest interest rates for borrowing out of any major economy, with a spread of 22% between what banks charge on loans and pay on deposits.

“Credit growth has moderated in line with the economy, reducing the risks of overheating in some sectors, while the large buffers in the system limit stability risks,” said the IMF.

Another economic report, by the Royal Institution of Chartered Surveyors discloses high interest rates have not stopped robust growth in financing, especially in the housing sector, where secured lending has risen 42% in the past 12 months.

“The upcoming June credit report will give us an update on the pace of credit expansion in the economy,” said Himanshu Wani, of RICS.

“The May report showed that total credit in the economy increased by 1.6% over the month and grew 18% over the past year. This has been led by public sector banks, which have been urged by the government to cut lending rates to consumers and business.”

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