Blame it on Rio

Brazil, Latin America’s largest economy, is expected to show improved economic performance in 2007 vs. 2006. Economic growth was hindered by double-digit local interest rates, which saw the selic rate peak at 19.75 percent in May 2005. Once inflationary pressures began to ease, the central bank was able to relax short-term rates, taking the selic down to its current 13 percent level. Analysts expect additional softening of monetary policy in 2007, which should in turn remove some of the constraints on economic growth and allow for a moderate recovery this year.

Coutino forecasts Brazilian growth at around 3.5 to 4.0 percent in 2007, vs. 3.0 percent in 2006. He expects the selic to continue on its downward path, with a target close to 12 percent later this year.

Despite the pullback, Brazil’s currency nonetheless chalked up a healthy 11-percent gain last year, Coutino notes. He says strong foreign investment is a key factor supporting the currency’s gains. The USD/BRL rate is currently trading around 2.12 .

The continued gains in the real during the first month of 2007 suggest that even though Brazil’s interest rates are declining, they are still attractive to foreign investors, according to Coutino.

“Brazil is one of the biggest recipients of foreign investment in Latin America,” he says.

Last year, roughly $20 billion of foreign investment flowed into Brazil. Coutino says tighter global liquidity conditions could pare back that number to roughly $16 billion in 2007.

Coutino forecasts mild depreciation in the real vs. the dollar throughout the year, with a target in the USD/BRL rate of 2.20. He sees continuing downward adjustment in commodity prices as a factor that could weigh on Brazil’s currency outlook.