Emerging Markets : Lula Unveils Growth Plan



Brazils central bank

is putting the brakes

on interest rate cuts

Having vowed to make economic growth the focus of his second term, Brazilian president Luiz Incio Lula da Silva unveiled a long-awaited plan to boost the nations economy. The federal government will invest $234 billion over the next four years to improve infrastructure, increase access to credit, reduce bureaucracy and encourage private investment. The president promised to accelerate growth to 5% in 2007, up from an average of 2.7% during his first administration.

Increased investment and lower interest rates should support the presidents growth strategy. The Institute of International Finance predicts net direct investment in Brazil will rise to $13 billion this year, compared to a $6 billion decline in 2006. Portfolio equity investment will also rise to a record $12 billion, according to the organization, which expects almost 50% of the $52 billion in net equity investment predicted for Latin America to go to Brazil.

Brazils central bank cut the benchmark Selic rate by a quarter-point to 13% in January, slowing the pace of its rate cuts. The IPCA inflation index (broad consumer price index) ended 2006 at 3.14%, its lowest level in nearly a decade and below the 4.5% official target. As a result, further rate cuts are expected.

The Petrobras state-owned oil company was granted an investment-grade rating by Standard & Poors. With a BBB- long-term rating, it is two notches above the sovereign. Meanwhile, investor appetite for sovereign paper remains high. A $500 million reopening of the governments 7.125% bonds due 2037, led by Bear Stearns and Merrill Lynch, saw demand for $950 million. The bonds were priced to yield 6.635%.

Antonio Guerrero