--Brazilian growth tends to be more robust when currency is strong
--Strong currency favors imports of components, capital goods
--After 2012 slowdown, Brazil is headed for rebound next year-Santander
By Luciana Magalhaes
SAO PAULO--If history is a guide, Brazil's deliberate weakening of its currency, the Brazilian real, might not add support to the country's faltering economy, according to the chief economist of Banco Santander Brasil (SANB11.BR).
"Over the last 20 years, Brazil's economy has always grown faster when the real was stronger, not weaker," Mauricio Molan, chief economist of the Brazilian unit of Spain's Banco Santander (SAN.MC), said in an interview with Dow Jones Newswires.
"I am not saying that a strong currency necessarily leads to better economic performance," he added. "It's because, when the economy is doing well, the currency tends to strengthen. It's also true that, whenever the currency is strong, imports grow faster than before and so do investments."
He said there was "such a correlation at the beginning of the Real [Stabilization] Plan in 1994 and again between 2004 and 2007." Brazil's gross domestic product grew at an annual rate of more than 5% in 1994 and again in 2004, 2007 and 2008.
So far this year, the Brazilian real has depreciated by about 9% against the U.S. dollar. At least part of the depreciation came after the government adopted a series of measures seeking to curb the currency's strength to protect local industry.
"While a stronger currency might lead companies to work harder to gain a competitive edge and reduce costs, a weaker currency may serve to simply hide inefficiencies," Mr. Molan said. But he added that he considers government action justified whenever there is an "exaggerated" currency appreciation.
Mr. Molan said Brazil has too often made a connection between competitive advantage and currency, even though a large proportion of Brazil's imports are either intermediary goods, such as components for manufactured products, or heavy machinery. Commodities are priced in dollars and this important export sector is more influenced by movements in the U.S. currency.
"For companies that depend on intermediary goods or machinery, a depreciation of the currency makes them less competitive," he said. "Meanwhile, 55% of Brazilian exports are related to the commodities sector, which are less affected by the currency."
There are other ways to stimulate growth, the economist said.
Brazil has been seeking to stimulate its economy with an agenda of sector-specific tax cuts, exchange rate depreciation and lower interest rates. "Now, I believe, it would be very beneficial if the government also took a more aggressive stance towards fiscal cuts, infrastructure development and productivity," said Mr. Molan.
He noted, however, that Brazil is in an inverse situation in relation to the troubled euro-zone countries. "These countries have to raise taxes and cut spending," he said. "Brazil, with declining interest rates, has a strong fiscal position."
Santander Brasil is still relatively optimistic about Brazil's performance in 2012, projecting a growth rate of 2.2%, which is slightly above market consensus of 1.9%. For 2013, the bank forecasts a much stronger pace of growth, 4.7%, due to the lagging effects of stimulus policies adopted in 2012.
Brazil's economy continued to slow in the first three months of the year as weak industrial production and easing domestic demand undermined growth for a sixth-consecutive quarter. Brazil's GDP expanded at a rate of only 0.8% compared with the first quarter of 2011. Family consumption increased 2.5% year-on-year as Brazilians took advantage of record-low unemployment, higher wages and access to credit.
However, non-performing loans increased markedly in the first half of the year, raising concerns about the stability of Brazil's recent consumption-led economic growth.
"We believe there are conditions in place for consumption to remain strong," said Mr. Molan. "We don't buy the theory that demand-led growth has been exhausted. Brazilian economic policy has been focused on sustaining family incomes. Such policies will allow consumption to keep expanding while, at the same time, helping families put their finances in order."
Write to Luciana Magalhaes at email@example.com
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