A Review of Brazil and Colombia

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Latin America Economic Analyst
Issue No: 10/19 October 15, 2010
Goldman Sachs Global Economics, Commodities and Strategy Research at https://360.gs.com

A Review of Brazil and Colombia
Paulo Leme paulo.leme@gs.com +1 305 755 1038 Alberto Ramos alberto.ramos@gs.com +1 212 357 5768 Luís Cezario luis.cezario@gs.com +55 (11) 3371 0778

In our first Focus on Brazil, we discuss recent measures Chart 1: Brazil - The Presidential Race is implemented to discourage capital inflows and to reduce Getting Tighter (%) pressures for the BRL to appreciate. The government 70 José Serra (PSDB) increased the size of its FX intervention program and 65 63 Dilma Roussef (PT) raised the IOF tax rate in foreign fixed income investments to 4.0% from 2.0%. We believe that the 60 authorities should: (1) more effectively manage large 55 53 capital inflows through a mix of FX market intervention 50 and prudential policies to avoid brusque movements in 47 the exchange rate and limit the formation of asset price 45 bubbles; and (2) mitigate the effects of a stronger BRL 40 on external competitiveness, without seeking any level 37 35 for the exchange rate. On October 3, Brazil completed the first round of the general election. The presidential election will go to a Source: IBOPE. second round on October 31. The runoff will be between former Minister Rousseff (PT) and former Governor Chart 2: Colombia - Headline/Core Serra (PSDB). We believe that Mr. Rousseff is still the Inflation Below the Target favorite to win the presidential elections. However, her (%) lead in the polls continues to decline, ranging from 4 to 6 8.0 percentage points, and there are no indications that the 7.0 decline has stopped. We believe that her victory in the second round is no longer a “slam dunk” as it appeared 6.0 before the first round. 5.0 4.0 3.0 2.0 1.0 Jan-08

30 Feb-10





In Colombia the economy has reached a stable, yet unimposing equilibrium: The economy is expanding at a moderate pace and inflation pressures—cost-push or demand-pull—remain benign. The main policy dilemma at this juncture is the misalignment of the COP versus fair value and the enduring pressure for further currency appreciation. It is likely that the Central Bank will keep the policy interest rate unchanged at 3.0% until 2H2011, or even longer if the COP appreciates further. We expect the COP to remain strong to theoretical fair-value and in the short-term to continue to trade under pressure to appreciate. The authorities may consider measures to increase the demand for FX and/or additional FX market intervention measures.

Headline; yoy Core; yoy Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

Source: Banco de la República and Goldman Sachs.

Important disclosures appear at the back of this document.

Goldman Sachs Economic Research

Latin America Economic Analyst

Focus: Brazil - Coping With a Stronger Exchange Rate Old Measures to Tame Pressures for BRL to Appreciate The Pressures for a Stronger BRL May Intensify Shifting the Focus to What the Government Can, Instead of What it Can’t, Do Conclusion Focus: Brazil - Presidential Election – It’s Not Over Until It’s Over Presidential Election Goes to a Second Round The Second Round: a Completely New Race Ms. Rousseff’s Lead in the Polls is Evaporating Focus: Colombia - Stable Real and Monetary Equilibrium: Moderate Growth Amid Benign Inflationary Pressures Introduction Joyless Economic Recovery Leading Indicators Show Activity Might Have Decelerated During 3Q2010 Benign Inflationary Environment Inflationary Pressures Expected to Remain Restrained in the Near Future Central Bank Comfortably on Hold for the Foreseeable Future After Some Hesitation, the Central Bank Resumed Intervention in the Spot FX market Mild Intervention Did Not Weaken COP/USD Government Studying Measures to Increase Demand for Foreign Exchange Conclusion Country Views and Forecasts Argentina Brazil Chile Colombia Ecuador...
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