Tags: advani | brazil | brics

Brazil's Smart Strategy (or Idle Boast) to Scale BRIC Wall

Wednesday, 21 Sep 2011 07:50 AM

By Ashish Advani

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I am cruising at 35,000 feet, winging my way to Asia again. The next three weeks will be spent visiting the various hot spots of Asia – India, Malaysia, Philippines and maybe China as well.

This is an exciting time to be in Asia. The streets are humming with activity and there is an unmistakable sense of excitement on the streets.
Businesses are growing and jobs are being created by the hundreds of thousands. Quite the opposite of the picture in the United States and Europe, and that is what makes this the business destination to be.

Let’s start with India. The Reserve Bank of India (RBI) raised the interest rates again last week. I was in the camp which believed that they wouldn’t and yet the RBI felt it to be prudent to continue to squash inflation.

The governor of RBI is receiving more criticism than accolades for this latest move. With the global slowdown nearly here, it was unnecessary to take this step at this stage. Inflation is still a bother and this I can understand is the RBI’s motivation to do what it did. But businesses and real estate are really slowing down as reflected by Industrial Production and the Business Sentiment Index. Both are at historic lows.

I am not sure if this was the most prudent act by the RBI, but I am sure that it will bear results that the RBI needs.

What is interesting to note here is that the RBI is breaking its lock step tradition with the rest of the world’s central banks. Most of the central banks are either on hold or reducing rates again. The U.S. Federal Reserve has declared ultra low rates until at least 2013. And this is another reason I’m not convinced this rate hike was the best use of the central bank tools.

Moving to Brazil, Minister of Finance Guido Mantega pulled a rabbit out of his hat, trying to usurp the role that China has planned on playing in Europe. He made a declaration that the BRIC nations (Brazil, Russia, India and China) are considering investing in the European bonds (Greece and Italy) in order to save the day.

The markets took some heart in this news and rallied, but quickly realized the depth of this statement and went back to sulking again.

What was the real surprise was the origin of the statement rather than the content. The markets have seen statements from China about buying Greek bonds and now asking Italy for a high price to rescue them.

But Brazil on behalf of the BRICs?

The forex reserves of BRI (without China) combined would be akin to a tanker full of water being sprinkled on the Sahara desert. Without China, there simply aren’t enough reserves to help Europe. And yet, Mantega felt compelled to make such a statement. While the markets did figure out the lack of substance behind this claim, it does bring out one aspect of the political horseplay.

Brazil is becoming quite famous for showing it ability to think outside the box and continue to grab the limelight. While it has to back it up with substance, it is challenging the world by staying in prominence.

Only time will tell if their tall claims will work or will they call ‘wolf’ one time too many.

In the meanwhile, while Asia is humming, it is humming in low gear. The economic data out of Malaysia, Indonesia, Taiwan and India is definitely slow and slowing further. This would be a good time to take some of the investments in this region off the table.

The Indian rupee has crashed to record lows of 48.25 rupees to the U.S. dollar. That is from a recent high of 44.05 just in August. So we have seen a decline of nearly 10 percent now.

While I would stay away from the stocks for now, I would consider investing in the rupee, if you haven’t already done so. You can’t keep a good currency down for too long.

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