After a Year in Economic Overdrive, Brazil Hopes to Elude Pitfalls

In the first major test of her stewardship of Latin America’s largest economy, President Dilma Rousseff is struggling to break free of an economic trap.

Coming off a year in which it recorded its highest growth in a quarter
century, Brazil is faced with rising inflation, an overvalued currency
and an industrial sector losing competitiveness to cheap Chinese
imports.

But Ms. Rousseff’s promising efforts to fix those problems could be
undermined in the coming months as the government embarks on one of its
biggest spending sprees in decades.

The leaders of the United States and Europe, struggling to right their
listing economies, would count themselves lucky to have problems like
Brazil’s. Its economy — driven by soaring prices for commodities, robust
Chinese demand for raw materials and a domestic consumption boom
spurred on by expanding credit — grew 7.5 percent last year, its highest
rate since 1986.

“Like other emerging countries, Brazil has thus far been less affected
by the global crisis,” Ms. Rousseff, an economist, said at the United
Nations last month. “But we know that our capacity to resist is not
unlimited.”

Her strategy so far has been bold. Predicting that the global economy
will not improve this year, Brazil’s Central Bank has slashed interest
rates, making a risky bet that already high inflation would not soar
further. That move, aimed at encouraging growth and reducing the value
of the currency, was paired with measures to protect Brazil’s industries
from a flood of Asian imports.

That approach has shown early signs of success. The stubbornly high
Brazilian real began losing value to the dollar last month, reaching its
lowest point since 2008 two weeks ago before recovering somewhat last
week.

The shift has been front-page news in Brazil, dampening a buoyancy among
Brazilians who felt richer than ever. Even as the overvalued currency
slowed industrial production, it fueled consumer spending at home and
abroad at a blistering pace.

The average per capita purchases by Brazilians in the United States grew
250 percent between 2003 and 2010. Only the Japanese and the British
spend more in the United States than Brazilians, figures from the United
States Commerce Department show. The foreign spending, which diverts
money that could support Brazilian industry, has alarmed government
officials here, who have tried to slow the pace of consumption by
imposing restrictions on credit card purchases.

But government spending represents the bigger threat.

Next year, the government will be obligated to meet tens of billions of dollars in promised payments for social welfare programs, minimum wage increases and infrastructure projects for its twin billing on the global stage, the 2014 World Cup and 2016 Olympic Games in Rio de Janeiro. 

A 14.7 percent increase in the minimum wage is scheduled to take effect
in 2012 at a cost of $13 billion, new low-income housing subsidies will
cost $6 billion, and investments for the sporting events are expected to
cost at least $4.5 billion, said Luiz Schymura, director of the
Brazilian Economic Institute at the Getulio Vargas Foundation in Rio de
Janeiro.

Since her inauguration in January, Ms. Rousseff has shown a willingness
to take a red pen to fiscal spending. Her government approved $28
billion in budget cuts, privatized airports — a move considered long
overdue by economists and many policy makers — and stood up to unions
demanding even higher wage increases.

But standing up to the minimum wage or the World Cup may be politically impossible.

“For all her good intentions, the political pressures on her will be enormous,” Dr. Schymura said.

The surge in spending, accompanied by lower interest rates, could
produce a cycle of higher inflation, economists fear. Whether the new
policies will be enough to revitalize Brazil’s industrial sector remains
to be seen. The economy’s growth has slowed this year to about 3.5
percent, economists say, about half that of last year. And the
consumption boom is slowing. Housing, grocery and retail stores are all
reporting reduced sales, said Alfredo Coutiño, director for Latin
America at Moody’s Analytics.