Vietnam market entry decisions
Lula’s dilemma: wanted to follow Cardoso’s framework
After his election stock market fell, currency weakened, prices raised and country’s premium increased
This made him steer away from orthodox policies
Brazil before Inflation Targeting: fiscal deficit increased inflation sky rocketed (triple digit inflation) stabilization programs failed
Real plan brought down inflation
FDI led to appreciation of Real
Asian crisis – Russian Crisis – lead to Capital fleeing
Inflation problem rose again
Inflation Targeting (Henceforth IT):
Maintaining low inflation rather than a mix of objectives
Developed economies adopted first, emerging economies followed
Targeting policy – persistent instability
Exchange rate method – made the country to rely on foreign country to control inflation
IT strategy made countries more transparent
Challenges in emerging Economies:
Fiscal indiscipline
High rates of dollarization
Credibility problems
Vulnerability to external shocks
Brazil’s IT policy:
Targeting was set at single digit level
Transparency and Accountability
Performance:
Positives:
Negatives:
Inflation Targets met
Real wages fell
Economy Grew at 0.8%
Unemployment increased
Country’s risk premium fell
Real Depreciated
Primary fiscal surplus was achieved
Influence of Electoral uncertainity(2002)
3.96 Reals to $1
Selic rate increased from 18%to21%
Stocks fell by 4.6%
Risk premium climbed to 23%
Debt Dynamics:
Actual inflation of 12.5% vs target of 3.5%. So Inflation targets revised
Net public Debt ratio increased from 42% in ‘99 to 57% in ‘02
48% debt linked to selic; 42% linked to foreign currencies. Real depreciation worsened the situation
Changes Initiated:
Target GDP Increased from 3.75% to 4.25%
Public pension reform
Full independence to banks on short term interest rates
Planned tax reform
Rewrite bankruptcy laws
Problems
Solutions
After his election stock market fell, currency weakened, prices raised and country’s premium increased
This made him steer away from orthodox policies
Brazil before Inflation Targeting: fiscal deficit increased inflation sky rocketed (triple digit inflation) stabilization programs failed
Real plan brought down inflation
FDI led to appreciation of Real
Asian crisis – Russian Crisis – lead to Capital fleeing
Inflation problem rose again
Inflation Targeting (Henceforth IT):
Maintaining low inflation rather than a mix of objectives
Developed economies adopted first, emerging economies followed
Targeting policy – persistent instability
Exchange rate method – made the country to rely on foreign country to control inflation
IT strategy made countries more transparent
Challenges in emerging Economies:
Fiscal indiscipline
High rates of dollarization
Credibility problems
Vulnerability to external shocks
Brazil’s IT policy:
Targeting was set at single digit level
Transparency and Accountability
Performance:
Positives:
Negatives:
Inflation Targets met
Real wages fell
Economy Grew at 0.8%
Unemployment increased
Country’s risk premium fell
Real Depreciated
Primary fiscal surplus was achieved
Influence of Electoral uncertainity(2002)
3.96 Reals to $1
Selic rate increased from 18%to21%
Stocks fell by 4.6%
Risk premium climbed to 23%
Debt Dynamics:
Actual inflation of 12.5% vs target of 3.5%. So Inflation targets revised
Net public Debt ratio increased from 42% in ‘99 to 57% in ‘02
48% debt linked to selic; 42% linked to foreign currencies. Real depreciation worsened the situation
Changes Initiated:
Target GDP Increased from 3.75% to 4.25%
Public pension reform
Full independence to banks on short term interest rates
Planned tax reform
Rewrite bankruptcy laws
Problems
Solutions