The performance of Brazil’s economy and related exchange traded funds (ETFs) so far this year has shaped into one of the most compelling emerging market growth stories. Where does it go from here?

Analysts credit the falling interest rates mixed with the government stimulus as the main contributers for growth stimulation. Among the other reasons Brazil could continue to grow as a global recovery tightens its grip:

  • In the 12 months to June, foreign direct investment hit $41 billion, up from $30 billion in the previous 12 months
  • Consumption has remained in place
  • Inflation has remained fairly tame, with the consumer price index moving up just 0.36% in the 12 months to June
  • Industrial output rose for the seventh consecutive month in July and posted its biggest gain in more than a year

On the flip side, John Rumsey for Latin Finance warns that distortions may result if the rebound persists to move as quickly as it has. More than $200 billion are still in reserves as the government has been leading the country down a conservative fiscal path. The challenge will come at presidential election time in October 2010, which could make it hard to keep a lid on fiscal spending and reverse monetary easing.

Adriana Brasileiro and Andre Soliani for Bloomberg report that the central bank also lowered the reserve requirement for lenders, encouraging banks to increase loans and putting about $100 billion into the economy. This should give the Brazilian economy an extra dose of energy and encourage consumer spending further.

  • iShares MSCI Brazil Index (EWZ): up 63.7% year-to-date

For more stories about Brazil, visit our Brazil category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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