Brazilian Central Bank to Cut Rates

Highlights include Telecomunicacoes de Sao Paulo SA (TSP - Snapshot Report), Companhia Energetica Minas Gerais (CIG - Analyst Report), Companhia Paranaense de Energia (ELP - Analyst Report), Tele Norte Leste Participacoes SA (TNE - Analyst Report) and Telemig Celular Participacoes SA (TMB).

Brazilian Central Bank to Cut Rates Today

Yesterday it was announced that the Brazilian GDP fell by 3.6% in the last quarter 2008. It was a tremendous adjustment from the previous quarters. Even after this huge decline, 2008 ended with a GDP growth of 5.1% for Brazil. The growth was really high in the first 3 quarters, thus the adjustment in the last quarter reflected a major shift.

The most intense decline was in the investment account, which went down by 9.8%. Family consumption was down just 2%, a fact that points out to some kind of recovery for the domestic market in 2009.

The most important consequence of this number will happen tonight! After the close of the market, the Brazilian Central Bank will announce a new cut in domestic interest rates. It is amazing that Brazilian rates remain at 12.75% per year, against an expected inflation of just 4.5% for 2009.

There is a lot of room for cuts in the following months. For this meeting, we expect a cut of 1.25% to 11.25% per year. We forecast a one-digit rate for Brazil in the end of 2009, somewhere close to 9.5%, the lowest level in more than 25 years!

As consumption was not that affected yet, we believe a more aggressive monetary easing in Brazil could help to counterbalance the negative effects of the crisis, fueling domestic demand during 2009. Nevertheless, it will be a difficult year for Brazil and Latin America. Our basic recommendations for Latin America remains the same, focus on domestic market and high dividend yields. We like Telesp (TSP - Snapshot Report), Cemig (CIG - Analyst Report), Copel (ELP - Analyst Report), Oi Participacoes (TNE - Analyst Report) and Telemig (TMB).