TNE Tele Norte Leste Participacoes S.A. Common Stock

By Carla Mozee

LOS ANGELES (MarketWatch) -- Brazilian equities slipped Friday, pulling back from their highest levels this year after a report showed Latin America's largest economy has emerged from recession at a faster pace than expected.

Brazil's Bovespa index was down 0.3% to 58,366. The benchmark in the previous session logged its best finish since the start of 2009, at 58,535.79.

Equities started Friday higher after the Brazilian census bureau, IBGE, said gross domestic product in the second quarter expanded by 1.9% from the previous quarter. Economists polled by Dow Jones Newswires had expected growth of 1.64%.

Brazil becomes the first country in Latin America to emerge out of recession.

GDP on a nonadjusted basis contracted 1.2% from the year-ago period, but the fresh quarter-over-quarter figures reflect that "the measures implemented by the government are working," Benito Berber, an economist covering Latin America at RBS Greenwich Capital Markets, said in a telephone interview.

Pressure on stocks came in part from the telecommunications group, which had led gains in the market over the past two sessions following a friendly takeover bid for fixed-line and broadband serves provider GVT Holding by France's Vivendi.

Shares of Vivo (VIV), a wireless services provider, fell 2.7% and Oi (TNE) lost 0.6%. Also lower were steel stocks, including Vale's (RIO) decline of 0.7%, and state-run oil firm Petrobras (PBR), down 1.3%.

In currency action, the Brazilian real gained ground Friday, trading at 1.812 real per U.S. dollar compared with 1.821 per greenback on Thursday.

Among exchange-traded funds, the iShares MSCI Brazil Index Fund (EWZ) eased 0.4%.

The Bovespa is poised to finish the holiday-shortened week with a gain of 3%.

In Mexico City, the IPC equity index rose 0.6% to 29,485. Banking stocks set the pace for advancers after Barclays Capital initiated coverage on 11 Latin American banks. The broker started its top pick, Mexico's Banorte, with an overweight rating, and issued the same rating for microlender Banco Compartamos.

Compartamos shares jumped 5.1% and Banorte climbed 3.1%.

The IPC is set to post a rise of about 4% for the week.

Chile's IPSA index rose 0.5% to 3,247, with shares of Banco de Chile (BCH) up 0.2%. Barclays issued an underweight rating on the bank.

The IPSA is set for a rise of more than 1% for the week, while Argentina's Merval is poised to gain more than 6%. In Friday's session, the Merval shed 0.8%.

Brazil's return to growth

After GDP contractions of 3.6% and 1.8% in the fourth quarter of 2008 and the first quarter of 2009, respectively, Brazil expansion of nearly 2% in the second quarter marks the end of the country's first recession since 2003.

The economy is among the "the quickest to bounce back," said Brazilian Finance Minister Guido Mantega in a telephone conference call on Friday.

Brazil's GDP growth rate outpaced those of other countries that have already reported second-quarter growth, including Japan's rate of 0.6% and Germany's rate of 0.4%, according to Alfredo Coutino, director of Latin American research at Moody's Economy.com.

Mantega credited Brazil's performance to government stimulus measures including higher spending and tax breaks on the purchase of white goods, as well as the central bank's series of rate cuts which have pushed the key Selic rate to an historic low of 8.75%. Domestic demand in the quarter rose 3.2% from the year-ago period.

Declines in rates offered at banks and other financial institutions also aided the economy, he said.

The government's stimulative measures were among the "cheapest programs in the world," said Mantega, adding that they will cost 1% to 1.5% of GDP. He also said programs aimed at pulling the economy through the crisis will end this year.

Brazil expects GDP growth between 2% and 3% in the fourth quarter, and to end 2009 with an expansion rate of 1%.

Berber at RBS Greenwich estimated GDP to range between a contraction of 0.2% to 0% on a year-over-year basis.

The government's projection of 1% appears "a little bit too optimistic" taking into account that stimulus measure will be phased out, which could moderate the pace of growth, said Berber.

Also, "as domestic demand continues to rise, that should imply higher imports and that's going to take out a little bit of the growth next year," he said, "and it's expensive to buy dollars," which would create "an extra incentive to increase imports."