The fall in the value of Brazil’s currency against the dollar is having a positive effect on exports, according to early inputs by the Maersk Line shipping group.
9th October 2013
The furore of tapering by the U.S. Federal Reserve has had its repercussions on the emerging economies- BRIC in particular, with the Brazil’s national currency Real falling to a four year low in August this year, casting a shadow on the economy and fuelling higher rates of inflation. The second week of August saw its currency depreciate by 0.8 percent to 2.3060 per U.S. dollar, the weakest closing level since March 2009. The real has crashed by 13 percent in the past three months, the most among its other counterparts in the BRIC, boosting the price of imports and resulting in a steep hike of oil rates in the Latin American country. The government is trying to stem the rot by supporting the real after it fell by 14 percent over the past three months, the Brazilian Central Bank intervened by selling all its 10,000 currency swaps through an auction in the last week of August, but this just a short term measure and economists feel that government need to put its act together to control the inflation by pegging the currency to the U.S. dollar.
To stem the crisis which is sparking huge public outrage, the central bank has said it would spend $ 500 million a day from Monday to Thursday and $ 1bn on Fridays buying reals in the currency markets. The Monday-to-Thursday intervention of the central bank will target currency swap markets – financial derivatives used by companies and investors to hedge their currency exposure – while on Friday’s, the central bank will buy the national currency directly in return for U.S. dollars. The move by the Central Bank seems to have bearing its results, on October 1st– the real advanced to 1.6 percent to 2.2170 per dollar in Sao Paulo, the highest since October 2011 and gaining 0.7 percent in the third quarter. Alexandre Tombini- President of Central Bank of Brazil said the intervention by the central bank will continue till December. The weaker currency is raising the cost of imports- oil in particular, which in turn is increasing the cost of living for Brazilians and raising concerns that inflation could get out of control. The currency devaluation could be disastrous to Brazilian corporates- particularly if the debts are denominated in foreign currencies- Brazilian companies have already seen their debt jump 2.9 percent in July due to a weaker real, according to credit bureau Serasa Experian.
Brazilian finance minister, Guido Mantega has said that the interventions taken by the Central Bank would stabilise the national currency, “it’s important to make clear that this pressure of the dollar in our case is not due to capital flight, nor the loss of exchange reserves, as is happening in other emerging economies like India and Indonesia, but mainly due to hedging and speculation” he said. The Minister also said the government would not allow the state run oil company Petrobras SA to raise fuel prices based on volatile swings in the currency, but did not rule out a price adjustment in the near future. The minister’s statement comes after local news papers carried out reports saying the government was considering 5 to 6 percent hike in gasoline prices.
Exports Rise
The fall in the value of Brazil’s currency against the dollar is having a positive effect on exports, according to early inputs by the Maersk Line shipping group, Brazil’s container trade along with other countries accelerated in the three months in June- rising 3.8 percent, compared with a 1.6 percent rise in the previous quarter, the export tirade is rebalancing the economy while reducing its dependence on consumption. In its report “Maersk” said “dry cargo” exports rose 2.7 percent in the second quarter of the year, reversing a decline in the previous three months of 2.6 percent on strong Asian demands for products such as pulp and paper, wood, sugar, tobacco and stronger shipments to the U.S. In the second quarter Brazilian imports shot up by 5.9 percent compared with previous quarter’s growth of 3.4 percent on the back of inputs for Brazilian factories, such as plastic and rubber, automotive and transportation goods, chemicals, food and beverages, 44 percent more sugar was exported in August compared to the earlier month and Latin America’s biggest economy – finished harvesting a record soybean crop in May and exported 5.4 million tonnes of the crop in August. Brazil is the world’s top exporter of sugar, coffee, and orange juice, the world’s sixth largest economy may outnumber U.S. as top soybean producer this season.
Our View
Guido Mantega, Brazil’s Finance Minister has said the pressure of dollar will not respond to a capital flight or loss of reserves due to the central bank’s intervention which has seen the currency peg back partially to the U.S. dollar, but there are other problems such as the government’s disregard to fiscal deficit, high taxes, poor infrastructure and the government’s corporate favoured moves and rampant corruption which make Brazil’s economy vulnerable. This situation will be aggravated once the Fed calls-off its quantitative easing, which will then offer investors less risky opportunities for their money in the developed economies. Credit rating agencies such as Moody’s Investment Service have downgraded Brazil’s debt rating to stable from positive, Brazil’s public debt is equal to 60 percent of its nation GDP. While exports continue to thrive, largely due to a devalued currency – the Latin American country need to focus on its structural challenges such as low investment and poor infrastructure and stabilise its currency and protect its markets and businesses.