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Brazil punished for its success
Viewpoint
Thursday November 5th 2009
Le Monde's Jean-Pierre Langellier reports on how the rising value of the real is attracting speculation and threatening exports
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Thursday November 5th 2009
Penalised...cars await export from Rio. Photograph: Antonio Scorza/AFP/Getty Images
Brazil has decided to levy a 2% tax on foreign capital inflows toward equities and fixed-income investments. Presented as a “preventive” measure, the aim is to “curb excess capital inflows that have pushed up the value of the real”, says the economy minister, Guido Mantega. Direct investments will not be affected.
The question of how high the real will go has dominated business news for weeks. At the worst point of the global crisis last year, the currency plummeted to 2.5 to the dollar. Now the value of the real has risen by 36% against the dollar so far this year.
It has broken all previous records, outstripping the South African rand, up 27%, and the Chilean peso, up 21%. This is not just due to the poor standing of the dollar; the real has been gaining against all the major currencies (euro, sterling and yen), and also against its neighbours in Latin America, the Argentine peso and the Mexican peso.
The strength of the real is mainly due to factors specific to Brazil. It was one of the last countries to be affected by the global crisis, soon shrugging it off. It has continued to expand, however slightly, in 2009 and is forecasting 5% growth for 2010. The banking system has emerged unscathed. Brazil now ranks as “sure” with the three main rating agencies. This attracts available assets, pulling in $35bn in a year. Asian and Middle Eastern pension and sovereign funds are investing for the long term in Brazil, buying government bonds. Although it has reached a historic low of 8.75%, the central bank’s base rate is still appealing to investors in a world where most interest rates are close to zero.
Careful speculators are choosing Brazil for other reasons. As a major exporter of raw materials it will benefit most from any rebound in the global economy. Tapping its recently discovered deepwater oil reserves and building infrastructure for the football World Cup in 2014 and the Olympic games in 2016 will also boost investment spending.
The influx of dollars has led to the Sao Paulo stock market gaining 76% so far this year, rising above its pre-crisis value. In a report published in October, the International Monetary Fund drew Brazil’s attention to investors’ appetite for its stock and the difficulties it might face coping with such plenty.
Since February 2008, Brazil has enjoyed creditor status, its foreign currency reserves ($231bn) exceeding its foreign debt, public and private combined. A side effect of the dollar’s decline against the real has been an increase in public borrowing, in absolute terms and as a proportion of gross domestic product (44%).
The drop in the dollar penalises exports, which earn less, while the rising value of the real increases the cost of Brazilian goods, making them less competitive. This is particularly true for manufactured goods, with stiffer competition in the world market. Companies are losing customers to China. The return on exports is at its lowest since 1985, mainly due to the exchange rates.
But the strong real means it costs less to buy abroad, helping to contain inflation and improve living standards for even the poorest.
To contain the Brazilian currency the central bank is buying dollars, which explains the surge in its reserves. But this is expensive and does not halt the slide. The tax on foreign capital should also have a limited effect in the medium and long term. The powerful appeal of the real is not only fuelled by speculation. Investors see it as the price Brazil must pay for success.
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