Bloomberg News

Mantega Leaves IMF Early as Brazil Ready to Act on Currency

September 25, 2011

Sept. 26 (Bloomberg) -- Brazil’s Finance Minister Guido Mantega returned home early from the International Monetary Fund meetings in Washington this weekend, after a plunge in the real extended the world’s biggest currency slump over the past month.

“We need to be there in case there is more volatility in the markets,” Mantega told reporters in Washington before he left for Brazil on Sept. 24, a day earlier than scheduled. “It’s better to be back in the country, but the situation in Brazil is calm.”

Policy makers in Latin America, after spending the past year fighting currency gains, have seen those policies upended as the European debt crisis leads investors to dump emerging market assets and seek safety in the U.S. dollar. After rallying 43 percent since the end of 2008 through August, the real has plunged 13 percent over the past 30 days, more than all 16 major currencies tracked by Bloomberg.

While the central bank acted in the currency futures market last week for the first time since 2008 in a bid to stem the rout, the government hasn’t decided whether to roll back any measures taken to curb currency gains. Since last year, the government has tripled a tax of foreign purchases of domestic bonds, increased reserve requirements on short dollar positions and raised levies on foreign loans.

The so-called IOF tax on foreign investors’ purchases of Brazil’s fixed income assets could be withdrawn “when it’s no longer needed,” Mantega said. The real jumped 3.9 percent Sept. 23 to 1.8339 per dollar, paring its biggest weekly loss since November 2008, on speculation the government may revoke the tax.

Today, Mantega will meet with President Dilma Rousseff, who while attending the United Nations General Assembly last week also voiced concern over the strengthening dollar. Rousseff, speaking to reporters in New York Sept. 22, said her government is “completely ready” to take additional currency measures.

Currency Swap

Brazil’s central bank on Sept. 22 auctioned swaps, the equivalent to selling dollars in the futures market, for the first time since 2008, helping the real rebound from a two-year low. While bank President Alexandre Tombini in Washington said he is ready to inject more liquidity into the market to protect the real from international volatility, a government official said policy makers see no need for now to sell any of their record $351 billion in reserves.

Rousseff’s government must help the central bank by “holding the line” on spending and keeping Brazil’s fiscal house in order, Tombini added.

The real strengthened to a 12-year high in July, as near zero interest rates in the U.S., Europe and Japan led investors to seek higher yielding assets in emerging markets.

Latin America ‘Oversold’

Other Latin American currencies have also been hit by the sell-off in emerging market assets. The Chilean peso fell 7 percent last week, leading all 25 emerging market currencies tracked by Bloomberg. The JPMorgan Latin American Index of currencies has slumped 9 percent this month.

Mexico’s central bank Governor Agustin Carstens, a former IMF deputy Managing Director, said in Washington yesterday that his nation’s currency is “oversold” after its 9 percent fall this month, and is likely to rally over the next few days along with other regional currencies.

Colombia’s Finance Minister Juan Carlos Echeverry said the recent fall in the peso had taken it to around its equilibrium level, and he would not welcome any further falls.

‘Natural’ Volatility

Itau Unibanco Holding SA Chief Executive Officer Roberto Setubal, the head of Latin America’s biggest bank by market value, said the real’s decline isn’t worrisome as Brazil has little direct exposure to the debt problems in Europe.

“It’s natural in moments of high volatility in the world,” Setubal told reporters in Washington yesterday. “The tendency is for not such a big devaluation,” he said, referring to the real.

Many analysts believe the government’s actions are punishing the real more than other currencies. The IOF tax contributed to the “disorderly” sell-off in the real, while the central bank’s surprise half point rate cut in August raised doubts among investors about the government’s commitment to its inflation target, Tony Volpon, Latin America strategist at Nomura Securities Inc., wrote in a Sept. 23 report.

--Editors: Joshua Goodman

To contact the reporters on this story: Fabiola Moura in Washington at fdemoura@bloomberg.net; Matthew Bristow in Washington at Mbristow5@bloomberg.net;

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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