Brazil’s fight to stem currency gains fueled by a “monetary tsunami” is succeeding, and the government will remain vigilant as borrowing costs in rich nations stay low over the next decade, a finance official said.
“Our measures to manage capital inflows have been effective,” Marcio Holland, secretary of economic policy at the finance ministry, said at a reception in Sao Paulo yesterday to unveil enhancements to the Bloomberg system. “They’ve had a lot of success.”
The real strengthened 8.7 percent in the first two months of the year against the U.S. dollar, the best performance among the 16 most-traded currencies tracked by Bloomberg. Since the start of March, when Brazil boosted efforts to contain the rally, it was the worst performer, falling 4.8 percent through yesterday.
President Dilma Rousseff, visiting Germany last week, pledged to take all needed measures to shield the world’s second-biggest emerging market from efforts by Europe and the U.S. to “artificially devalue” their currencies.
Yesterday, she extended a 6 percent tax on foreign loans and bonds issued abroad to include lending of as much as five years. The tax, which originally applied to foreign borrowing of up to two years, had already been extended on March 1 to include loans of three years or less. The real fell 1 percent to 1.8143 per U.S. dollar at 9:33 a.m. local time.
Holland said the government is seeking to eliminate “bad” capital inflows that create distortions in the economy.
“The world will probably have to live with low interest rate for approximately 10 years,” Holland said. “It’s up to countries like Brazil, obviously, to fight against capital inflows that disrupt the Brazilian economic system.”
Investors and exporters have poured $15.5 billion into Brazil since the beginning of the year, contributing to gains in the currency, compared with an outflow of $3 billion in the fourth quarter of 2011.
Jim O’Neill, chairman of Goldman Sachs Asset Management, said that the government’s efforts to weaken the real may be falling short, as the currency needs to decline by 20 percent to keep Latin America’s biggest economy competitive.
“Brazil’s biggest cyclical challenge is to get rid of the strength of the real,” O’Neill, 54, said in an interview in London yesterday. O’Neill, who created the BRIC acronym in 2001 to describe the emerging markets of Brazil, Russia, India and China, said the currency needs to lose a fifth of its value to be “sustainable.”
Eduardo Loyo, a former central bank director who is now chief economist at Banco BTG Pactual SA, said at the same event yesterday with Holland that the real continues to be supported by “positive fundamentals.”
A stronger currency hurts exporters by making goods more expensive in dollar terms and spurs demand for imports. Car imports surged 30 percent last year, accounting for 24 percent of vehicles licensed, compared with 18.8 percent in 2010. Industrial production fell 3.4 percent in January from a year ago, the most since September 2009, after the economy had its second-weakest performance last year since 2003.
To fight what Rousseff and her aides frequently refer to as a global “currency war,” Brazil in the past two years has raised taxes on foreign investors in the local fixed-income market, boosted costs for domestic companies that borrow abroad, and imposed a tax on trading currency derivatives.
The central bank has lowered the benchmark interest rate by 275 basis points since August, to 9.75 percent, reducing the attractiveness of Brazilian assets to investors borrowing at near-zero rates abroad. Even with the easing, Brazil’s inflation-adjusted rate, at 4.28 percent, remains the highest in the Group of 20 nations after Russia.
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