Brazil gets whiplash as currency heads the other way: down

RIO DE JANEIRO/SAO PAULO,  (Reuters) – Two short years ago, Brazil had a terrible problem with its currency – it was far too strong.

Local factories, unable to compete with Chinese imports made cheaper by the real’s appreciation, were closing their doors. Fernando Pimentel, the trade minister and a close adviser to President Dilma Rousseff, declared that “Brazil has joined the team of countries with strong currencies” and urged industries to adapt to the new reality.

Now, as global investors shed assets in emerging markets worldwide, Brazil’s problem has abruptly turned upside-down. The real, along with India’s rupee, has weakened more than any other major currency since May. Its tumble of 16 percent is forcing businesses, policymakers and consumers to prepare for consequences including inflation and costlier foreign financing.

The decline has become another symbol of Brazil’s fall from grace among investors and produced a severe case of whiplash among producers who complain that the basic pillars of Latin America’s largest economy have constantly shifted under Rousseff’s left-leaning government.

Consequences will be felt everywhere from fuel pumps in Sao Paulo to retail outlets in Miami and New York City, where Brazilians were such prolific shoppers during the strong-currency years that the U.S. Travel Association referred to them as “walking stimulus packages” in 2012.

The depreciation, Finance Minister Guido Mantega told a Sao Paulo newspaper over the weekend, “isn’t good for anybody.” “It changes the calculation for just about everyone,” says Neil Shearing, chief emerging markets economist at Capital Economics in London. “What makes sense when you have a strong currency no longer does at a weaker level.”

Until this year, the real was on a tear.

A decade-long period of steady growth appeared to put Brazil on the fast track toward first-world status, attracting record amounts of foreign investment and making the real one of the most coveted currencies in the world.

Since May, when investors turned back toward developed markets amid bets of a U.S. recovery, the real has tumbled, trading yesterday at 2.39 per dollar. Last week, it approached a five-year low which, compared with a peak of 1.54 per dollar in mid-2011, represents a fall of 37 percent.



The biggest threat of a weaker real is that of inflation, especially in a country with a long history of dramatic price increases. Annual inflation at the end of July was at 6.27 percent, just below the ceiling of the government’s target band.

With a weaker real, the cost of imported food, industrial supplies, consumer goods and other goods rises. Over the past year the price of wheat flour, a staple that is Brazil’s biggest food import, spiked 29 percent according to central bank data. The higher costs pose operational challenges for companies with big dollar expenses and those who need affordable access to foreign capital. Airlines, who import jet fuel, are so worried that last week they asked Brazil’s government for tax breaks.

The government was surprised by the sudden fall, which could further complicate an expected re-election bid by Rousseff next year. Her approval ratings, until recently among the highest of any leader worldwide, fell sharply after mass protests in June against everything from poor public services to rising prices.

Yet economists say there is nothing behind a weaker real that should have caught anyone off-guard.

Demand for Brazil’s commodity exports, one of the drivers of the boom, slowed as growth in China and other big customers cooled. A nascent recovery in the United States clearly meant that the dollar, suppressed in recent years by loose monetary policy now ending, would appreciate.

“Any economic model would tell you that this was going to happen,” says Marcio Garcia, an economist at the Catholic University in Rio de Janeiro and a visiting scholar at the MIT Sloan School of Management. “The question was when.”




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