Efforts by Brazil to tame inflation are providing foreign-exchange traders with the biggest returns in the world by purchasing reais with funds borrowed in dollars.
Investing in real forward contracts funded by the greenback has gained 5.3 percent this year, the most of any of the 44 other currencies tracked by Bloomberg. Wagers that Brazil’s currency will rise outpaced those expecting a decline by an average of $5.6 billion this year, data from the Sao Paulo-based BM&F exchange and compiled by Bloomberg show. As recently as September there were net bets against the real.
Finance Minister Guido Mantega, who popularized the term “currency war” in 2010, told Bloomberg News last month he’s abandoning the strategy that drove the real down 19 percent in two years as the government shifts its focus to containing inflation. The central bank signaled on March 6 that it’s ready to raise interest rates from a record low 7.25 percent after dropping a pledge to hold borrowing costs steady for what it had called “a prolonged period of time.”
Andre Soliani & Joshua Goodman, Bloomberg, 02/27/2013
As the currency war intensifies in the developed world, the Brazilian official who coined the phrase says for his country it’s softened.
Brazil succeeded in reducing swings in the real after letting the currency depreciate 19 percent in the two years ending in December to protect local manufacturers from foreign competition, Finance Minister Guido Mantega said in an interview. Now with the real hovering around 2 per dollar, Brazil is abandoning policies to depress the exchange rate even as Japan weakens the yen and the U.S. sticks to policies Mantega has said spurred the start of the currency war.
“We haven’t resolved it, but we neutralized, softened the currency war issue that other countries are facing,” Mantega, 63, said at Bloomberg’s headquarters in New York. “We are in Brazil in a transition to a more solid, competitive and efficient economy.”
Alonso Soto and Luciana Otoni – Reuters, 02/08/2013
Brazilian Finance Minister Guido Mantega told Reuters European countries should focus on reviving their economies with more investments, rather than trying to weaken the euro to protects jobs as France has suggested ahead of next week’s meeting of G20 economic powers.
“We will continue to have this currency problem unless the global economy takes off,” Mantega said in an interview late Thursday. “The solution here is to make their economies more dynamic and jolt them out of stagnation.”
More than two years ago Mantega used the term “currency wars” to describe the series of competitive devaluations adopted by rich nations to bolster their exports amid the global slowdown to the detriment of emerging market nations.
A global “currency war” will intensify this year as the world economy slows, Brazilian Finance Minister Guido Mantega said, adding that Brazil is “well prepared” to defend its currency against unwanted appreciation.
“Global economic growth in 2012 will be below that of 2011,” Mr. Mantega said ahead of his participation at a meeting of finance and monetary officials from the Group of 20 nations this weekend in Mexico City. “One of the results of the slowdown is that the global currency war is intensifying.”
As developed economies have aggressively eased monetary policies in a bid to revive their sputtering economies, their currencies have weakened. That, in turn, has made their exports more competitive and has prompted investors to move money into higher-yielding assets—in many cases in emerging markets such as Brazil, where economic growth and base interest rates are considerably higher.
In 2011, Brazil’s economy grew by less than half the 7.5 percent it attained in 2010. However, this result would be miraculous in any other country with the barriers to productivity and competitiveness that prevail in Brazil.
The base interest rate of 11 percent is the highest in the world in real terms, and the tax burden amounts to 35 percent of GDP, much higher than in the rest of Latin America and closer to that of European states, but without providing a similar level of social welfare.
Moreover, the enormous bureaucratic apparatus is a hindrance to business, and costs are also raised by the precarious transport infrastructure and the high price of energy, contradicting the official discourse on modest electricity costs based mainly on hydroelectric power.
Brazil’s president Dilma Rousseff has announced the “Bigger Brazil Plan.” The program cuts $ 16 billion in taxes until the end of 2012 and is focused on protecting domestic manufactures, affected by competition from Asian countries, mainly China, and recent currency appreciation.
Following a report showing that industrial production dropped 1.6% in June, Dilma Roussef unveiled the program in Brasilia, “This is the first step to boost Brazil’s competitiveness relying on innovation, demanding more added value and fighting unfair and fraudulent practices by competitors.”(To understand what the president refers to by “fraudulent practices by competitors” see: Chinese company uses L. A. port to avoid Brazilian anti-dumping tariffs)
The program offers tax exemptions of 20% to the industries of clothing, shoemaking, furniture and software. Further, exporters of manufactured goods will receive tax credits of 0.5% of the value of their sales abroad. These tax cuts will be partially offset by an additional tax, which will vary from sector to sector, of at least 1.5 percent in sales.