The Real is Top Performer

By Jaylan Boyle, Contributing Reporter

RIO DE JANEIRO – The Brazilian Real finished the last quarter as the second best performer among the 16 most-traded currencies worldwide, just behind the South African Rand. The gain in value is the largest experienced by the Real since it was brought onto the market in 1994.

The Real came into being in July of that year, in a concerted effort to staunch runaway inflation of 5,000% per year. It became the countries’ sixth new currency since 1986.

Gaining 19 percent in value since March 31, the Real shot up amid speculation that a rally in the commodities market coupled with record-low interest rates would see Brazil emerge from the present crisis sooner than expected. The current recession is the country’s first since 2003.

Many in the financial industries believe that Brazil will experience more pronounced growth than other developing economies, should interest rates stay at their current level.

Government policy will be closely watched in the near future however, and many analysts are allowing for the possibility of a sudden end to the cycle of diving rates. The upcoming meeting of the National Monetary Council (CMN) to discuss inflation targets for 2011 may be a deciding factor. If this target is tightened, many are predicting a return to the stiflingly high interest rates of recent years.

An economic spring is appearing on the horizon for Brazil. The soaring value of the Real looks set to continue as the local arm of credit card transaction giant Visa Inc. completed its Initial Public Offering (IPO). The company’s IPO is one of the largest seen worldwide in recent times, and a record in Brazil. Many are predicting that other firms will be tempted to follow suit and sell shares with the aim of attracting more international investment.

“The IPO reflects the confidence of foreign investors in the Brazilian economy, (and) will pave the way for other companies to sell shares and attract foreign capital, which is positive for the Real,” said Leonardo Breder, a fixed income manager at Nobel Asset Management in Rio de Janeiro.

In further positive news for Brazilian fortunes, an improved outlook for the Chinese economy has been felt right across the local steel sector, after Chinese steelmakers signaled that they will be increasing efforts to reach agreement for iron-ore supply contracts.

“The pick-up in commodity prices and faster growth in China are positive for the Real, prompting risk-taking by investors,” said Douglas Smith, Chief Economist for the Americas at Standard Chartered Bank. Smith is predicting that the Brazilian economy will strengthen by 0.6% in 2009 and 3.8% in 2010.

Brazil is proving to be an economic anomaly among developed countries. With a GDP ranked ninth worldwide and conferred by three sources – the IMF, the World Bank and the CIA World Factbook – it sits comfortably between the established European economies of France and Italy. If the Brazilian government continues to maintain a climate favorable to investors, it just might become the model for sustaining economic growth during a crisis.